Donegal (DGICA) - 2024 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements The company's financial position strengthened in Q1 2024 with increased assets, higher net income, and improved operating cash flow Consolidated Balance Sheets Total assets, liabilities, and stockholders' equity all increased in Q1 2024, reflecting growth in premiums receivable and unearned premiums Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Total investments | $1,331,903,625 | $1,327,053,645 | | Total assets | $2,294,308,053 | $2,266,293,888 | | Liabilities & Equity | | | | Losses and loss expenses | $1,124,452,191 | $1,126,156,838 | | Unearned premiums | $634,136,621 | $599,411,468 | | Total liabilities | $1,809,221,579 | $1,786,548,534 | | Total stockholders' equity | $485,086,474 | $479,745,354 | Consolidated Statements of Income Net income increased in Q1 2024, primarily due to growth in net premiums earned and investment income, which outpaced the rise in total expenses Consolidated Income Statement Highlights (Unaudited) | Account | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net premiums earned | $227,748,679 | $215,233,160 | | Investment income, net | $10,972,327 | $9,449,078 | | Total revenues | $241,140,869 | $224,745,771 | | Net losses and loss expenses | $150,896,415 | $138,105,889 | | Total expenses | $233,892,473 | $218,449,338 | | Net income | $5,955,551 | $5,203,596 | | Class A EPS (basic and diluted) | $0.18 | $0.16 | | Class B EPS (basic and diluted) | $0.16 | $0.15 | Consolidated Statements of Cash Flows Operating activities generated positive cash flow in Q1 2024, a significant improvement from the prior year, while investing and financing activities used cash Consolidated Cash Flow Highlights (Unaudited) | Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $4,818,144 | ($680,734) | | Net cash (used in) provided by investing activities | ($3,817,413) | $1,408,999 | | Net cash used in financing activities | ($4,987,964) | ($3,015,553) | | Net decrease in cash | ($3,987,233) | ($2,287,288) | | Cash at end of period | $19,805,040 | $22,836,044 | Notes to Consolidated Financial Statements The notes provide details on the company's structure, accounting policies, investment portfolio, and loss reserve methodology, highlighting its reinsurance pooling agreement and operating segments - The company operates through a pooling agreement where its largest subsidiary, Atlantic States, pools premiums and losses with Donegal Mutual, retaining 80% of the pooled business, which homogenizes risk and represents a significant portion of consolidated revenues[26][28] - The company's 2024 reinsurance program includes property coverage of $36.0 million over a $4.0 million retention, liability coverage of $72.0 million over a $3.0 million retention, and workers' compensation coverage of $17.0 million over a $3.0 million retention[35] - At March 31, 2024, the investment portfolio held 893 debt securities in an unrealized loss position, with total gross unrealized losses of $119.2 million ($117.6 million held for more than 12 months), which management considered temporary[48][49] - For Q1 2024, the company recognized an $8.4 million decrease in prior-year liabilities for losses and loss expenses, primarily from lower-than-expected loss emergence in commercial multi-peril, commercial auto, and homeowners lines[69] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2024 performance, highlighting increased net premiums written, a higher GAAP combined ratio due to loss trends, improved net income from investment income, and strong liquidity Critical Accounting Policies and Estimates The liability for property and casualty insurance losses is the most critical accounting estimate, subject to inherent uncertainties and significant impact from reserve changes - The liability for losses and loss expenses is the company's most critical accounting estimate, based on assumptions about future trends, claims severity, and other factors[90][91] - A 1% change in the company's net loss and loss expense reserves would affect pre-tax operating results by approximately $6.9 million as of March 31, 2024[94] Sensitivity of Net Loss Reserves and Stockholders' Equity (March 31, 2024) | Percentage Change in Net Loss Reserves | Percentage Change in Stockholders' Equity (Net of Tax) | | :--- | :--- | | (10.0)% | 11.3% | | (5.0)% | 5.7% | | Base | — | | 5.0% | (5.7)% | | 10.0% | (11.3)% | Results of Operations Q1 2024 saw increased net income and premiums written, though the GAAP combined ratio deteriorated due to a higher loss ratio from increased core and large fire losses - Net premiums written increased 6.0% year-over-year to $251.4 million, driven by 18.5% growth in personal lines, while commercial lines decreased 0.5% due to planned attrition[114] - Net investment income increased 16.1% year-over-year to $11.0 million, attributed to a higher average investment yield[115] GAAP Combined Ratio Breakdown | Component | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Loss ratio | 66.3% | 64.2% | | Expense ratio | 35.7% | 36.4% | | Dividend ratio | 0.4% | 0.6% | | Combined ratio | 102.4% | 101.2% | - The loss ratio increased to 66.3% from 64.2% year-over-year, driven by a higher core loss ratio (58.7% vs 56.5%) and more large fire losses (6.6% vs 5.1%), partially offset by lower weather-related losses (4.7% vs 6.5%)[117] - Net income rose to $6.0 million ($0.18/share Class A) in Q1 2024, compared to $5.2 million ($0.16/share Class A) in Q1 2023[122] Liquidity and Capital Resources The company maintains strong liquidity through operating cash flows, investment activities, and available credit facilities, supporting ongoing operations and dividend payments - Operating activities provided net cash flow of $4.8 million in Q1 2024, compared to a use of $0.7 million in Q1 2023[124] - At March 31, 2024, the company had a $20.0 million unused line of credit with M&T and a $35.0 million outstanding advance with the FHLB of Pittsburgh[125] - In April 2024, the board declared quarterly dividends of $0.1725 per Class A share and $0.155 per Class B share, with approximately $39.6 million available for distribution from insurance subsidiaries without prior regulatory approval[130] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are equity price, interest rate, and credit risk within its investment portfolio, with no material changes reported since year-end 2023 - The company's main market risks are equity price risk, interest rate risk, and credit risk within its investment portfolio[132][133][137] - There have been no material changes to the company's quantitative or qualitative market risk exposure from December 31, 2023, through March 31, 2024[138] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of March 31, 2024, the company's disclosure controls and procedures were effective[139] - No changes occurred in internal control over financial reporting during the first quarter of 2024 that materially affected or are likely to materially affect internal controls[140] PART II OTHER INFORMATION Legal Proceedings The company reported no material legal proceedings during the period - None[143] Risk Factors No material changes were reported in the company's risk factors since the 2023 Annual Report on Form 10-K - There have been no material changes in the risk factors disclosed in the 2023 Form 10-K Report during the three months ended March 31, 2024[144] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[145] Exhibits The filing includes required certifications, statements, XBRL data, and incorporates by reference the 2024 Equity Incentive Plans - Exhibits filed include CEO and CFO certifications (31.1, 31.2), statements under 18 U.S.C. Section 1350 (32.1, 32.2), and various XBRL documents[151] - The Donegal Group Inc. 2024 Equity Incentive Plans for Employees and Directors are incorporated by reference[151]