DONEGAL GROUP INC

Previous wording

Reserve estimates can change over time because of unexpected changes in assumptions related to our insurance subsidiaries’ external environment and, to a lesser extent, assumptions related to our insurance subsidiaries’ internal operations. For example, our insurance subsidiaries have experienced an increase in claims severity and a lengthening of the claim settlement periods on bodily injury claims during the past several years. In addition, the COVID-19 pandemic and related government mandates and restrictions resulted in various changes from historical claims reporting and settlement trends during 2020 and resulted in significant increases in loss costs in subsequent years due to a number of factors, including supply chain disruption, higher used automobile values, lengthening of repair completion times, increases in the cost of replacement automobile parts and rising labor rates. These trend changes give rise to greater uncertainty as to the pattern of future loss settlements. Related uncertainties regarding future trends include social inflation, availability and cost of building materials, availability of skilled labor, the rate of plaintiff attorney involvement in claims and the cost of medical technologies and procedures. Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at March 31, 2024. At March 31, 2024, for every 1% change in our insurance subsidiaries’ loss and loss expense reserves, net of reinsurance recoverable, the effect on our pre-tax results of operations would be approximately $6.9 million.

Current wording

Reserve estimates can change over time because of unexpected changes in assumptions related to our insurance subsidiaries’ external environment and, to a lesser extent, assumptions related to our insurance subsidiaries’ internal operations. For example, our insurance subsidiaries have experienced an increase in claims severity and a lengthening of the claim settlement periods on bodily injury claims during the past several years. In addition, the COVID-19 pandemic and related government mandates and restrictions resulted in various changes from historical claims reporting and settlement trends during 2020 and resulted in significant increases in loss costs in subsequent years due to a number of factors, including supply chain disruption, higher used automobile values, lengthening of repair completion times, increases in the cost of replacement automobile parts and rising labor rates. These trend changes give rise to greater uncertainty as to the pattern of future loss settlements. Related uncertainties regarding future trends include social inflation, availability and cost of building materials, availability of skilled labor, the rate of plaintiff attorney involvement in claims and the cost of medical technologies and procedures. Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at June 30, 2024. At June 30, 2024, for every 1% change in our insurance subsidiaries’ loss and loss expense reserves, net of reinsurance recoverable, the effect on our pre-tax results of operations would be approximately $7.1 million.

Previous wording

Atlantic States’ participation in the pool with Donegal Mutual exposes Atlantic States to adverse loss development on the business of Donegal Mutual that the pool includes. However, pooled business represents the predominant percentage of the net underwriting activity of both companies, and Donegal Mutual and Atlantic States share proportionately any adverse risk development relating to the pooled business. The business in the pool is homogeneous and each company has a pro-rata share of the entire pool. Since the predominant percentage of the business of Atlantic States and Donegal Mutual is pooled and the results shared by each company according to its participation level under the terms of the pooling agreement, the intent of the underwriting pool is to produce a more uniform and stable underwriting result from year to year for each company than either would experience individually and to spread the risk of loss between the companies.

Current wording

Atlantic States’ participation in the pool with Donegal Mutual exposes Atlantic States to adverse loss development on the business of Donegal Mutual that the pool includes. However, pooled business represents the predominant percentage of the net underwriting activity of both companies, and Donegal Mutual and Atlantic States share proportionately any adverse loss development relating to the pooled business. The business in the pool is homogeneous and each company has a pro-rata share of the entire pool. Since the predominant percentage of the business of Atlantic States and Donegal Mutual is pooled and the results shared by each company according to its participation level under the terms of the pooling agreement, the intent of the underwriting pool is to produce a more uniform and stable underwriting result from year to year for each company than either would experience individually and to spread the risk of loss between the companies.

Previous wording

The following table provides a reconciliation of our net premiums earned to our net premiums written for the three months ended March 31, 2024 and 2023:

Current wording

The following table provides a reconciliation of our net premiums earned to our net premiums written for the three and six months ended June 30, 2024 and 2023:

Previous wording

The following table presents comparative details with respect to our GAAP and statutory combined ratios for the three months ended March 31, 2024 and 2023:

Current wording

The following table presents comparative details with respect to our GAAP and statutory combined ratios for the three and six months ended June 30, 2024 and 2023:

Previous wording

Net Premiums Earned. Our insurance subsidiaries’ net premiums earned for the first quarter of 2024 were $227.7 million, an increase of $12.5 million, or 5.8%, compared to $215.2 million for the first quarter of 2023, primarily reflecting solid premium retention and renewal premium increases.

