Donegal Group Inc. Announces Second Quarter and First Half 2022 Results

Rhea-AI Summary

Donegal Group reported a net loss of $8.2 million for Q2 2022, equating to 26 cents per Class A share, compared to a profit of $16.2 million in Q2 2021. Despite an increase in net premiums earned by 6% to $204.1 million, the company's combined ratio rose to 105% from 96.1%. Notably, after-tax investment losses reached $6.6 million due to equity declines. As of June 30, 2022, the book value per share was $15.87, down 10% year-over-year. Management anticipates improved results from premium rate increases implemented in 2022 and 2023.

Positive

• Net premiums earned increased by 6.0% to $204.1 million in Q2 2022.
• Net premiums written rose 4.2% to $218.4 million.

Negative

• Net loss of $8.2 million in Q2 2022, down from a profit of $16.2 million in Q2 2021.
• Combined ratio increased to 105% from 96.1% year-over-year.
• After-tax net investment losses of $6.6 million compared to gains of $3.4 million in Q2 2021.
• Book value per share decreased by 10% year-over-year to $15.87.

MARIETTA, Pa., July 28, 2022 (GLOBE NEWSWIRE) -- Donegal Group Inc. (NASDAQ: DGICA) and (NASDAQ: DGICB) today reported its financial results for the second quarter and first half of 2022.

Significant Items for Second Quarter of 2022 (all comparisons to second quarter of 2021):

• Net loss of $8.2 million, or 26 cents per Class A share, compared to net income of $16.2 million, or 53 cents per diluted Class A share
• Net premiums earned increased 6.0% to $204.1 million
• Net premiums written¹ increased 4.2% to $218.4 million
• Combined ratio of 105.0%, compared to 96.1%
• Net loss included after-tax net investment losses of $6.6 million, or 21 cents per Class A share, compared to after-tax net investment gains of $3.4 million, or 11 cents per diluted Class A share
• Book value per share of $15.87 at June 30, 2022

Financial Summary

	Three Months Ended June 30,											Six Months Ended June 30,
		2022				2021			% Change				2022				2021			% Change
	(dollars in thousands, except per share amounts)
Income Statement Data
Net premiums earned	$	204,128			$	192,489			6.0	%		$	403,377			$	379,740			6.2	%
Investment income, net		8,204				7,652			7.2				16,063				15,163			5.9
Net investment (losses) gains		(8,377	)			4,241			NM2				(8,453	)			6,710			NM
Total revenues		204,311				205,146			-0.4				411,938				403,116			2.2
Net (loss) income		(8,208	)			16,164			NM				4,937				26,694			-81.5
Non-GAAP operating (loss) income1		(1,590	)			12,814			NM				11,615				21,393			-45.7
Annualized (loss) return on average equity		-6.3	%			12.0	%		NM				1.9	%			10.0	%		-8.1	pts
Per Share Data
Net (loss) income – Class A (diluted)	$	(0.26	)		$	0.53			NM			$	0.16			$	0.88			-81.8	%
Net (loss) income – Class B		(0.24	)			0.48			NM				0.14				0.80			-82.5
Non-GAAP operating (loss) income – Class A (diluted)		(0.05	)			0.42			NM				0.37				0.71			-47.9
Non-GAAP operating (loss) income – Class B		(0.05	)			0.38			NM				0.34				0.64			-46.9
Book value		15.87				17.64			-10.0	%			15.87				17.64			-10.0

¹The “Definitions of Non-GAAP Financial Measures” section of this release defines data that the Company prepares on an accounting basis other than U.S. generally accepted accounting principles (“GAAP”) and reconciles such data to GAAP measures.

²Not meaningful.

