Donegal Group Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Donegal writes personal and commercial property-and-casualty insurance through independent agents. Its insurance operations are closely integrated with Donegal Mutual, including a pooling arrangement under which Atlantic States receives 80% of pooled underwriting results. Beginning with policies effective in 2021, Mountain States Insurance Group business was included in the pool.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $198.0 million | $184.9 million |
| Net premiums earned | $187.3 million | $187.3 million |
| Net premiums written | $215.9 million | $198.2 million |
| Net investment income | $7.5 million | $7.4 million |
| Net investment gains (losses) | $2.5 million | ($10.7 million) |
| Income before tax | $12.8 million | $2.5 million |
| Net income | $10.5 million | $3.7 million |
| Diluted EPS, Class A / Class B | $0.35 / $0.32 | $0.13 / $0.12 |
| Operating cash flow | $29.9 million | $10.8 million |
- Net premiums written rose 8.9%; commercial lines increased 18.7%, primarily reflecting the addition of Mountain States business to the pool, while personal lines declined 6.7% amid underwriting-focused attrition, partly offset by rate increases.
- The GAAP combined ratio increased to 98.5% from 97.0%. The statutory combined ratio was 96.5% versus 95.4%; commercial lines were 99.3% and personal lines 92.6%.
- Loss ratio rose to 63.7% from 62.6%, primarily due to elevated commercial multi-peril fire losses. Weather losses were $6.8 million, comparable to $6.9 million a year earlier and below the five-year first-quarter average of $10.3 million. Favorable prior-year reserve development was $8.2 million, versus $4.3 million.
- At March 31, total assets were $2.19 billion and stockholders’ equity was $529.2 million. Cash was $102.4 million. Total investments were $1.20 billion, down from $1.22 billion at year-end.
- Borrowings were $35.0 million, consisting of a 1.74% fixed-rate FHLB advance due August 2024; the $50.0 million FHLB advance from March 2020 was repaid at maturity in March 2021. The company had no M&T line borrowings and could borrow up to $20.0 million there.
Changes, outlook and risks
- The earnings improvement principally reflected the reversal from investment losses to gains year over year, alongside higher underwriting income before GAAP adjustments. Q1 2020 included a $1.6 million tax benefit related to carrying back 2018 net operating losses; Q1 2021 tax expense was $2.2 million, an effective rate of 17.4%.
- Management provided no specific earnings or premium guidance. It cautioned that quarterly results are not necessarily indicative of full-year results. The board declared, after quarter-end, dividends of $0.16 per Class A share and $0.1425 per Class B share, payable May 17, 2021.
- Key uncertainties include reserve adequacy, claims severity and settlement delays, social inflation and litigation, COVID-related shifts in claims patterns, severe weather, reinsurance availability and cost, interest rates, investment-market movements, competition, regulation, and technology execution. A 1% change in net loss reserves would affect pretax results by approximately $5.8 million, according to the filing.
- Management considered fixed-maturity unrealized losses temporary and reported no investment impairment losses in either quarter. No material changes to disclosed risk factors or market-risk exposure were reported; no legal proceedings were reported.
Investor facts to verify
- Whether commercial-line growth from Mountain States business translates into profitable underwriting; commercial multi-peril and commercial automobile statutory combined ratios were 107.7% and 102.3%, respectively.
- Whether elevated fire losses, claims inflation, litigation trends and slower settlements affect future loss emergence and reserves.
- How much of the earnings comparison reflects equity-market gains and the prior-year investment loss and tax benefit, rather than recurring underwriting performance.
- Future investment-portfolio sensitivity to interest rates and equity prices, and the availability of insurer-subsidiary dividends to fund parent-company needs.