Current wording

Net Premiums Earned. Our insurance subsidiaries’ net premiums earned for the second quarter of 2024 were $234.3 million, an increase of $18.0 million, or 8.3%, compared to $216.3 million for the second quarter of 2023, primarily reflecting solid premium retention and renewal premium increases.

Previous wording

Net Premiums Written. Our insurance subsidiaries’ net premiums written for the first quarter of 2024 were $251.4 million, an increase of $14.1 million, or 6.0%, from the $237.3 million of net premiums written for the first quarter of 2023. Commercial lines net premiums written decreased $0.9 million, or 0.5%, for the first quarter of 2024 compared to the first quarter of 2023. Personal lines net premiums written increased $15.0 million, or 18.5%, for the first quarter of 2024 compared to the first quarter of 2023. We attribute the decrease in commercial lines net premiums written primarily to planned attrition in states we are exiting or have targeted for profit improvement, offset partially by higher new business writings and a continuation of renewal premium increases in lines other than workers’ compensation. We attribute the increase in personal lines net premiums written primarily to renewal premium increases and strong policy retention.

Current wording

Net Premiums Written. Our insurance subsidiaries’ net premiums written for the second quarter of 2024 were $247.2 million, an increase of $20.7 million, or 9.1%, from the $226.5 million of net premiums written for the second quarter of 2023. Commercial lines net premiums written increased $9.4 million, or 7.1%, for the second quarter of 2024 compared to the second quarter of 2023. Personal lines net premiums written increased $11.3 million, or 12.1%, for the second quarter of 2024 compared to the second quarter of 2023. We attribute the increase in commercial lines net premiums written primarily to higher new business writings and a continuation of renewal premium increases in lines other than workers’ compensation, offset partially by planned attrition in states we are exiting or have targeted for profit improvement. We attribute the increase in personal lines net premiums written primarily to renewal premium increases and strong policy retention.

Previous wording

Net Investment Gains (Losses). Net investment gains for the first quarter of 2024 were $2.1 million, compared to net investment losses of $331,189 for the first quarter of 2023. The net investment gains for the first quarter of 2024 resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at March 31, 2024. We did not recognize any impairment losses for individual securities in our investment portfolio during the first quarter of 2024 or 2023.

Current wording

Net Investment Gains. Net investment gains for the second quarter of 2024 were $736,669, compared to $2.5 million for the second quarter of 2023. The net investment gains for the second quarter of 2024 and 2023 resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at June 30, 2024 and 2023, respectively. We did not recognize any impairment losses for individual securities in our investment portfolio during the second quarter of 2024 or 2023.

Previous wording

Underwriting Expenses. The expense ratio for an insurance company is the ratio of policy acquisition costs and other underwriting expenses to premiums earned. The expense ratio of our insurance subsidiaries was 35.7% for the first quarter of 2024, compared to 36.4% for the first quarter of 2023. The decrease in the expense ratio primarily reflected early impacts of expense reduction initiatives, offset partially by higher technology costs related to our ongoing systems modernization initiatives for the first quarter of 2024 compared to the prior-year quarter. We expect the impact from allocated costs from Donegal Mutual to our insurance subsidiaries related to the ongoing systems modernization project will peak at approximately 1.3 percentage points of the expense ratio for the full year of 2024 before beginning to subside gradually in subsequent years.

Current wording

Underwriting Expenses. The expense ratio for an insurance company is the ratio of policy acquisition costs and other underwriting expenses to premiums earned. The expense ratio of our insurance subsidiaries was 31.9% for the second quarter of 2024, compared to 34.2% for the second quarter of 2023. The decrease in the expense ratio primarily reflected impacts of expense reduction initiatives, including agency incentive program revisions, commission schedule adjustments, targeted staffing reductions, and deferred replacement of open employment positions, among others, offset partially by higher technology costs related to our ongoing systems modernization initiatives for the second quarter of 2024 compared to the prior-year quarter. We expect the impact from allocated costs from Donegal Mutual to our insurance subsidiaries related to the ongoing systems modernization project will peak at approximately 1.3 percentage points of the expense ratio for the full year of 2024 before beginning to subside gradually in subsequent years.

