Donegal Group Inc. Announces Fourth Quarter and Full Year 2022 Results

MARIETTA, Pa., Feb. 23, 2023 (GLOBE NEWSWIRE) -- Donegal Group Inc. (NASDAQ:DGICA) and (NASDAQ:DGICB) today reported its financial results for the fourth quarter and full year ended December 31, 2022.

Significant Items for Fourth Quarter of 2022 (all comparisons to fourth quarter of 2021):

• Net premiums earned increased 6.5% to $213.0 million
• Combined ratio of 102.8%, compared to 101.6%
• Net income of $3.5 million, or 11 cents per diluted Class A share, compared to $5.3 million, or 17 cents per diluted Class A share
• Net investment gains (after tax) of $0.5 million, or 2 cents per diluted Class A share, compared to $1.1 million, or 3 cents per diluted Class A share, are included in net income

Significant Items for Full Year of 2022 (all comparisons to full year of 2021):

• Net premiums earned increased 6.0% to $822.5 million
• Combined ratio of 103.3%, compared to 101.0%
• Net loss of $2.0 million, or 6 cents per Class A share, compared to net income of $25.3 million, or 83 cents per diluted Class A share
• Net investment losses (after tax) of $8.0 million, or 26 cents per Class A share, compared to net investment gains (after tax) of $5.1 million, or 17 cents per diluted Class A share, are included in net loss
• Book value per share of $14.79 at December 31, 2022, compared to $16.95 at year-end 2021
  
  

Financial Summary

¹The “Definitions of Non-GAAP and Operating Measures” section of this release defines and reconciles data that we prepare on an accounting basis other than U.S. generally accepted accounting principles (“GAAP”).

²Not meaningful.

Management Commentary

Kevin G. Burke, President and Chief Executive Officer of Donegal Group Inc., stated, “We are pleased to have achieved growth in net premiums written¹ in the fourth quarter of 2022 in every line of business, led by a return to strong growth in our personal lines business segment. We attribute the personal lines growth to new business writings resulting from the successful launch of new products over the past year, strong renewal retention rates in our legacy products and substantial premium rate increases to combat ongoing inflationary pressures on loss costs. As we continue to closely monitor the effects of economic conditions, we are actively managing new business growth in this segment. We expect to expand our new personal lines products and agency portal to the state of Michigan in the second quarter of 2023, which will complete the ten-state rollout that we began in late 2021.

Net premiums written within our commercial lines segment increased by 6.9% for the fourth quarter of 2022. We continue to execute state-specific strategies that include accelerating growth in states where we see opportunities for profitable growth and reducing exposures in states we have targeted for profit improvement. We are accelerating pricing increases in tandem with tighter underwriting guidelines to improve profit margins within our commercial business segment. We look forward to the introduction of a new businessowners product, coupled with enhanced straight-through-processing capabilities for that product as well as commercial automobile, commercial umbrella and workers’ compensation policies via our new operating platform, beginning in the second quarter of 2023. This third major release of new systems will allow us to more effectively compete for smaller commercial accounts that we expect will begin to drive additional commercial lines growth in the second half of 2023.

Beyond the ongoing strategic transformation of our products and systems, we continue to enhance our pipeline for strategic growth by building and strengthening relationships with our independent agency partners as we strive to achieve targeted new business volumes, retain attractive accounts and restore rate adequacy where necessary.”

Jeffrey D. Miller, Executive Vice President and Chief Financial Officer, added, “From an underwriting perspective, our fourth quarter of 2022 results continued to benefit from net favorable development of reserves for losses incurred in prior accident years, which reflected our conservative reserving practices. The overall combined ratio of 102.8% during the quarter was disappointing, reflecting the impacts of elevated weather-related losses that included $5.0 million related to Winter Storm Elliott, ongoing inflationary impacts on property and automobile loss costs and higher technology expenses related to our systems and data modernization initiatives.”

