Donegal Group Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Donegal is a property-and-casualty insurer writing commercial and personal lines through independent agents. Its insurance subsidiaries share a substantial underwriting pool with Donegal Mutual.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net premiums earned | $216.3 million | $204.1 million | $431.5 million | $403.4 million |
| Total revenue | $229.2 million | $204.3 million | $453.9 million | $411.9 million |
| Net investment income | $10.2 million | $8.2 million | $19.6 million | $16.1 million |
| Net investment gains (losses) | $2.5 million | $(8.4) million | $2.2 million | $(8.5) million |
| Net income (loss) | $2.0 million | $(8.2) million | $7.2 million | $4.9 million |
| Diluted EPS, Class A / Class B | $0.06 / $0.05 | $(0.26) / $(0.24) | $0.22 / $0.20 | $0.16 / $0.14 |
| GAAP combined ratio | 104.7% | 105.0% | 103.0% | 100.4% |
Premium growth reflected renewal rate increases and retention. Second-quarter net premiums written rose 3.7% year over year: personal lines increased 14.8%, while commercial lines declined 3.2%. First-half net premiums written rose 6.2%.
Underwriting remained unprofitable: the GAAP combined ratio exceeded 100% in both periods. Q2 improved slightly year over year, but the first-half ratio deteriorated as loss costs rose. Q2 statutory combined ratio was 103.8%, unchanged year over year; first-half statutory combined ratio was 101.7%, versus 99.0%.
Cash, balance sheet and capital
- Six-month operating cash flow was $13.1 million, down from $35.0 million; cash ended June 30 at $24.7 million.
- Total investments were $1.308 billion; total assets were $2.289 billion, liabilities $1.803 billion and stockholders’ equity $486.2 million.
- Borrowings included a $35.0 million FHLB advance at 1.74%, due August 2024. No balance was drawn on the $20.0 million M&T line of credit; $7.1 million of FHLB borrowing capacity was available.
- Accumulated other comprehensive loss was $45.2 million. Held-to-maturity securities had amortized cost of $686.7 million and estimated fair value of $602.8 million; available-for-sale fixed maturities had fair value of $560.7 million.
- The board declared post-quarter dividends of $0.17 per Class A share and $0.1525 per Class B share, payable August 15, 2023.
Changes, outlook and risks
- Q2 returned to net income from a year-earlier loss, aided in part by a swing in investment results. Net investment income also increased, primarily due to higher average investment yields.
- Prior-year reserve development reduced incurred losses by $8.5 million in the first half, compared with $24.4 million in the prior-year period. The smaller reserve benefit contributed to the year-over-year increase in the first-half loss ratio.
- Weather losses were $19.7 million in Q2 and $33.8 million in the first half; first-half weather impact was above the company’s prior five-year average. Management also cited elevated labor, parts, materials and repair costs, claim severity, litigation trends and slower claim settlement.
- The company provided no specific full-year earnings or premium guidance. It cautioned that interim results are not necessarily indicative of full-year results.
- Loss reserves are inherently uncertain; a 1% change in net reserves would affect pretax results by approximately $6.8 million. Risks include inflation, social inflation, severe weather, late-reported claims, reserve adequacy, reinsurance availability and collectability, and investment-market movements.
- Adoption of expected-credit-loss accounting on January 1, 2023 reduced retained earnings by $1.9 million after tax; the company said adoption did not significantly affect results or cash flows. It recorded allowances of $1.3 million on held-to-maturity investments and $1.6 million on reinsurance receivables.
- No legal proceedings were reported, and the company said there were no material changes to previously disclosed risk factors. It reported effective disclosure controls and no material changes to market-risk exposure.
Important facts for investors to verify
- Whether premium-rate actions and underwriting changes can bring combined ratios below 100%, particularly in commercial auto, commercial multi-peril and personal auto.
- Reserve adequacy and the persistence of favorable prior-year development, given rising severity, litigation and settlement delays.
- Investment portfolio sensitivity to interest rates and credit conditions, including the substantial fair-value discount on held-to-maturity securities.
- The filing’s cover page appears to mark “No” for having filed all required reports during the preceding 12 months; verify this checkbox disclosure and its context.
- Donegal Mutual, rather than Donegal Group’s stated share repurchase program, purchased 223,058 Class A shares in May and June under its own discretionary program.