Previous wording

Combined Ratio. The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of policyholder dividends incurred to premiums earned. Our insurance subsidiaries’ combined ratios were 102.4% and 101.2% for the first quarter of 2024 and 2023, respectively. We attribute the increase in the combined ratio primarily to an increase in the loss ratio for the first quarter of 2024 compared to the first quarter of 2023.

Current wording

Combined Ratio. The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of policyholder dividends incurred to premiums earned. Our insurance subsidiaries’ combined ratios were 103.0% and 104.7% for the second quarter of 2024 and 2023, respectively. We attribute the decrease in the combined ratio primarily to a decrease in the expense ratio for the second quarter of 2024 compared to the second quarter of 2023.

Previous wording

Net Income and Net Income Per Share. Our net income for the first quarter of 2024 was $6.0 million, or $.18 per share of Class A common stock on a diluted basis and $.16 per share of Class B common stock, compared to $5.2 million, or $.16 per share of Class A common stock on a diluted basis and $.15 per share of Class B common stock, for the first quarter of 2023. We had 27.8 million and 27.3 million Class A shares outstanding at March 31, 2024 and 2023, respectively. We had 5.6 million Class B shares outstanding at the end of both periods.

Current wording

Net Income and Net Income Per Share. Our net income for the second quarter of 2024 was $4.2 million, or $.13 per share of Class A common stock on a diluted basis and $.11 per share of Class B common stock, compared to $2.0 million, or $.06 per share of Class A common stock on a diluted basis and $.05 per share of Class B common stock, for the second quarter of 2023. We had 27.9 million and 27.5 million Class A shares outstanding at June 30, 2024 and 2023, respectively. We had 5.6 million Class B shares outstanding at the end of both periods.

Previous wording

Investment Income. Our net investment income was $11.0 million for the first quarter of 2024, an increase of $1.6 million, or 16.1%, compared to $9.4 million for the first quarter of 2023. We attribute the increase primarily to an increase in the average investment yield relative to the first quarter of 2023.

Current wording

Investment Income. Our net investment income was $22.0 million for the first half of 2024, an increase of $2.4 million, or 12.4%, compared to $19.6 million for the first half of 2023. We attribute the increase primarily to an increase in the average investment yield relative to the first half of 2023.

Previous wording

Losses and Loss Expenses. Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 66.3% for the first quarter of 2024, an increase from our insurance subsidiaries’ loss ratio of 64.2% for the first quarter of 2023. We attribute this increase primarily to increased core losses and large fire losses, which we define as individual fire losses in excess of $50,000, offset partially by decreased weather-related losses. The core loss ratio, which excludes weather-related losses, large fire losses and net favorable development of reserves for losses incurred in prior accident years, was 58.7% for the first quarter of 2024, compared to 56.5% for the first quarter of 2023. For the commercial lines segment, the core loss ratio of 59.0% for the first quarter of 2024 increased modestly from 58.2% for the first quarter of 2023. For the personal lines segment, the core loss ratio of 58.1% for the first quarter of 2024 increased from 53.7% for the first quarter of 2023, due largely to ongoing inflationary impacts on loss costs for that segment. Weather-related losses were $10.8 million, or 4.7 percentage points of the loss ratio, for the first quarter of 2024, compared to $14.1 million, or 6.5 percentage points of the loss ratio, for the first quarter of 2023. The impact of weather-related loss activity to the loss ratio for the first quarter of 2024 was in line with our previous five-year average of 4.7 percentage points for first quarter weather-related losses. Large fire losses for the first quarter of 2024 were $15.0 million, or 6.6 percentage points of the loss ratio, compared to $10.9 million, or 5.1 percentage points of the loss ratio, for the first quarter of 2023. On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 66.0% for the first quarter of 2024, compared to 63.2% for the first quarter of 2023, primarily due to increases in the workers’ compensation and commercial automobile loss ratios. The personal lines statutory loss ratio of our insurance subsidiaries increased to 68.5% for the first quarter of 2024, compared to 66.4% for the first quarter of 2023. We attribute this increase primarily to an increase in the homeowners loss ratio. Our insurance subsidiaries experienced favorable loss reserve development for the first quarter of 2024 of approximately $8.4 million that decreased the loss ratio by 3.7 percentage points, compared to $8.3 million that decreased the loss ratio for the first quarter of 2023 by 3.9 percentage points. Our insurance subsidiaries experienced favorable development primarily in the commercial multi-peril, commercial automobile and homeowners lines of business for the first quarter of 2024, with the majority of the impact relating to reserves for accident years 2020 through 2023.