Management Commentary

Kevin G. Burke, President and Chief Executive Officer, stated, “Our second quarter of 2022 results reflected a number of factors, including after-tax investment losses of $6.6 million related to the market-driven decline in the value of our equity investment holdings as well as elevated weather-related and large fire losses during the quarter. The above-average weather-related losses for the second quarter of 2022 resulted primarily from multiple localized wind and hail events, with only one event generating claims that exceeded our insurance subsidiaries’ reinsurance retention amount. While claim frequency levels generally remained consistent with historical trends, inflationary pressures contributed to higher loss costs in our homeowners, commercial multi-peril and automobile lines of business. We expect the premium rate increases we have implemented to date, and plan to implement during the remainder of 2022 and 2023 will lead to improved results as those increases are earned over the terms of the underlying policies. In spite of the elevated loss activity in the second quarter, our underwriting results for the first half of 2022 largely met our expectations. We are making excellent progress on our ongoing strategic and business transformation initiatives. Maintaining a long-term view, we believe that we are well-positioned to enhance our profitability and achieve our operational and financial objectives over time.”

Insurance Operations

Donegal Group is an insurance holding company whose insurance subsidiaries and affiliates offer personal and commercial property and casualty lines of insurance in three Mid-Atlantic states (Delaware, Maryland and Pennsylvania), three New England states (Maine, New Hampshire and Vermont), six Southern states (Alabama, Georgia, North Carolina, South Carolina, Tennessee and Virginia), eight Midwestern states (Illinois, Indiana, Iowa, Michigan, Nebraska, Ohio, South Dakota and Wisconsin) and four Southwestern states (Colorado, New Mexico, Texas and Utah). Donegal Mutual Insurance Company and the insurance subsidiaries of Donegal Group conduct business together as the Donegal Insurance Group.

	Three Months Ended June 30,												Six Months Ended June 30,
		2022				2021			% Change					2022				2021			% Change
	(dollars in thousands)
Net Premiums Earned
Commercial lines	$	126,854			$	115,300				10.0	%		$	251,183			$	224,525			11.9	%
Personal lines		77,274				77,189				0.1				152,194				155,215			-1.9
Total net premiums earned	$	204,128			$	192,489				6.0	%		$	403,377			$	379,740			6.2	%
Net Premiums Written
Commercial lines:
Automobile	$	43,588			$	42,574				2.4	%		$	92,216			$	89,813			2.7	%
Workers' compensation		29,343				28,567				2.7				62,240				63,508			-2.0
Commercial multi-peril		51,117				47,912				6.7				105,314				99,715			5.6
Other		10,496				9,970				5.3				21,607				20,421			5.8
Total commercial lines		134,544				129,023				4.3				281,377				273,457			2.9
Personal lines:
Automobile		44,988				44,296				1.6				87,228				87,303			-0.1
Homeowners		32,785				30,369				8.0				56,300				53,057			6.1
Other		6,129				5,917				3.6				11,983				11,650			2.9
Total personal lines		83,902				80,582				4.1				155,511				152,010			2.3
Total net premiums written	$	218,446			$	209,605				4.2	%		$	436,888			$	425,467			2.7	%

Net Premiums Written

The 4.2% increase in net premiums written for the second quarter of 2022 compared to the second quarter of 2021, as shown in the table above, represents 4.3% growth in commercial lines net premiums written and 4.1% growth in personal lines net premiums written. The $8.8 million increase in net premiums written for the second quarter of 2022 compared to the second quarter of 2021 included:

• Commercial Lines: $5.5 million increase that we attribute primarily to modest new business writings, strong premium retention and a continuation of renewal premium increases in lines other than workers’ compensation, offset partially by planned attrition in regions we have targeted for profit improvement.
• Personal Lines: $3.3 million increase that we attribute to premium rate increases our insurance subsidiaries have implemented over the past four quarters, strong policy retention and modest new business writings in certain states where we have introduced an updated suite of products.

