Donegal Group Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Donegal is a property-and-casualty insurer writing commercial and personal lines through independent agents. Its insurance subsidiaries share substantial business through a pooling arrangement with Donegal Mutual.
Financial performance
| Metric | Q3 2022 | Nine months 2022 |
|---|---|---|
| Total revenue | $212.8 million, up 4.8% year over year | $624.8 million, up 3.1% |
| Net premiums earned | $206.1 million, up 5.0% | $609.5 million, up 5.8% |
| Net income (loss) | $(10.4) million; Class A/B EPS $(0.33)/$(0.30) | $(5.4) million; Class A/B EPS $(0.17)/$(0.16) |
| Operating cash flow | Not separately provided for the quarter | $49.9 million, versus $58.5 million |
| Combined ratio | 109.6%, versus 107.7% | 103.5%, versus 100.8% |
Combined ratios above 100% indicate underwriting losses. Q3 underwriting loss was $19.8 million on a GAAP basis. Nine-month GAAP underwriting loss was $21.5 million. Net investment income increased to $8.6 million in Q3 and $24.6 million for the nine months; net investment losses were $2.4 million and $10.8 million, respectively. The nine-month comparison includes $5.1 million of investment gains in 2021.
At September 30, cash was $26.7 million, total investments were $1.281 billion, and stockholders’ equity was $481.2 million. Borrowings included a $35.0 million FHLB advance at 1.74%, due August 2024; no amount was drawn on the $20.0 million M&T credit line. Nine-month dividends paid were $15.2 million. The board declared Q4 dividends of $0.165 per Class A share and $0.1475 per Class B share.
Changes and notable items
- Premium growth reflected new business, retention, renewal rate increases, and the inclusion of Mountain States business in the underwriting pool. Nine-month net premiums written rose 3.3% to $643.1 million.
- Higher losses and underwriting expenses weakened the combined ratio. Q3 weather losses were $19.4 million and large fire losses were $17.4 million; nine-month weather losses were $47.0 million and large fire losses were $40.4 million.
- Favorable prior-year reserve development was $6.2 million in Q3 and $30.6 million for the nine months. Management attributed the nine-month development primarily to lower-than-expected loss emergence or severity across most lines.
- Technology costs associated with an ongoing systems-modernization project contributed to higher expense ratios. Q3 expense ratio rose to 33.4% from 31.5%; the nine-month ratio rose to 34.7% from 33.9%.
- Comprehensive loss for the nine months was $55.7 million, including $50.3 million of after-tax other comprehensive loss. Available-for-sale fixed maturities had $54.7 million of gross unrealized losses; management considered debt-security declines temporary and reported no investment impairment losses.
- Loss and loss expense liabilities were $1.108 billion, including $445.7 million of reinsurance recoverables. Management estimates are sensitive to claims inflation, litigation trends, delayed reporting and settlement, and catastrophe experience.
Outlook, risks and contingencies
The filing provides no quantified earnings or premium guidance. Management cautions that interim results are not necessarily indicative of full-year results. Principal risks include reserve adequacy, severe weather, rising automobile and property repair costs, labor and medical inflation, social inflation and litigation, reinsurance availability and collectability, investment-market and interest-rate changes, competition, and execution of the technology modernization program. A 1% change in net loss reserves would affect pretax results by approximately $6.6 million. Management reported no material change in risk factors from its 2021 Form 10-K and no material change in market-risk exposure. No legal proceedings were reported.
Insurer subsidiaries paid no dividends to the parent during the first nine months. Approximately $47.3 million was available for distribution in 2022 without prior regulatory approval, subject to statutory and regulatory restrictions. The filing says Donegal Mutual purchased 409,193 Class A shares in August and September under its own disclosed purchasing activity; these were not reported as purchases by Donegal Group under its share-repurchase program.
Key facts for investors to verify
- Whether premium rate actions and retention can offset claims-cost inflation and improve combined ratios, particularly in personal auto, homeowners, and commercial multi-peril.
- Whether favorable reserve development persists and how actual claims emergence compares with the recorded reserves.
- The impact of further interest-rate or market movements on investment values, accumulated other comprehensive loss, and capital.
- Progress and future costs of systems modernization, and the effect on underwriting expenses and controls.
- Regulatory limits, reinsurance recoverables, and available parent-company liquidity, including the distinction between Donegal Group and Donegal Mutual share purchases.