Current wording

Losses and Loss Expenses. Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 68.4% for the first half of 2024, an increase from our insurance subsidiaries’ loss ratio of 67.1% for the first half of 2023. We attribute this increase primarily to increased core losses and large fire losses, which we define as individual fire losses in excess of $50,000. The core loss ratio, which excludes weather-related losses, large fire losses and net favorable development of reserves for losses incurred in prior accident years, was 56.8% for the first half of 2024, compared to 55.8% for the first half of 2023. For the commercial lines segment, the core loss ratio of 56.9% for the first half of 2024 increased modestly from 56.1% for the first half of 2023. For the personal lines segment, the core loss ratio of 56.6% for the first half of 2024 increased from 55.1% for the first half of 2023. Weather-related losses were $35.5 million, or 7.7 percentage points of the loss ratio, for the first half of 2024, compared to $33.8 million, or 7.8 percentage points of the loss ratio, for the first half of 2023. The impact of weather-related loss activity to the loss ratio for the first half of 2024 was higher than our previous five-year average of 6.7 percentage points for first half weather-related losses. Large fire losses for the first half of 2024 were $27.4 million, or 5.9 percentage points of the loss ratio, compared to $23.6 million, or 5.5 percentage points of the loss ratio, for the first half of 2023. On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 68.5% for the first half of 2024, compared to 65.5% for the first half of 2023, primarily due to an increase in the workers’ compensation loss ratio. The personal lines statutory loss ratio of our insurance subsidiaries decreased slightly to 69.9% for the first half of 2024, compared to 70.0% for the first half of 2023. We attribute this decrease primarily to a decrease in the personal automobile loss ratio, offset partially by an increase in the homeowners loss ratio. Our insurance subsidiaries experienced favorable loss reserve development for the first half of 2024 of approximately $9.2 million that decreased the loss ratio by 2.0 percentage points, compared to $8.5 million that decreased the loss ratio for the first half of 2023 by 2.0 percentage points. Our insurance subsidiaries experienced favorable development primarily in the commercial automobile, commercial multi-peril and personal automobile lines of business for the first half of 2024, offset partially by unfavorable development in the workers’ compensation line of business that we attribute to higher-than-expected severity for a relatively small number of previously reported claims.

Previous wording

Income Tax Expense. We recorded income tax expense of $1.3 million for the first quarter of 2024, representing an effective tax rate of 17.8%. We recorded income tax expense of $1.1 million for the first quarter of 2023, representing an effective tax rate of 17.4%. The income tax tax expense for the first quarter of 2024 and 2023 represented estimates based on our projected annual taxable income and effective tax rates.

Current wording

Income Tax Expense. We recorded income tax expense of $2.2 million for the first half of 2024, representing an effective tax rate of 17.6%. We recorded income tax expense of $1.3 million for the first half of 2023, representing an effective tax rate of 15.8%. The income tax expense for the first half of 2024 and 2023 represented estimates based on our projected annual taxable income and effective tax rates.

Previous wording

Our operations have historically generated sufficient net positive cash flow to fund our commitments and add to our investment portfolio, thereby increasing future investment returns and enhancing our liquidity. The impact of the pooling agreement between Donegal Mutual and Atlantic States has historically been cash-flow positive because of the consistent underwriting profitability of the pool. Donegal Mutual and Atlantic States settle their respective obligations to each other under the pool monthly, thereby resulting in cash flows substantially similar to the cash flows that would result from each company writing the business directly. We have not experienced any unusual variations in the timing of claim payments associated with the loss reserves of our insurance subsidiaries. We maintain significant liquidity in our investment portfolio in the form of readily marketable fixed maturities, equity securities and short-term investments. We structure our fixed-maturity investment portfolio following a “laddering” approach, so that projected cash flows from investment income and principal maturities are evenly distributed from a timing perspective, thereby providing an additional measure of liquidity to meet our obligations should an unexpected variation occur in the future. Our operating activities provided (used) net cash flows in the first three months of 2024 and 2023 of $4.8 million and ($680,734), respectively.

