Donegal Group Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited consolidated results. Donegal Group writes personal and commercial property and casualty insurance through independent agents. Atlantic States participates in a pooling arrangement with Donegal Mutual, which holds approximately 71% of the company’s voting power.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $224.7 million | $207.6 million |
| Net premiums earned | $215.2 million | $199.2 million |
| Net premiums written | $237.3 million | $218.4 million |
| Net investment income | $9.4 million | $7.9 million |
| Net investment losses | $0.3 million | $0.1 million |
| Income before tax | $6.3 million | $16.2 million |
| Net income | $5.2 million | $13.1 million |
| Diluted EPS, Class A / Class B | $0.16 / $0.15 | $0.43 / $0.39 |
| Operating cash flow | $(0.7) million | $20.7 million |
- Net premiums earned rose 8.0%; net premiums written rose 8.6%. Written premium growth was 4.2% in commercial lines and 17.7% in personal lines.
- The GAAP combined ratio increased to 101.2% from 95.8%; above 100% generally indicates an underwriting loss. The statutory combined ratio was 99.6%, versus 94.1%.
- The loss ratio rose to 64.2% from 59.2%, including weather losses of $14.1 million (6.5 points of the ratio) versus $8.0 million (4.0 points). Prior-year reserve releases were $8.3 million, compared with $16.5 million a year earlier.
- The expense ratio increased to 36.4% from 35.8%, primarily reflecting higher technology-system costs. Commercial multi-peril and personal automobile statutory combined ratios were 114.8% and 103.9%, respectively.
- Comprehensive income was $9.2 million, compared with a comprehensive loss of $7.4 million, mainly reflecting the swing in investment-related other comprehensive income.
Financial position and liquidity
- At March 31, total assets were $2.279 billion, liabilities $1.785 billion, and stockholders’ equity $493.6 million. Equity increased from $483.6 million at year-end 2022.
- Cash was $22.8 million and short-term investments $28.1 million. Total investments were $1.306 billion. Cash declined from $25.1 million at December 31, 2022.
- Operating cash flow was negative despite higher premiums, with cash flow affected by working-capital movements, including growth in unearned premiums, premiums receivable and prepaid reinsurance.
- Debt included a $35.0 million FHLB advance at a fixed 1.74%, due August 2024. There were no M&T line borrowings; up to $20.0 million was available under that facility. FHLB borrowing capacity available was $9.1 million.
- Insurance subsidiaries had approximately $46.4 million available for dividends to the parent without prior regulatory approval in 2023; they paid no dividends to the parent in Q1. The board declared quarterly dividends of $0.17 per Class A share and $0.1525 per Class B share for payment May 15, 2023.
Material changes, outlook and risks
- Management attributed premium growth to retention, renewal rate increases and personal-lines new-business growth following product launches in nine of ten states where personal lines are offered.
- Higher weather-related losses, inflation in labor, parts and materials, and reduced favorable reserve development weighed on underwriting results. Technology-system modernization costs also increased.
- The company reported no specific earnings or premium guidance. Management cautions that Q1 results are not necessarily indicative of full-year results.
- Key uncertainties include reserve adequacy, social inflation and litigation, claim severity and settlement delays, severe weather, reinsurance availability and collectability, competition, interest rates, and successful implementation of new technology systems. Management estimates that a 1% change in net loss and loss expense reserves would affect pretax results by approximately $6.7 million.
- Adoption of the expected-credit-loss accounting guidance on January 1, 2023 reduced retained earnings by $1.9 million after tax; management said it did not significantly affect results of operations or cash flows. The quarter included new allowances for expected credit losses on held-to-maturity securities and reinsurance receivables.
- Management reported no material change in market-risk exposure, no material change in internal control over financial reporting, and no material change in previously disclosed risk factors. No legal proceedings were reported.
Important facts for investors to verify
- Whether pricing and retention can offset ongoing loss-cost inflation and weather volatility, particularly in commercial multi-peril and personal automobile.
- Reserve development trends and the sensitivity of earnings and equity to revisions in loss estimates.
- Whether personal-lines growth and the systems-modernization investment translate into improved underwriting profitability without sustained expense pressure.
- Reinsurance recoverability and counterparty exposure, including the company’s significant pooling relationship with Donegal Mutual.
- Liquidity and capital needs, including operating cash flow, the August 2024 FHLB maturity, and regulatory limits on subsidiary dividends.