Underwriting Performance

We evaluate the performance of our commercial lines and personal lines segments primarily based upon the underwriting results of our insurance subsidiaries as determined under statutory accounting practices. The following table presents comparative details with respect to the GAAP and statutory combined ratios¹ for the three and six months ended June 30, 2022 and 2021:

	Three Months Ended								Six Months Ended
	June 30,								June 30,
		2022				2021				2022				2021
GAAP Combined Ratios (Total Lines)
Loss ratio (non-weather)		59.8	%			53.1	%			57.5	%			56.5	%
Loss ratio (weather-related)		9.6				6.1				6.8				4.9
Expense ratio		35.0				36.0				35.4				35.1
Dividend ratio		0.6				0.9				0.7				0.8
Combined ratio		105.0	%			96.1	%			100.4	%			97.3	%
Statutory Combined Ratios
Commercial lines:
Automobile		100.1	%			105.5	%			94.7	%			103.9	%
Workers' compensation		78.7				84.0				87.8				89.3
Commercial multi-peril		119.5				94.5				109.8				100.8
Other		87.1				77.2				79.9				68.8
Total commercial lines		101.6				94.3				97.6				96.6
Personal lines:
Automobile		104.0				91.1				98.9				92.2
Homeowners		123.5				110.1				115.9				102.4
Other		51.3				74.5				47.6				75.7
Total personal lines		107.5				96.9				101.2				94.7
Total lines		103.8	%			95.4	%			99.0	%			95.9	%

Loss Ratio

For the second quarter of 2022, the loss ratio increased to 69.4%, compared to 59.2% for the second quarter of 2021. Weather-related losses were $19.6 million, or 9.6 percentage points of the loss ratio, for the second quarter of 2022, compared to $11.7 million, or 6.1 percentage points of the loss ratio, for the second quarter of 2021. Weather-related loss activity for the second quarter of 2022 was higher than our previous five-year average of $17.1 million for second-quarter weather-related losses.

Large fire losses, which we define as individual fire losses in excess of $50,000, for the second quarter of 2022 were $13.4 million, or 6.6 percentage points of the loss ratio. That amount exceeded the large fire losses of $11.7 million, or 6.1 percentage points of the loss ratio, for the second quarter of 2021.   We experienced a $1.5 million increase in commercial property fire losses compared to the prior-year quarter.

Net favorable development of reserves for losses incurred in prior accident years of $7.9 million decreased the loss ratio for the second quarter of 2022 by 3.9 percentage points, compared to $13.4 million that decreased the loss ratio for the second quarter of 2021 by 6.9 percentage points. Our insurance subsidiaries experienced favorable development primarily relating to reserves for accident years 2021 and 2020 in the commercial automobile, personal automobile and workers’ compensation lines of business.

Expense Ratio

The expense ratio was 35.0% for the second quarter of 2022, compared to 36.0% for the second quarter of 2021. The decrease in the expense ratio reflected lower underwriting-based incentive costs for our agents and employees for the second quarter of 2022 compared to the prior-year quarter.

Investment Operations

Donegal Group’s investment strategy is to generate an appropriate amount of after-tax income on its invested assets while minimizing credit risk through investment in high-quality securities. As a result, we had invested 92.9% of our consolidated investment portfolio in diversified, highly rated and marketable fixed-maturity securities at June 30, 2022.

	June 30, 2022								December 31, 2021
	Amount				%				Amount				%
	(dollars in thousands)
Fixed maturities, at carrying value:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	134,746				10.4	%		$	121,453				9.5	%
Obligations of states and political subdivisions		448,206				34.5				428,814				33.6
Corporate securities		398,017				30.6				412,758				32.3
Mortgage-backed securities		226,412				17.4				237,709				18.6
Total fixed maturities		1,207,381				92.9				1,200,734				94.0
Equity securities, at fair value		45,261				3.5				63,420				5.0
Short-term investments, at cost		46,685				3.6				12,692				1.0
Total investments	$	1,299,327				100.0	%		$	1,276,846				100.0	%
Average investment yield		2.5	%							2.6	%
Average tax-equivalent investment yield		2.6	%							2.6	%
Average fixed-maturity duration (years)		6.1								4.7

Total investments at June 30, 2022 increased by $22.5 million compared to December 31, 2021, as new funds invested were largely offset by $41.5 million of unrealized losses within our available-for-sale fixed-maturity portfolio due to a substantial increase in market interest rates during the first half of 2022.

Net investment income of $8.2 million for the second quarter of 2022 increased 7.2% compared to $7.7 million for the second quarter of 2021. The increase in net investment income reflected primarily an increase in average invested assets relative to the prior-year second quarter.

