SEC Filing | Donegal Group Inc.

View:

Download DOC

Download PDF

Download XLS

Download XBRL

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number 0-15341

Donegal Group Inc.

(Exact name of registrant as specified in its charter)

Delaware	23-2424711
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1195 River Road, P.O. Box 302, Marietta, PA 17547

(Address of principal executive offices) (Zip code)

(717) 426-1931

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐	Accelerated filer ☑	Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbols	Name of Each Exchange on Which Registered

Class A Common Stock, $.01 par value	DGICA	The NASDAQ Global Select Market

Class B Common Stock, $.01 par value	DGICB	The NASDAQ Global Select Market

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 27,668,853 shares of Class A Common Stock, par value $0.01 per share, and 5,576,775 shares of Class B Common Stock, par value $0.01 per share, outstanding on November 1, 2023.

DONEGAL GROUP INC.

INDEX TO FORM 10-Q REPORT

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults upon Senior Securities	35
Item 4.	Mine Safety Disclosure	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
Signatures		37

Index

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Donegal Group Inc. and Subsidiaries

Consolidated Balance Sheets

	September 30, 2023			December 31, 2022
	(Unaudited)
Assets
Investments
Fixed maturities
Held to maturity, at amortized cost (net of allowance for expected credit losses of $1,358,977 and $0)	$	683,911,746		$	688,439,360
Available for sale, at fair value		566,539,622			523,791,931
Equity securities, at fair value		35,463,958			35,104,840
Short-term investments, at cost, which approximates fair value		20,370,551			57,321,111
Total investments		1,306,285,877			1,304,657,242
Cash		23,718,830			25,123,332
Accrued investment income		10,477,007			8,861,292
Premiums receivable		188,633,601			173,846,294
Reinsurance receivable (net of allowance for expected credit losses of $1,604,771 and $0)		437,888,614			456,522,223
Deferred policy acquisition costs		77,920,996			73,170,230
Deferred tax asset, net		23,790,808			21,603,017
Prepaid reinsurance premiums		173,147,044			160,591,399
Property and equipment, net		2,673,580			2,755,105
Accounts receivable - securities		—			1,842
Federal income taxes recoverable		7,974,138			8,510,897
Goodwill		5,625,354			5,625,354
Other intangible assets		958,010			958,010
Other		1,183,162			1,123,098
Total assets	$	2,260,277,021		$	2,243,349,335
Liabilities and Stockholders’ Equity
Liabilities
Losses and loss expenses	$	1,113,354,318		$	1,121,045,758
Unearned premiums		617,325,983			577,653,130
Accrued expenses		4,107,224			4,226,390
Reinsurance balances payable		7,454,490			3,495,824
Borrowings under lines of credit		35,000,000			35,000,000
Cash dividends declared to stockholders		—			5,296,990
Due to affiliate		1,189,483			5,173,289
Other		8,505,945			7,864,942
Total liabilities		1,786,937,443			1,759,756,323
Stockholders’ Equity
Preferred stock, $0.01 par value, authorized 2,000,000 shares; none issued		—			—
Class A common stock, $0.01 par value, authorized 50,000,000 shares, issued 30,629,636 and 30,120,263 shares and outstanding 27,627,048 and 27,117,675 shares		306,297			301,203
Class B common stock, $0.01 par value, authorized 10,000,000 shares, issued 5,649,240 shares and outstanding 5,576,775 shares		56,492			56,492
Additional paid-in capital		333,559,263			325,601,647
Accumulated other comprehensive loss		(50,295,321	)		(41,703,747	)
Retained earnings		230,939,204			240,563,774
Treasury stock, at cost		(41,226,357	)		(41,226,357	)
Total stockholders’ equity		473,339,578			483,593,012
Total liabilities and stockholders’ equity	$	2,260,277,021		$	2,243,349,335

See accompanying notes to consolidated financial statements.