Mr. Burke concluded, “On behalf of the entire Donegal leadership team, we would like to recognize the tireless efforts and hard work of our dedicated team of employees and independent agents over the past year. We are confident in our ability to stabilize our underwriting performance and expect profitable growth that will enable us to enhance long-term shareholder value in the years to come.”

Insurance Operations

Donegal Group is an insurance holding company whose insurance subsidiaries and affiliates offer 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.

Net Premiums Written

The 10.2% increase in net premiums written for the fourth quarter of 2022 compared to the fourth quarter of 2021, as shown in the table above, represents the combination of 6.9% growth in commercial lines net premiums written and 15.6% growth in personal lines net premiums written. The $18.6 million increase in net premiums written for the fourth quarter of 2022 compared to the fourth quarter of 2021 included:

• Commercial Lines: $7.8 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: $10.8 million increase that we attribute to premium rate increases our insurance subsidiaries have implemented over the past four quarters, strong policy retention and new business writings in certain states where we have introduced an updated suite of products.

The $39.3 million increase in net premiums written for the full year of 2022 compared to the full year of 2021 included:

• Commercial Lines: $18.0 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: $21.3 million increase that we attribute to premium rate increases our insurance subsidiaries have implemented over the past four quarters, strong policy retention and 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 months and full years ended December 31, 2022 and 2021:

Loss Ratio – Fourth Quarter

For the fourth quarter of 2022, the loss ratio increased slightly to 69.9%, compared to 69.7% for the fourth quarter of 2021. For both commercial lines and personal lines segments, the fourth quarter of 2022 core loss ratios, which exclude weather-related losses, large fire losses and net favorable development of reserves for losses incurred in prior accident years, were virtually unchanged from the fourth quarter of 2021. The core loss ratios for both quarterly periods reflected increases in average claim severity due to the ongoing impact of supply chain disruption and labor shortages on repair and replacement costs for buildings and automobiles.

The fourth quarter of 2022 loss ratio for workers’ compensation was elevated due to several large workers’ compensation losses related to severe work-related injuries that occurred during the quarter. The commercial automobile core loss ratio decreased by 10.8 percentage points compared to the prior-year quarter, reflecting the benefit of significant premium rate increases and reduced exposures in underperforming states over the past several years.

Weather-related losses of $16.5 million, or 7.7 percentage points of the loss ratio, for the fourth quarter of 2022 increased from $8.7 million, or 4.3 percentage points of the loss ratio, for the fourth quarter of 2021. Our insurance subsidiaries incurred $5.0 million in losses from the severe freeze event that occurred across most of the country in late December 2022, primarily related to water damage from frozen pipes in commercial properties. The impact of weather-related loss activity to the loss ratio for the fourth quarter of 2022 was higher than our previous five-year average of 4.4 percentage points for fourth quarter weather-related losses.

Large fire losses, which we define as individual fire losses in excess of $50,000, were $13.1 million, or 6.2 percentage points of the loss ratio, for the fourth quarter of 2022. That amount compared to large fire losses of 10.9 million, or 5.5 percentage points of the loss ratio, for the fourth quarter of 2021. The average claim severity for large commercial property fires increased in the fourth quarter of 2022 relative to the prior-year quarter, due in part to higher costs of labor and building materials.

Net favorable development of reserves for losses incurred in prior accident years of $14.2 million reduced the loss ratio for the fourth quarter of 2022 by 6.7 percentage points. For the fourth quarter of 2022, our insurance subsidiaries experienced favorable development primarily in commercial automobile, homeowners and personal automobile losses. Net favorable development of reserves for losses incurred in prior accident years of $5.3 million reduced the loss ratio for the fourth quarter of 2021 by 2.7 percentage points. Our insurance subsidiaries experienced favorable development in personal automobile, commercial automobile and other commercial losses for the prior-year quarter.

