Donegal Group Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Donegal is a property and casualty insurer operating through independent agents, with commercial lines, personal lines and investment segments. Its insurance subsidiaries share an underwriting pool with Donegal Mutual; Atlantic States receives 80% of pooled results.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net premiums earned | $204.1 million | $192.5 million | $403.4 million | $379.7 million |
| Net premiums written | $218.4 million | $209.6 million | $436.9 million | $425.5 million |
| Net investment income | $8.2 million | $7.7 million | $16.1 million | $15.2 million |
| Net investment gains (losses) | $(8.4) million | $4.2 million | $(8.5) million | $6.7 million |
| Net income (loss) | $(8.2) million | $16.2 million | $4.9 million | $26.7 million |
| Class A / Class B EPS | $(0.26) / $(0.24) | $0.53 / $0.48 | $0.16 / $0.14 | $0.89 / $0.80 |
Premiums earned rose 6.0% in Q2 and 6.2% year to date, supported by Mountain States business entering the pool, retention and renewal rate increases. Net premiums written increased 4.2% in Q2 and 2.7% year to date. Total Q2 revenue was $204.3 million, slightly below $205.1 million a year earlier, as investment losses offset premium and investment-income growth.
- Underwriting: The GAAP combined ratio was 105.0% in Q2 versus 96.1% a year earlier, and 100.4% for the first half versus 97.3%. Ratios above 100% indicate underwriting losses. Q2 statutory combined ratios were 101.6% for commercial lines and 107.5% for personal lines; homeowners and commercial multi-peril were notable areas of weakness.
- Losses and reserves: Q2 weather losses were $19.6 million, above the prior five-year Q2 average of $17.1 million. First-half weather losses were $27.5 million, approximately in line with the five-year average. Favorable prior-year reserve development was $7.9 million in Q2 and $24.4 million for the first half, compared with $13.4 million and $21.6 million, respectively, in 2021.
- Cash flow: Operating cash flow was $35.0 million for the first half, down from $59.2 million. Investing activities used $73.1 million; financing provided $2.2 million. Cash declined to $21.8 million at June 30 from $57.7 million at year-end.
- Balance sheet and liquidity: Total assets were $2.25 billion and stockholders’ equity $511.0 million at June 30. Investments totaled $1.30 billion. The company had a $35.0 million FHLB advance outstanding at 1.74%, due August 2024, and no borrowings on its $20.0 million M&T credit line. FHLB borrowing capacity available was $9.1 million.
Changes, outlook and risks
The decline in earnings primarily reflects higher claim costs, weaker underwriting results and investment-market losses. Q2 net investment losses were driven mainly by unrealized losses in equity securities; no investment impairment losses were recorded. First-half other comprehensive loss was $32.8 million, and accumulated other comprehensive loss stood at $29.5 million at June 30, compared with accumulated other comprehensive income of $3.3 million at year-end.
Management cited inflation in vehicle and property repair costs, supply-chain disruption, labor availability, rising claim severity, litigation and slower claim settlement as sources of reserve uncertainty. The filing states that a 1% change in net loss reserves would affect pretax results by approximately $6.4 million. Catastrophe exposure, reserve adequacy, reinsurance availability and collectability, investment-market movements, interest rates, and systems modernization are also relevant risks. Management reported no material change in previously disclosed risk factors, no material change in market-risk exposure, and no legal proceedings. Disclosure controls were deemed effective.
The filing provides no quantified earnings or premium guidance. The board declared a quarterly dividend of $0.165 per Class A share and $0.1475 per Class B share, payable August 15, 2022. Insurance-subsidiary dividends available for distribution without prior regulatory approval in 2022 totaled approximately $47.3 million; none were paid to the parent in the first half. Donegal Mutual, not Donegal Group, purchased 367,077 Class A and 54,231 Class B shares in May and June under its separately disclosed purchasing activity.
Important facts for investors to verify
- Whether premium rate increases and retention can offset claims inflation and restore combined ratios below 100%.
- How much of the first-half underwriting result depended on favorable prior-year reserve development, and whether that development persists.
- Investment portfolio sensitivity to interest rates and equity markets, including the effect of unrealized losses on reported equity and liquidity.
- Cash-flow needs, FHLB advance repayment, available borrowing capacity, and regulatory limits on insurance-subsidiary dividends.
- Progress and costs of systems modernization, and the impact of changes in expense allocations.