Net investment losses of $8.4 million for the second quarter of 2022 were primarily related to unrealized losses in the fair value of equity securities held at June 30, 2022. Net investment gains of $4.2 million for the second quarter of 2021 were primarily related to unrealized gains in the fair value of equity securities held at June 30, 2021.

Our book value per share was $15.87 at June 30, 2022, compared to $16.95 at December 31, 2021, with the decrease primarily related to after-tax unrealized losses within our available-for-sale fixed-maturity portfolio during the first half of 2022 that reduced our book value by $1.02 per share.

Definitions of Non-GAAP Financial Measures

We prepare our consolidated financial statements on the basis of GAAP. Our insurance subsidiaries also prepare financial statements based on statutory accounting principles state insurance regulators prescribe or permit (“SAP”). In addition to using GAAP-based performance measurements, we also utilize certain non-GAAP financial measures that we believe provide value in managing our business and for comparison to the financial results of our peers. These non-GAAP measures are net premiums written, operating income or loss and statutory combined ratio.

Net premiums written and operating income or loss are non-GAAP financial measures investors in insurance companies commonly use. We define net premiums written as the amount of full-term premiums our insurance subsidiaries record for policies effective within a given period less premiums our insurance subsidiaries cede to reinsurers. We define operating income or loss as net income or loss excluding after-tax net investment gains or losses, after-tax restructuring charges and other significant non-recurring items. Because our calculation of operating income or loss may differ from similar measures other companies use, investors should exercise caution when comparing our measure of operating income or loss to the measure of other companies.

The following table provides a reconciliation of net premiums earned to net premiums written for the periods indicated:

	Three Months Ended June 30,											Six Months Ended June 30,
		2022				2021			% Change				2022				2021			% Change
	(dollars in thousands)
Reconciliation of Net Premiums
Earned to Net Premiums Written
Net premiums earned	$	204,128			$	192,489			6.0	%		$	403,377			$	379,740			6.2	%
Change in net unearned premiums		14,318				17,116			-16.3				33,511				45,727			-26.7
Net premiums written	$	218,446			$	209,605			4.2	%		$	436,888			$	425,467			2.7	%

The following table provides a reconciliation of net (loss) income to operating (loss) income for the periods indicated:

	Three Months Ended June 30,											Six Months Ended June 30,
		2022				2021			% Change				2022				2021			% Change
	(dollars in thousands, except per share amounts)
Reconciliation of Net (Loss) Income
to Non-GAAP Operating (Loss) Income
Net (loss) income	$	(8,208	)		$	16,164			NM			$	4,937			$	26,694			-81.5	%
Investment losses (gains) (after tax)		6,618				(3,350	)		NM				6,678				(5,301	)		NM
Non-GAAP operating (loss) income	$	(1,590	)		$	12,814			NM			$	11,615			$	21,393			-45.7	%
Per Share Reconciliation of Net (loss) Income
to Non-GAAP Operating (Loss) Income
Net (loss) income – Class A (diluted)	$	(0.26	)		$	0.53			NM			$	0.16			$	0.88			-81.8	%
Investment losses (gains) (after tax)		0.21				(0.11	)		NM				0.21				(0.17	)		NM
Non-GAAP operating (loss) income – Class A	$	(0.05	)		$	0.42			NM			$	0.37			$	0.71			-47.9	%
Net (loss) income – Class B	$	(0.24	)		$	0.48			NM			$	0.14			$	0.80			-82.5	%
Investment losses (gains) (after tax)		0.19				(0.10	)		NM				0.20				(0.16	)		NM
Non-GAAP operating (loss) income – Class B	$	(0.05	)		$	0.38			NM			$	0.34			$	0.64			-46.9	%

The statutory combined ratio is a non-GAAP standard measurement of underwriting profitability that is based upon amounts determined under SAP. The statutory combined ratio is the sum of:

• the statutory loss ratio, which is the ratio of calendar-year incurred losses and loss expenses, excluding anticipated salvage and subrogation recoveries, to premiums earned;
• the statutory expense ratio, which is the ratio of expenses incurred for net commissions, premium taxes and underwriting expenses to premiums written; and
• the statutory dividend ratio, which is the ratio of dividends to holders of workers’ compensation policies to premiums earned.