Index

Donegal Group Inc. and Subsidiaries

Consolidated Statements of Loss

(Unaudited)

	Three Months Ended September 30,
	2023			2022
Revenues:
Net premiums earned	$	224,392,849		$	206,121,826
Investment income, net of investment expenses		10,536,488			8,568,671
Net investment losses (includes ($237,611) and $371,194 accumulated other comprehensive income reclassifications)		(1,242,521	)		(2,357,634	)
Lease income		85,663			91,679
Installment payment fees		155,771			413,706
Total revenues		233,928,250			212,838,248
Expenses:
Net losses and loss expenses		156,683,024			155,754,256
Amortization of deferred policy acquisition costs		39,332,000			35,513,000
Other underwriting expenses		37,155,385			33,411,529
Policyholder dividends		1,399,310			1,239,154
Interest		156,318			71,430
Other expenses, net		207,127			218,083
Total expenses		234,933,164			226,207,452
Loss before income tax benefit		(1,004,914	)		(13,369,204	)
Income tax benefit (includes ($49,898) and $77,951 income tax (benefit) expense from reclassification items)		(199,613	)		(2,993,333	)
Net loss	$	(805,301	)	$	(10,375,871	)
Net loss per share:
Class A common stock - basic and diluted	$	(0.02	)	$	(0.33	)
Class B common stock - basic and diluted	$	(0.02	)	$	(0.30	)

Donegal Group Inc. and Subsidiaries

Consolidated Statements of Comprehensive Loss

(Unaudited)

	Three Months Ended September 30,
	2023			2022
Net loss	$	(805,301	)	$	(10,375,871	)
Other comprehensive loss, net of tax
Unrealized loss on securities:
Unrealized holding loss during the period, net of income tax benefit of $1,992,787 and $4,572,428		(8,085,494	)		(17,201,046	)
Reclassification adjustment for losses (gains) included in net loss, net of income tax (benefit) expense of ($49,898) and $77,951		187,713			(293,243	)
Other comprehensive loss		(7,897,781	)		(17,494,289	)
Comprehensive loss	$	(8,703,082	)	$	(27,870,160	)

See accompanying notes to consolidated financial statements.

Index

Donegal Group Inc. and Subsidiaries

Consolidated Statements of Income (Loss)

(Unaudited)

	Nine Months Ended September 30,
	2023		2022
Revenues:
Net premiums earned	$	655,886,046	$	609,498,939
Investment income, net of investment expenses		30,143,025		24,631,398
Net investment gains (losses) (includes ($2,289,648) and $824,409 accumulated other comprehensive income reclassifications)		930,302		(10,810,594	)
Lease income		261,718		294,529
Installment payment fees		648,849		1,161,842
Total revenues		687,869,940		624,776,114
Expenses:
Net losses and loss expenses		446,023,609		415,245,619
Amortization of deferred policy acquisition costs		115,065,000		104,867,000
Other underwriting expenses		113,715,159		106,753,031
Policyholder dividends		4,088,288		4,176,649
Interest		463,911		464,188
Other expenses, net		968,976		991,671
Total expenses		680,324,943		632,498,158
Income (loss) before income tax expense (benefit)		7,544,997		(7,722,044	)
Income tax expense (benefit) (includes ($480,826) and $173,126 income tax (benefit) expense from reclassification items)		1,149,279		(2,283,445	)
Net income (loss)	$	6,395,718	$	(5,438,599	)
Net income (loss) per share:
Class A common stock - basic and diluted	$	0.20	$	(0.17	)
Class B common stock - basic and diluted	$	0.17	$	(0.16	)

Donegal Group Inc. and Subsidiaries

Consolidated Statements of Comprehensive Loss

(Unaudited)

	Nine Months Ended September 30,
	2023			2022
Net income (loss)	$	6,395,718		$	(5,438,599	)
Other comprehensive loss, net of tax
Unrealized loss on securities:
Unrealized holding loss during the period, net of income tax benefit of $3,353,482 and $13,185,692		(13,204,298	)		(49,603,320	)
Reclassification adjustment for losses (gains) included in net income (loss), net of income tax (benefit) expense of ($480,826) and $173,126		1,808,822			(651,283	)
Other comprehensive loss		(11,395,476	)		(50,254,603	)
Comprehensive loss	$	(4,999,758	)	$	(55,693,202	)

See accompanying notes to consolidated financial statements.

