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Donegal (DGICA) - 2022 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements The unaudited consolidated financial statements for Q1 2022 present the company's financial position, operational results, and cash flows, highlighting key changes from the prior year Consolidated Balance Sheets As of March 31, 2022, total assets were $2.24 billion and total stockholders' equity was $524.3 million, reflecting a decrease primarily due to increased accumulated other comprehensive loss Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Investments | $1,270,827 | $1,276,846 | | Total Assets | $2,240,762 | $2,255,175 | | Losses and loss expenses | $1,071,587 | $1,077,620 | | Total Liabilities | $1,716,496 | $1,724,139 | | Total Stockholders' Equity | $524,266 | $531,036 | - Accumulated other comprehensive income swung from a positive $3.3 million at year-end 2021 to a loss of $17.3 million as of March 31, 2022, primarily reflecting unrealized losses on securities10 Consolidated Statements of Income For Q1 2022, total revenues increased to $207.6 million and net income rose to $13.1 million, with diluted EPS at $0.43 Q1 2022 vs Q1 2021 Income Statement (in thousands, except per share data) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net premiums earned | $199,249 | $187,252 | | Total revenues | $207,627 | $197,970 | | Total expenses | $191,400 | $185,219 | | Income before income tax | $16,226 | $12,751 | | Net income | $13,145 | $10,530 | | EPS (Class A, diluted) | $0.43 | $0.35 | - The company experienced a net investment loss of $76,247 in Q1 2022, a significant reversal from the $2.5 million net investment gain reported in Q1 202113 Consolidated Statements of Cash Flows Net cash from operating activities decreased to $20.7 million in Q1 2022, while investing activities reversed to a net cash outflow of $17.8 million Q1 2022 vs Q1 2021 Cash Flows (in thousands) | Cash Flow Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net cash from Operating | $20,750 | $29,877 | | Net cash (used in) from Investing | ($17,778) | $19,152 | | Net cash used in Financing | ($4,606) | ($49,732) | | Net decrease in cash | ($1,634) | ($703) | | Cash at end of period | $56,075 | $102,392 | Notes to Consolidated Financial Statements The notes detail the company's organizational structure, accounting policies, investment portfolio, segment performance, and loss reserve methodology - Donegal Group Inc. is organized as an insurance holding company, with Donegal Mutual Insurance Company holding approximately 70% of the total voting power2628 - Atlantic States, the largest subsidiary, participates in a proportional reinsurance pooling agreement with Donegal Mutual, allocated 80% of the pooled business29 - The company operates in three segments: investment function, commercial lines of insurance, and personal lines of insurance27 Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights a 6.4% increase in net premiums earned and an improved combined ratio of 95.8% in Q1 2022, while addressing liquidity and capital resources - The most significant accounting estimate is the liability for property and casualty insurance losses and loss expenses, where a 1% change in net reserves would impact pre-tax results by approximately $6.3 million9396 GAAP Combined Ratio Breakdown | Ratio Component | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Loss ratio (non-weather) | 55.2% | 60.0% | | Loss ratio (weather-related) | 4.0% | 3.7% | | Total Loss Ratio | 59.2% | 63.7% | | Expense ratio | 35.8% | 34.1% | | Dividend ratio | 0.8% | 0.7% | | Combined ratio | 95.8% | 98.5% | - Favorable loss reserve development for Q1 2022 was approximately $16.5 million, or 8.3 percentage points of the loss ratio, compared to $8.2 million (4.4 percentage points) in Q1 2021123 Results of Operations Net premiums earned increased by 6.4% to $199.2 million in Q1 2022, driven by a lower loss ratio and an improved combined ratio of 95.8% - Net premiums earned increased by $11.9 million (6.4%) in Q1 2022, primarily due to the inclusion of Mountain States Insurance Group business and renewal premium increases119 - The loss ratio decreased to 59.2% in Q1 2022 from 63.7% in Q1 2021, attributed to favorable prior year loss development and lower fire losses123 - The expense ratio increased to 35.8% from 34.1% year-over-year, reflecting higher underwriting-based incentive costs and increased technology system-related expenses124 Liquidity and Capital Resources The company maintains sufficient liquidity through operating cash flows, investment income, and available credit facilities, with $20.7 million provided by operations in Q1 2022 - Operating activities provided net cash flows of $20.7 million and $29.9 million in the first three months of 2022 and 2021, respectively130 - As of March 31, 2022, the company had a $20.0 million unsecured line of credit with no outstanding balance and a $35.0 million outstanding advance from the FHLB of Pittsburgh131 - Approximately $47.3 million is available for dividend distribution from insurance subsidiaries to the parent company in 2022 without prior regulatory approval136 Quantitative and Qualitative Disclosures About Market Risk The company's market risk primarily arises from its investment portfolio's exposure to price and interest rate fluctuations, with no material changes reported - The company's main market risks are associated with its investment portfolio (price and interest rate risk) and, to a lesser extent, its debt obligations143 - No material changes were reported in the quantitative or qualitative market risk exposure from December 31, 2021, through March 31, 2022144 Controls and Procedures Management concluded that disclosure controls were effective as of March 31, 2022, following the implementation of a new expense allocation and reinsurance system - The CEO and CFO concluded that as of March 31, 2022, the company's disclosure controls and procedures were effective145 - A new application system for expense allocation and reinsurance was implemented, leading to changes in internal controls over financial reporting as part of a systems modernization project146147 PART II OTHER INFORMATION Legal Proceedings The company reported no material legal proceedings - None152 Risk Factors No material changes were reported in the risk factors from the company's 2021 Annual Report on Form 10-K - No material changes were reported in the risk factors from the 2021 Annual Report on Form 10-K153 Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds from such sales - None155 Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - The exhibits filed include CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2) and XBRL interactive data files (Exhibit 101 series)164