The statutory combined ratio does not reflect investment income, federal income taxes or other non-operating income or expense. A statutory combined ratio of less than 100% generally indicates underwriting profitability.

Dividend Information

On July 21, 2022, we declared a regular quarterly cash dividend of $0.165 per share for our Class A common stock and $0.1475 per share for our Class B common stock, which is payable on August 15, 2022 to stockholders of record as of the close of business on August 1, 2022.

Pre-Recorded Webcast

At approximately 8:30 am EDT on Thursday, July 28, 2022, we will make available in the Investors section of our website a pre-recorded audio webcast featuring management commentary and a question and answer session. You may listen to the pre-recorded webcast by accessing the link on our website at http://investors.donegalgroup.com. A supplemental investor presentation is also available via our website.

About the Company

Donegal Group Inc. is an insurance holding company whose insurance subsidiaries and affiliates offer property and casualty lines of insurance in certain Mid-Atlantic, Midwestern, New England, Southern and Southwestern states. Donegal Mutual Insurance Company and the insurance subsidiaries of Donegal Group Inc. conduct business together as the Donegal Insurance Group. The Donegal Insurance Group has an A.M. Best rating of A (Excellent).

The Class A common stock and Class B common stock of Donegal Group Inc. trade on the NASDAQ Global Select Market under the symbols DGICA and DGICB, respectively. We are focused on several primary strategies, including achieving sustained excellent financial performance, strategically modernizing our operations and processes to transform our business, capitalizing on opportunities to grow profitably and delivering a superior experience to our agents and customers.

Safe Harbor

We base all statements contained in this release that are not historic facts on our current expectations. Such statements are forward-looking in nature (as defined in the Private Securities Litigation Reform Act of 1995) and necessarily involve risks and uncertainties. Forward-looking statements we make may be identified by our use of words such as “will,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “seek,” “estimate” and similar expressions. Our actual results could vary materially from our forward-looking statements. The factors that could cause our actual results to vary materially from the forward-looking statements we have previously made include, but are not limited to, prolonged economic challenges resulting from the COVID-19 pandemic, adverse litigation and other trends that could increase our loss costs (including labor shortages and escalating medical, automobile and property repair costs), adverse and catastrophic weather events, our ability to maintain profitable operations (including our ability to underwrite risks effectively and charge adequate premium rates), the adequacy of the loss and loss expense reserves of our insurance subsidiaries, the availability and successful operation of the information technology systems our insurance subsidiaries utilize, the successful development of new information technology systems to allow our insurance subsidiaries to compete effectively, business and economic conditions in the areas in which we and our insurance subsidiaries operate, interest rates, competition from various insurance and other financial businesses, terrorism, the availability and cost of reinsurance, legal and judicial developments including those related to COVID-19 business interruption coverage exclusions, changes in regulatory requirements, our ability to attract and retain independent insurance agents, changes in our A.M. Best rating and the other risks that we describe from time to time in our filings with the Securities and Exchange Commission. We disclaim any obligation to update such statements or to announce publicly the results of any revisions that we may make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Investor Relations Contacts

Karin Daly, Vice President, The Equity Group Inc.
Phone: (212) 836-9623
E-mail: kdaly@equityny.com

Jeffrey D. Miller, Executive Vice President & Chief Financial Officer
Phone: (717) 426-1931
E-mail: investors@donegalgroup.com