Index

Donegal Group Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Equity

(Unaudited)

Nine Months Ended September 30, 2023

	Class A Shares		Class B Shares		Class A Amount		Class B Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Retained Earnings			Treasury Stock			Total Stockholders’ Equity
Balance, December 31, 2022		30,120,263		5,649,240	$	301,203	$	56,492	$	325,601,647	$	(41,703,747	)	$	240,563,774		$	(41,226,357	)	$	483,593,012
Issuance of common stock (stock compensation plans)		35,045		—		350		—		440,746		—			—			—			441,096
Share-based compensation		143,004		—		1,431		—		2,218,355		—			—			—			2,219,786
Net income		—		—		—		—		—		—			5,203,596			—			5,203,596
Cash dividends declared		—		—		—		—		—		—			(7,057	)		—			(7,057	)
Grant of stock options		—		—		—		—		114,724		—			(114,724	)		—			—
Cumulative effect of adoption of updated guidance for credit losses at January 1, 2023		—		—		—		—		—		—			(1,895,902	)		—			(1,895,902	)
Other comprehensive income		—		—		—		—		—		4,007,638			—			—			4,007,638
Balance, March 31, 2023		30,298,312		5,649,240	$	302,984	$	56,492	$	328,375,472	$	(37,696,109	)	$	243,749,687		$	(41,226,357	)	$	493,562,169
Issuance of common stock (stock compensation plans)		44,664		—		447		—		668,933		—			—			—			669,380
Share-based compensation		195,893		—		1,958		—		2,966,842		—			—			—			2,968,800
Net income		—		—		—		—		—		—			1,997,423			—			1,997,423
Cash dividends declared		—		—		—		—		—		—			(5,498,873	)		—			(5,498,873	)
Grant of stock options		—		—		—		—		61,749		—			(61,749	)		—			—
Other comprehensive loss		—		—		—		—		—		(7,505,333	)		—			—			(7,505,333	)
Balance, June 30, 2023		30,538,869		5,649,240	$	305,389	$	56,492	$	332,072,996	$	(45,201,442	)	$	240,186,488		$	(41,226,357	)	$	486,193,566
Issuance of common stock (stock compensation plans)		28,912		—		289		—		354,337		—			—			—			354,626
Share-based compensation		61,855		—		619		—		1,030,458		—			—			—			1,031,077
Net loss		—		—		—		—		—		—			(805,301	)		—			(805,301	)
Cash dividends declared		—		—		—		—		—		—			(5,536,609	)		—			(5,536,609	)
Grant of stock options		—		—		—		—		101,472		—			(101,472	)		—			—
Reclassification of held to maturity transfer		—		—		—		—		—		2,803,902			(2,803,902	)		—			—
Other comprehensive loss		—		—		—		—		—		(7,897,781	)		—			—			(7,897,781	)
Balance, September 30, 2023		30,629,636		5,649,240	$	306,297	$	56,492	$	333,559,263	$	(50,295,321	)	$	230,939,204		$	(41,226,357	)	$	473,339,578

See accompanying notes to consolidated financial statements.

Index

Donegal Group Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Equity

(Unaudited)

Nine Months Ended September 30, 2022

	Class A Shares		Class B Shares		Class A Amount		Class B Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total Stockholders’ Equity
Balance, December 31, 2021		28,756,203		5,649,240	$	287,562	$	56,492	$	304,889,481	$	3,283,551		$	263,745,358		$	(41,226,357	)	$	531,036,087
Issuance of common stock (stock compensation plans)		33,407		—		335		—		423,665		—			—			—			424,000
Share-based compensation		900		—		9		—		256,451		—			—			—			256,460
Net income		—		—		—		—		—		—			13,145,029			—			13,145,029
Cash dividends declared		—		—		—		—		—		—			(5,490	)		—			(5,490	)
Grant of stock options		—		—		—		—		98,409		—			(98,409	)		—			—
Other comprehensive loss		—		—		—		—		—		(20,590,225	)		—			—			(20,590,225	)
Balance, March 31, 2022		28,790,510		5,649,240	$	287,906	$	56,492	$	305,668,006	$	(17,306,674	)	$	276,786,488		$	(41,226,357	)	$	524,265,861
Issuance of common stock (stock compensation plans)		54,743		—		547		—		736,349		—			—			—			736,896
Share-based compensation		775,898		—		7,759		—		11,476,429		—			—			—			11,484,188
Net loss		—		—		—		—		—		—			(8,207,757	)		—			(8,207,757	)
Cash dividends declared		—		—		—		—		—		—			(5,086,617	)		—			(5,086,617	)
Grant of stock options		—		—		—		—		59,216		—			(59,216	)		—			—
Other comprehensive loss		—		—		—		—		—		(12,170,089	)		—			—			(12,170,089	)
Balance, June 30, 2022		29,621,151		5,649,240	$	296,212	$	56,492	$	317,940,000	$	(29,476,763	)	$	263,432,898		$	(41,226,357	)	$	511,022,482
Issuance of common stock (stock compensation plans)		23,454		—		235		—		270,887		—			—			—			271,122
Share-based compensation		195,322		—		1,953		—		3,013,995		—			—			—			3,015,948
Net loss		—		—		—		—		—		—			(10,375,871	)		—			(10,375,871	)
Cash dividends declared		—		—		—		—		—		—			(5,235,993	)		—			(5,235,993	)
Grant of stock options		—		—		—		—		138,907		—			(138,907	)		—			—
Other comprehensive loss		—		—		—		—		—		(17,494,289	)		—			—			(17,494,289	)
Balance, September 30, 2022		29,839,927		5,649,240	$	298,400	$	56,492	$	321,363,789	$	(46,971,052	)	$	247,682,127		$	(41,226,357	)	$	481,203,399