Current wording

Our operations have historically generated sufficient net positive cash flow to fund our commitments and add to our investment portfolio, thereby increasing future investment returns and enhancing our liquidity. The impact of the pooling agreement between Donegal Mutual and Atlantic States has historically been cash-flow positive because of the consistent underwriting profitability of the pool. Donegal Mutual and Atlantic States settle their respective obligations to each other under the pool monthly, thereby resulting in cash flows substantially similar to the cash flows that would result from each company writing the business directly. We have not experienced any unusual variations in the timing of claim payments associated with the loss reserves of our insurance subsidiaries. We maintain significant liquidity in our investment portfolio in the form of readily marketable fixed maturities, equity securities and short-term investments. We structure our fixed-maturity investment portfolio following a “laddering” approach, so that projected cash flows from investment income and principal maturities are evenly distributed from a timing perspective, thereby providing an additional measure of liquidity to meet our obligations should an unexpected variation occur in the future. Our operating activities provided net cash flows in the first six months of 2024 and 2023 of $26.5 million and $13.1 million, respectively.

Previous wording

On July 18, 2013, our board of directors authorized a share repurchase program pursuant to which we have the authority to purchase up to 500,000 shares of our Class A common stock at prices prevailing from time to time in the open market subject to the provisions of applicable rules of the SEC and in privately negotiated transactions. We did not purchase any shares of our Class A common stock under this program during the three months ended March 31, 2024 or 2023. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through March 31, 2024.

Current wording

On July 18, 2013, our board of directors authorized a share repurchase program pursuant to which we have the authority to purchase up to 500,000 shares of our Class A common stock at prices prevailing from time to time in the open market subject to the provisions of applicable rules of the SEC and in privately negotiated transactions. We did not purchase any shares of our Class A common stock under this program during the six months ended June 30, 2024 or 2023. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through June 30, 2024.

Previous wording

On April 18, 2024, our board of directors declared quarterly cash dividends of $.1725 per share of our Class A common stock and $.155 per share of our Class B common stock, payable on May 22, 2024 to our stockholders of record as of the close of business on May 8, 2024. We are not subject to any restrictions on our payment of dividends to our stockholders, although there are state law restrictions on the payment of dividends by our insurance subsidiaries to us. Dividends from our insurance subsidiaries are our principal source of cash for payment of dividends to our stockholders. Our insurance subsidiaries are subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval of their domiciliary insurance regulatory authorities. Our insurance subsidiaries are also subject to risk based capital (“RBC”) requirements that limit their ability to pay dividends to us. Our insurance subsidiaries’ statutory capital and surplus at December 31, 2023 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin. Our insurance subsidiaries did not pay any dividends to us during the first three months of 2024. Amounts remaining available for distribution to us as dividends from our insurance subsidiaries without prior approval of their domiciliary insurance regulatory authorities in 2024 are $27.4 million from Atlantic States, $7.2 million from MICO and $5.0 million from Peninsula, or a total of approximately $39.6 million.

Current wording

On July 18, 2024, our board of directors declared quarterly cash dividends of $.1725 per share of our Class A common stock and $.155 per share of our Class B common stock, payable on August 15, 2024 to our stockholders of record as of the close of business on August 1, 2024. We are not subject to any restrictions on our payment of dividends to our stockholders, although there are state law restrictions on the payment of dividends by our insurance subsidiaries to us. Dividends from our insurance subsidiaries are our principal source of cash for payment of dividends to our stockholders. Our insurance subsidiaries are subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval of their domiciliary insurance regulatory authorities. Our insurance subsidiaries are also subject to risk based capital (“RBC”) requirements that limit their ability to pay dividends to us. Our insurance subsidiaries’ statutory capital and surplus at December 31, 2023 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin. Our insurance subsidiaries paid $5.0 million in dividends to us during the first six months of 2024. Amounts remaining available for distribution to us as dividends from our insurance subsidiaries without prior approval of their domiciliary insurance regulatory authorities in 2024 are $22.4 million from Atlantic States, $7.2 million from MICO and $5.0 million from Peninsula, or a total of approximately $34.6 million.