Financial Supplement

Donegal Group Inc.
Consolidated Statements of (Loss) Income
(unaudited; in thousands, except share data)
	Quarter Ended June 30,
		2022				2021
Net premiums earned	$	204,128			$	192,489
Investment income, net of expenses		8,204				7,652
Net investment (losses) gains		(8,377	)			4,241
Lease income		98				108
Installment payment fees		258				656
Total revenues		204,311				205,146
Net losses and loss expenses		141,608				113,957
Amortization of deferred acquisition costs		35,172				33,103
Other underwriting expenses		36,235				36,230
Policyholder dividends		1,289				1,629
Interest		240				217
Other expenses, net		346				313
Total expenses		214,890				185,449
(Loss) income before income tax (benefit) expense		(10,579	)			19,697
Income tax (benefit) expense		(2,371	)			3,533
Net (loss) income	$	(8,208	)		$	16,164
(Loss) earnings per common share:
Class A - basic and diluted	$	(0.26	)		$	0.53
Class B - basic and diluted	$	(0.24	)		$	0.48
Supplementary Financial Analysts' Data
Weighted-average number of shares outstanding:
Class A - basic		26,069,692				25,341,989
Class A - diluted		26,294,147				25,594,024
Class B - basic and diluted		5,576,775				5,576,775
Net premiums written	$	218,446			$	209,605
Book value per common share at end of period	$	15.87			$	17.64

Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)
	Six Months Ended June 30,
		2022				2021
Net premiums earned	$	403,377			$	379,740
Investment income, net of expenses		16,063				15,163
Net investment (losses) gains		(8,453	)			6,710
Lease income		203				216
Installment payment fees		748				1,287
Total revenues		411,938				403,116
Net losses and loss expenses		259,491				233,176
Amortization of deferred acquisition costs		69,354				63,282
Other underwriting expenses		73,342				70,012
Policyholder dividends		2,937				2,924
Interest		393				530
Other expenses, net		774				744
Total expenses		406,291				370,668
Income before income tax expense		5,647				32,448
Income tax expense		710				5,754
Net income	$	4,937			$	26,694
Net income per common share:
Class A - basic	$	0.16			$	0.89
Class A - diluted	$	0.16			$	0.88
Class B - basic and diluted	$	0.14			$	0.80
Supplementary Financial Analysts' Data
Weighted-average number of shares outstanding:
Class A - basic		25,928,952				25,056,610
Class A - diluted		26,052,149				25,246,791
Class B - basic and diluted		5,576,775				5,576,775
Net premiums written	$	436,888			$	425,467
Book value per common share at end of period	$	15.87			$	17.64

Donegal Group Inc.
Consolidated Balance Sheets
(in thousands)
	June 30,				December 31,
		2022				2021
	(unaudited)
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost	$	700,335			$	668,105
Available for sale, at fair value		507,046				532,629
Equity securities, at fair value		45,261				63,420
Short-term investments, at cost		46,685				12,692
Total investments		1,299,327				1,276,846
Cash		21,811				57,709
Premiums receivable		190,324				168,863
Reinsurance receivable		445,151				455,411
Deferred policy acquisition costs		74,247				68,028
Prepaid reinsurance premiums		172,406				176,936
Receivable from Michigan Catastrophic Claims Association		-				18,113
Other assets		46,582				33,269
Total assets	$	2,249,848			$	2,255,175
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Losses and loss expenses	$	1,083,354			$	1,077,620
Unearned premiums		601,939				572,958
Accrued expenses		4,797				4,029
Borrowings under lines of credit		35,000				35,000
Cash refunds due to Michigan policyholders		-				18,113
Other liabilities		13,736				16,419
Total liabilities		1,738,826				1,724,139
Stockholders' equity:
Class A common stock		296				288
Class B common stock		56				56
Additional paid-in capital		317,940				304,889
Accumulated other comprehensive (loss) income		(29,477	)			3,284
Retained earnings		263,433				263,745
Treasury stock		(41,226	)			(41,226	)
Total stockholders' equity		511,022				531,036
Total liabilities and stockholders' equity	$	2,249,848			$	2,255,175

FAQ

What were Donegal Group's Q2 2022 financial results for DGICA and DGICB?

Donegal Group reported a net loss of $8.2 million for Q2 2022, with net premiums earned at $204.1 million.

How much did Donegal Group's book value per share decrease in Q2 2022?

The book value per share decreased by 10% year-over-year to $15.87.

What caused the increase in Donegal Group's combined ratio in Q2 2022?

The combined ratio increased to 105% due to elevated weather-related losses and investment losses.

What is the outlook for Donegal Group following their Q2 2022 results?

Management expects improved results from premium rate increases implemented in 2022 and planned for 2023.