See accompanying notes to consolidated financial statements.

Index

Donegal Group Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2023			2022
Cash Flows from Operating Activities:
Net income (loss)	$	6,395,718		$	(5,438,599	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and other non-cash items		3,215,399			3,747,654
Net investment (gains) losses		(930,302	)		10,810,594
Changes in assets and liabilities:
Losses and loss expenses		(7,691,440	)		30,505,293
Unearned premiums		39,672,853			22,394,901
Premiums receivable		(14,787,307	)		(12,881,975	)
Deferred acquisition costs		(4,750,766	)		(6,355,269	)
Deferred income taxes		600,019			(2,645,695	)
Reinsurance receivable		17,501,773			3,564,454
Prepaid reinsurance premiums		(12,555,645	)		11,222,717
Accrued investment income		(1,615,715	)		(1,608,978	)
Due to affiliate		(3,983,806	)		(1,342,121	)
Reinsurance balances payable		3,958,666			(16,695	)
Current income taxes		536,759			(4,150,265	)
Accrued expenses		(119,166	)		282,286
Other, net		580,936			1,811,243
Net adjustments		19,632,258			55,338,144
Net cash provided by operating activities		26,027,976			49,899,545
Cash Flows from Investing Activities:
Purchases of fixed maturities, held to maturity		(25,226,609	)		(68,902,605	)
Purchases of fixed maturities, available for sale		(131,155,483	)		(101,328,478	)
Purchases of equity securities, available for sale		(5,128,994	)		(12,488,733	)
Maturity of fixed maturities:
Held to maturity		29,144,970			41,194,285
Available for sale		41,318,216			60,346,490
Sales of fixed maturities:
Available for sale		28,154,556			6,568,154
Sales of equity securities, available for sale		8,080,764			17,498,036
Net (purchases) sales of property and equipment		(44,701	)		28,289
Net sales (purchases) of short-term investments		36,950,560			(23,968,454	)
Net cash used in investing activities		(17,906,721	)		(81,053,016	)
Cash Flows from Financing Activities:
Cash dividends paid		(16,339,529	)		(15,243,368	)
Issuance of common stock		6,813,772			15,348,793
Net cash (used in) provided by financing activities		(9,525,757	)		105,425
Net decrease in cash		(1,404,502	)		(31,048,046	)
Cash at beginning of period		25,123,332			57,709,375
Cash at end of period	$	23,718,830		$	26,661,329

Cash paid during period - Interest	$	463,911		$	464,188
Net cash paid during period - Taxes	$	—		$	4,500,000

See accompanying notes to consolidated financial statements.

Index

DONEGAL GROUP INC. AND SUBSIDIARIES

(Unaudited)

Notes to Consolidated Financial Statements

1 -	Organization

Donegal Mutual Insurance Company (“Donegal Mutual”) organized us as an insurance holding company on August 26, 1986. Our insurance subsidiaries, Atlantic States Insurance Company (“Atlantic States”), Michigan Insurance Company (“MICO”), Southern Insurance Company of Virginia (“Southern”) and the Peninsula Insurance Group (“Peninsula”), which consists of Peninsula Indemnity Company and The Peninsula Insurance Company, and our affiliates write personal and commercial lines of property and casualty coverages exclusively through a network of independent insurance agents in certain Mid-Atlantic, Midwestern, New England, Southern and Southwestern states.

