Donegal Group Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This annual filing does not provide a clear standalone fourth-quarter summary. Donegal is a property-and-casualty insurance holding company operating through subsidiaries in 24 states, primarily via independent agents. Its largest subsidiary shares pooled underwriting results with Donegal Mutual, which holds approximately 71% of the company’s combined voting power.
Financial performance and condition
- Premiums and revenue: Net premiums earned rose 6.0% to $822.5 million; net premiums written increased 4.9% to $843.5 million. Total revenue was $848.2 million, up from $816.5 million.
- Earnings: Net loss was $2.0 million, or $0.06 per Class A share and $0.07 per Class B share, versus net income of $25.3 million in 2021. The 2022 result included a $27.5 million GAAP underwriting loss and $10.2 million of net investment losses, partly offset by $34.0 million of net investment income and a $1.7 million income-tax benefit.
- Underwriting and margins: The combined ratio worsened to 103.3% from 101.0%; above 100% indicates an underwriting loss. The loss ratio rose to 68.6% from 67.1%, while the expense ratio increased to 34.1% from 33.3%. Commercial lines’ statutory combined ratio was 103.7%; personal lines’ was 102.8%.
- Cash flow and liquidity: Operating cash flow was $67.1 million, compared with $76.7 million in 2021. Year-end cash was $25.1 million, down from $57.7 million. Investments totaled $1.305 billion. The company had no borrowings on its $20 million M&T line; Atlantic States had $35 million outstanding under a fixed-rate FHLB advance due August 2024. Insurers could pay approximately $46.4 million in ordinary dividends to the parent during 2023 without prior regulatory approval.
- Equity and investment portfolio: Stockholders’ equity declined to $483.6 million from $531.0 million, and book value per share fell to $14.79 from $16.95. The decline primarily reflected $45.4 million of after-tax unrealized losses in available-for-sale fixed maturities. All debt securities were investment grade.
- Reserves: Gross loss and loss expense reserves were $1.121 billion, including $451.2 million of reinsurance recoverables. Favorable prior-year reserve development was $44.8 million, versus $31.2 million in 2021.
Material changes versus 2021
- Growth in earned premiums and investment income did not offset weaker underwriting and investment results; the company moved from net income to a net loss.
- Personal-lines loss ratio increased to 71.0% from 64.8%, with higher auto and homeowners claim severity attributed in part to supply-chain disruption, labor shortages and rising repair and replacement costs. Commercial-lines loss ratio improved to 67.1% from 68.6%, notably as commercial auto improved.
- Weather-related losses increased to $63.5 million from $45.3 million; large fire losses rose to $53.5 million from $45.6 million.
- Net investment income increased 9.3%, but net investment results swung to a $10.2 million loss from a $6.5 million gain, primarily reflecting equity-security valuation changes.
- Higher technology-system costs contributed to the increase in the expense ratio. Allocated expenses from Donegal Mutual rose to $199.2 million from $186.6 million.
Outlook, risks and other notable items
- Management said pricing actions and underwriting refinements positioned the business for 2023 and beyond. It expects continued personal-lines rate increases and careful management of personal-lines growth amid inflationary loss costs.
- The next modernization release, covering three commercial lines, was scheduled to begin in the first half of 2023; rollout of new personal-lines products in the remaining state was also planned for the first half of 2023. Management noted the multiyear modernization effort may not meet planned timing or budget, and its benefits are not assured.
- For 2023, reinsurance terms include higher retention levels under several programs amid increased pricing and reduced market capacity. The filing describes catastrophe, inflation, litigation/social inflation, reserve-estimation and reinsurance recoverability risks.
- Donegal Mutual’s control and extensive pooling, service and reinsurance arrangements create related-party considerations. The filing reports routine insurance litigation, which management does not expect to have a material adverse financial effect. No off-balance-sheet arrangements were reported.
- The company reported an unqualified audit opinion and effective internal control over financial reporting. Adoption of expected-credit-loss guidance on January 1, 2023 was estimated to reduce retained earnings by $1.5 million to $2.5 million after tax, with no significant expected effect on operations or cash flows.
Important facts for investors to verify
- Whether rate increases and underwriting actions bring combined ratios below 100%, particularly in personal auto, homeowners and commercial multi-peril.
- Whether recent favorable reserve development persists; the actuaries’ 2022 net reserve point estimate of $669.9 million was within a stated range of $621.6 million to $721.6 million.
- How the 2023 reinsurance renewals affect net catastrophe exposure, retention and costs, and whether recoverables remain collectible.
- Whether the investment portfolio’s unrealized losses, book-value decline and higher reinvestment yields evolve as expected.
- Progress, costs and operational impact of the systems modernization, alongside the material transactions and governance implications of Donegal Mutual’s control.