Loss Ratio – Full Year

For the full year of 2022, the loss ratio increased to 68.6%, compared to 67.1% for the full year of 2021. While the 2022 core loss ratio increased modestly from 2021, the core loss ratios for both years reflected increases in average claim severity due to the ongoing impact of supply chain disruption and labor shortages on repair and replacement costs for buildings and automobiles.

Weather-related losses for the full year of 2022 of $63.5 million, or 7.7 percentage points of the loss ratio, increased from $45.3 million, or 5.8 percentage points of the loss ratio, for the full year of 2021. The loss ratio impact of weather-related losses for the full year of 2022 was modestly higher than the previous five-year average of 7.2 percentage points of the loss ratio.

Large fire losses were $53.5 million, or 6.5 percentage points of the loss ratio, for the full year of 2022, compared to $45.6 million, or 5.9 percentage points of the loss ratio, for the full year of 2021. The average claim severity for large commercial property fires and home fires increased for the full year of 2022 compared to 2021.

Net favorable development of reserves for losses incurred in prior accident years of $44.8 million reduced the loss ratio for the full year of 2022 by 5.4 percentage points. For the full year of 2022, our insurance subsidiaries experienced favorable development in losses in all major lines of business, with primary favorable impact in the personal automobile and commercial automobile lines of business. Net favorable development of reserves for losses incurred in prior accident years of $31.2 million reduced the loss ratio for the full year of 2021 by 4.0 percentage points. Our insurance subsidiaries experienced favorable development in losses in all major lines of business in the prior year, with primary favorable impact in the personal automobile, workers’ compensation and commercial automobile lines of business.

Expense Ratio

The expense ratio was 32.3% for the fourth quarter of 2022, compared to 31.4% for the fourth quarter of 2021. Relative to the prior-year quarter, the increase in the expense ratio primarily reflected higher technology costs related to our ongoing systems modernization initiatives.

The expense ratio was 34.1% for the full year of 2022, compared to 33.3% for the full year of 2021. An increase in technology systems-related expenses was partially offset by lower commercial growth incentive costs for our agents and decreased underwriting-based incentive costs for our employees for 2022 compared to 2021.

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 December 31, 2022.

Total investments at December 31, 2022 increased by $27.8 million compared to December 31, 2021, as new funds invested were partially offset by $57.5 million of unrealized losses within our available-for-sale fixed-maturity portfolio due to a substantial increase in market interest rates during 2022.

Net investment income of $9.4 million for the fourth quarter of 2022 increased 14.5% compared to $8.2 million in net investment income for the fourth quarter of 2021, due primarily to higher average invested assets and an increase in the average investment yield compared to the prior-year fourth quarter. Net investment income of $34.0 million for the full year of 2022 increased 9.3% compared to the full year of 2021, due primarily to higher average invested assets and an increase in the average investment yield compared to the prior year.

Net investment gains were $0.6 million for the fourth quarter of 2022, compared to $1.3 million for the fourth quarter of 2021. We attribute the gains to the quarterly increases in the market value of the equity securities held at the end of the respective periods.

Net investment losses were $10.2 million for the full year of 2022, compared to net investment gains of $6.5 million for the full year of 2021. We attribute the losses and gains to the change in the market value of the equity securities held at the end of the respective periods.

Our book value per share was $14.79 at December 31, 2022, compared to $16.95 at December 31, 2021, with the decrease primarily related to $45.4 million of after-tax unrealized losses within our available-for-sale fixed-maturity portfolio during 2022 that reduced our book value by $1.39 per share and dividends we declared during the year.

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:

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

The statutory combined ratio is a standard non-GAAP 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 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 December 15, 2022, we declared regular quarterly cash dividends of $0.165 per share for our Class A common stock and $0.1475 per share for our Class B common stock, which were paid on February 15, 2023 to stockholders of record as of the close of business on February 1, 2023.

Pre-Recorded Webcast

At approximately 8:30 am EDT on Thursday, February 23, 2023, 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 24 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 policyholders.

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