Donegal Group Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; unaudited. Donegal writes personal and commercial property-and-casualty insurance through independent agents, alongside an investment segment. Comparisons are affected by Mountain States Insurance Group business entering the underwriting pool for policies effective in 2021.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $205.1 million | $198.9 million | $403.1 million | $383.8 million |
| Net premiums earned | $192.5 million | $184.4 million | $379.7 million | $371.6 million |
| Net income | $16.2 million | $22.7 million | $26.7 million | $26.4 million |
| Diluted EPS, Class A / Class B | $0.53 / $0.48 | $0.79 / $0.72 | $0.88 / $0.80 | $0.92 / $0.84 |
| Combined ratio | 96.1% | 92.3% | 97.3% | 94.7% |
| Operating cash flow | Not separately presented for the quarter | $59.2 million | $48.0 million |
- Q2 revenue rose about 3%, but net income fell about 29% year over year. Higher losses and underwriting expenses outweighed premium and investment-income growth; investment gains were also lower than in Q2 2020.
- First-half revenue increased about 5% and net income was broadly flat. First-half diluted EPS declined for both share classes.
- Q2 net premiums written increased 8.2% to $209.6 million: commercial lines rose 19.9%, while personal lines fell 6.4%. For the first half, net premiums written rose 8.6% to $425.5 million, with commercial lines up 19.3% and personal lines down 6.5%.
- Underwriting remained profitable overall, with combined ratios below 100%, but deteriorated versus the prior year. The Q2 loss ratio rose to 59.2% from 57.1%; the expense ratio rose to 36.0% from 34.3%. First-half ratios were 61.4% loss and 35.1% expense, versus 59.9% and 33.8%.
- Q2 weather losses were $11.7 million, down from $18.7 million a year earlier; first-half weather losses were $18.6 million versus $25.6 million. Favorable prior-year reserve development was $13.4 million in Q2 and $21.6 million in the first half, compared with $6.6 million and $10.9 million, respectively, in 2020.
- First-half net investment gains were $6.7 million, versus a $4.2 million loss in 2020, mainly reflecting equity-security results. Net investment income increased to $15.2 million from $14.5 million.
Financial position, cash flow and liquidity
- At June 30, total assets were $2.246 billion, investments $1.262 billion, cash $88.0 million and stockholders’ equity $550.2 million. Cash was $103.1 million at year-end 2020.
- First-half operating cash flow was $59.2 million; investing activities used $27.4 million and financing activities used $46.9 million. The $15.1 million net cash decrease reflected, among other items, $50.0 million of line-of-credit repayments and $9.3 million of dividends paid.
- Borrowings were $35.0 million at June 30, down from $85.0 million at December 31, 2020, after repayment of a $50.0 million FHLB advance that had been obtained as contingent liquidity during the pandemic. The remaining FHLB advance carries a 1.74% fixed rate and is due August 2024. A separate $5.0 million surplus note carries 5.00% interest; payments require regulatory approval.
- The company reported no M&T line-of-credit borrowings and up to $20.0 million available under that facility, plus $8.8 million of currently available FHLB borrowing capacity. Insurance subsidiaries had approximately $46.4 million available for dividends to the parent without prior regulatory approval in 2021; subsidiary dividends remain subject to regulatory and capital restrictions.
Outlook, risks and notable items
- The filing provides no specific full-year earnings or premium guidance. Management cautions that first-half results are not necessarily indicative of full-year results.
- Management cites increased personal-auto claim frequency versus the pandemic-affected Q2 2020 comparison, elevated fire losses in the first half, higher technology and agent-incentive expenses, and a software-system change that shifted some expense allocation from loss expense to underwriting expense.
- Loss-reserve estimates are a major uncertainty. Management identifies bodily-injury severity, slower litigated-claim settlements, social inflation, supply-chain disruption, medical costs, changing claims reporting patterns and legal or judicial developments as potential drivers. A 1% change in net loss reserves would affect pretax results by approximately $5.8 million.
- Other cited risks include adverse or catastrophic weather, COVID-19-related economic effects, reinsurance availability and cost, investment-market and interest-rate risk, competition, regulation, and information-technology execution. Management reported no material change in disclosed risk factors or market-risk exposure, and no material change in internal control over financial reporting. No legal proceedings were reported.
- Donegal Mutual began placing Mountain States Insurance Group business into the underwriting pool for 2021-effective policies, contributing to commercial growth and limiting direct year-over-year comparability. The company also reported $21.6 million of favorable prior-year reserve development in the first half.
Investor verification points
- Review whether reserve releases and the favorable loss experience persist; assess the stated reserve sensitivity and development by line of business.
- Separate underlying premium and underwriting trends from Mountain States pool inclusion and the unusually low driving activity in the Q2 2020 comparison.
- Track personal-auto and homeowners loss trends, commercial multi-peril fire losses, and whether expense-ratio increases continue.
- Confirm liquidity, FHLB capacity and regulatory limits on subsidiary dividends, particularly alongside claims and catastrophe exposure.
- Assess investment gains’ contribution to earnings and the effect of equity-market, interest-rate and credit movements on the portfolio.