Donegal Group Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Donegal Group is a property and casualty insurance holding company whose subsidiaries write personal and commercial insurance through independent agents. Results include the 2021 addition of Mountain States Insurance Group business to the underwriting pool; that business was not included in comparable 2020 results.
Financial results and key metrics
| Metric | Q3 2021 | Nine months 2021 |
|---|---|---|
| Net premiums earned | $196.2 million; up 6.1% year over year | $576.0 million; up 3.5% |
| Net premiums written | $197.0 million; up 9.0% | $622.5 million; up 8.7% |
| Total revenue | $203.1 million, versus $196.5 million | $606.2 million, versus $580.3 million |
| Net investment income | $7.8 million, versus $7.4 million | $22.9 million, versus $22.0 million |
| Net investment gains (losses) | $(1.6) million, versus $3.3 million | $5.1 million, versus $(0.9) million |
| Net income (loss) | $(6.7) million, versus $11.8 million | $20.0 million, versus $38.2 million |
| Class A / Class B EPS | $(0.22) / $(0.20), versus $0.41 / $0.37 | $0.66 / $0.59, versus $1.34 / $1.21 |
| Combined ratio | 107.7%, versus 98.3% | 100.8%, versus 95.9% |
| Operating cash flow | Not separately stated for the quarter | $58.5 million, versus $68.5 million |
Underwriting and margins: The combined ratio exceeded 100% in Q3 and for the first nine months, indicating an underwriting loss before investment income and other items. Q3 loss ratio was 75.5%, versus 65.4%; expense ratio was 31.5%, versus 31.9%. For nine months, the loss ratio was 66.2%, versus 61.7%, and the expense ratio was 33.9%, versus 33.2%. Weather losses were $18.0 million in Q3 and $36.6 million year to date.
Balance sheet at September 30, 2021: Total assets were $2.252 billion; investments were $1.257 billion; cash was $68.9 million; and stockholders’ equity was $538.1 million. Loss and loss expense liabilities were $1.050 billion, including $444.7 million of reinsurance recoverable. Borrowings were $35.0 million, consisting of a fixed-rate FHLB advance due in August 2024 at 1.74%. The company had no M&T line borrowings and could draw up to $20.0 million. MICO repaid its $5.0 million surplus note in September.
Changes versus the prior comparable period
- Q3 shifted from $11.8 million net income to a $6.7 million net loss, primarily as underwriting costs rose and investment results moved from gains to losses.
- Q3 net premiums earned increased, supported by Mountain States pool business, new business, and renewal rate increases. Commercial written premiums grew; personal written premiums declined due primarily to deliberate underwriting actions and attrition.
- Nine-month net income fell to $20.0 million from $38.2 million despite higher premiums and investment income. Underwriting performance weakened, while investment results improved year over year.
- Prior-year reserve development was favorable by $4.3 million in Q3 and $25.9 million for nine months, compared with $0.5 million unfavorable in Q3 2020 and $10.3 million favorable for nine months 2020.
- Cash declined from $103.1 million at year-end 2020 to $68.9 million. The company repaid $50.0 million of FHLB advances and the $5.0 million surplus note; the 2020 comparison included $50.0 million of line-of-credit borrowing.
Outlook, commentary, and risks
- The filing provides no numerical earnings or premium guidance. Management cautions that nine-month results are not necessarily indicative of full-year results.
- Management attributed higher 2021 claim costs to increased personal auto claim frequency as driving activity recovered from pandemic shutdowns, higher workers’ compensation severity, and elevated fire losses. Three individual losses totaling $6.0 million exceeded the per-risk reinsurance retention and primarily affected homeowners and commercial multi-peril results.
- Weather-related losses in Q3 exceeded the company’s prior five-year Q3 average. Conversely, favorable prior-year reserve development primarily reflected lower-than-expected loss emergence or severity across nearly all lines.
- Reserve adequacy is a significant uncertainty. Management notes that a 1% change in net loss reserves would affect pretax results by approximately $6.1 million. Risks include social inflation, bodily injury severity and slower settlements, supply-chain and labor costs, litigation, weather catastrophes, reinsurance availability and collectability, and COVID-19-related economic and claims effects.
- Reinsurance includes excess-of-loss coverage above a $2.0 million retention and catastrophe protection with stated limits. The filing describes substantial pooled business with Donegal Mutual, creating intercompany and reinsurance exposure.
- Management reported no material changes in disclosed risk factors or market-risk exposure, and stated that disclosure controls were effective. No legal proceedings were reported.
Important facts for investors to verify
- Whether subsequent quarters improve the combined ratio, particularly in commercial auto, commercial multi-peril, workers’ compensation, personal auto, and homeowners.
- Whether current-year loss trends, inflation, litigation, and claim settlement patterns affect reserve estimates or reverse favorable prior-year development.
- The sustainability and quality of premium growth, including the contribution from Mountain States and the continued decline in personal lines written premiums.
- Investment portfolio sensitivity to interest rates, equity price movements, credit conditions, and reported unrealized losses; most fixed maturities are valued using Level 2 inputs.
- Liquidity and capital resources, including future cash flows, FHLB borrowing capacity, regulatory limits on insurance-subsidiary dividends, and the $46.4 million of stated 2021 dividend capacity without prior regulatory approval.