At September 30, 2023, we had three segments: our investment function, our commercial lines of insurance and our personal lines of insurance. The commercial lines products of our insurance subsidiaries consist primarily of commercial automobile, commercial multi-peril and workers’ compensation policies. The personal lines products of our insurance subsidiaries consist primarily of homeowners and private passenger automobile policies.

At September 30, 2023, Donegal Mutual held approximately 44% of our outstanding Class A common stock and approximately 84% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately 71% of the total voting power of our common stock. Our insurance subsidiaries and Donegal Mutual have interrelated operations due to a pooling agreement and other intercompany agreements and transactions. While each company maintains its separate corporate existence, our insurance subsidiaries and Donegal Mutual conduct business together as the Donegal Insurance Group. As such, Donegal Mutual and our insurance subsidiaries share the same business philosophy, the same management, the same employees and the same facilities and offer the same types of insurance products.

Atlantic States, our largest subsidiary, participates in a proportional reinsurance agreement, or pooling agreement, with Donegal Mutual. Under the pooling agreement, Donegal Mutual and Atlantic States contribute substantially all of their respective premiums, losses and loss expenses to the underwriting pool, and the underwriting pool, acting through Donegal Mutual, then allocates 80% of the pooled business to Atlantic States. Thus, Donegal Mutual and Atlantic States share the underwriting results of the pooled business in proportion to their respective participation in the underwriting pool.

In addition, Donegal Mutual has 100% quota-share reinsurance agreements with Mountain States Commercial Insurance Company, Mountain States Indemnity Company and Southern Mutual Insurance Company. Donegal Mutual places its assumed business from these companies into the underwriting pool.

The same executive management and underwriting personnel administer products, classes of business underwritten, pricing practices and underwriting standards of Donegal Mutual and our insurance subsidiaries. In addition, as the Donegal Insurance Group, Donegal Mutual and our insurance subsidiaries share a combined business plan to achieve market penetration and underwriting profitability objectives. The products our insurance subsidiaries and Donegal Mutual market are generally complementary, thereby allowing the Donegal Insurance Group to offer a broader range of products to a given market and to expand the Donegal Insurance Group’s ability to service an entire personal lines or commercial lines account. Distinctions within the products of Donegal Mutual and our insurance subsidiaries generally relate to specific risk profiles targeted within similar classes of business, such as preferred tier versus standard tier products, but we do not allocate all of the standard risk gradients to one company. Therefore, the underwriting profitability of the business the individual companies write directly will vary. However, the underwriting pool homogenizes the risk characteristics of all business that Donegal Mutual and Atlantic States write directly. The business Atlantic States derives from the underwriting pool represents a significant percentage of our total consolidated revenues.

Index

2 -	Basis of Presentation

Our financial information for the interim periods included in this Form 10-Q Report is unaudited; however, our financial information we include in this Form 10-Q Report reflects all adjustments, consisting only of normal recurring adjustments that, in the opinion of our management, are necessary for a fair presentation of our financial position, results of operations and cash flows for those interim periods. Our results of operations for the nine months ended September 30, 2023 are not necessarily indicative of the results of operations we expect for the year ending December 31, 2023.

We recommend you read the interim financial statements we include in this Form 10-Q Report in conjunction with the financial statements and the notes to our financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2022.

3 -	Net Income (Loss) Per Share

We have two classes of common stock, which we refer to as our Class A common stock and our Class B common stock. Our certificate of incorporation provides that whenever our board of directors declares a dividend on our Class B common stock, our board of directors shall simultaneously declare a dividend on our Class A common stock that is payable to the holders of our Class A common stock at the same time and as of the same record date at a rate that is at least 10% greater than the rate at which our board of directors declared a dividend on our Class B common stock. Accordingly, we use the two-class method to compute our net income (loss) per share. The two-class method is an earnings allocation formula that determines net income (loss) per share separately for each class of common stock based on dividends we have declared and an allocation of our remaining undistributed net income (loss) using a participation percentage that reflects the dividend rights of each class. The table below presents for the periods indicated a reconciliation of the numerators and denominators we used to compute basic and diluted net income (loss) per share for our Class A common stock and our Class B common stock:

	Three Months Ended September 30,
	2023						2022
	Class A			Class B			Class A			Class B
	(in thousands, except per share data)
Basic net loss per share:
Numerator:
Allocation of net loss	$	(671	)	$	(134	)	$	(8,714	)	$	(1,662	)
Denominator: