DONEGAL GROUP INC [DGICA] Filings

10-Q 1 ef20034566_10q.htm 10-Q

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, 2024

☐	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: 28,318,895 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, 2024.

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	34

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
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, 2024			December 31, 2023
	(Unaudited)
Assets
Investments
Fixed maturities
Held to maturity, at amortized cost (net of allowance for expected credit losses of $1,483,475 and $1,325,847)	$	694,662,557		$	679,497,038
Available for sale, at fair value		622,840,325			589,348,243
Equity securities, at fair value		35,957,068			25,902,956
Short-term investments, at cost, which approximates fair value		15,804,785			32,305,408
Total investments		1,369,264,735			1,327,053,645
Cash		28,650,774			23,792,273
Accrued investment income		10,810,293			9,945,714
Premiums receivable		194,253,985			179,591,821
Reinsurance receivable (net of allowance for expected credit losses of $942,804 and $1,394,074)		434,077,660			441,431,334
Deferred policy acquisition costs		78,484,456			75,043,404
Deferred tax asset, net		16,287,979			19,532,525
Prepaid reinsurance premiums		185,363,903			168,724,465
Property and equipment, net		2,517,163			2,633,405
Accounts receivable - securities		—			1,501,079
Federal income taxes recoverable		2,375,684			8,102,321
Due from affiliate		17,399,612			1,907,527
Goodwill		5,625,354			5,625,354
Other intangible assets		958,010			958,010
Other		56,421			451,011
Total assets	$	2,346,126,029		$	2,266,293,888
Liabilities and Stockholders’ Equity
Liabilities
Losses and loss expenses	$	1,134,852,442		$	1,126,156,838
Unearned premiums		646,870,410			599,411,468
Accrued expenses		2,987,398			3,946,974
Reinsurance balances payable		3,389,828			8,758,976
Borrowings under lines of credit		35,000,000			35,000,000
Cash dividends declared to stockholders		—			5,569,992
Other		9,655,905			7,704,286
Total liabilities		1,832,755,983			1,786,548,534
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 31,154,488 and 30,764,555 shares and outstanding 28,151,900 and 27,761,967 shares		311,545			307,646
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		342,186,402			335,694,478
Accumulated other comprehensive loss		(20,951,289	)		(32,881,822	)
Retained earnings		232,993,253			217,794,917
Treasury stock, at cost		(41,226,357	)		(41,226,357	)
Total stockholders’ equity		513,370,046			479,745,354
Total liabilities and stockholders’ equity	$	2,346,126,029		$	2,266,293,888

See accompanying notes to consolidated financial statements.

Index

Donegal Group Inc. and Subsidiaries

Consolidated Statements of Income (Loss)

(Unaudited)

	Three Months Ended September 30,
	2024		2023
Revenues:
Net premiums earned	$	237,957,051	$	224,392,849
Investment income, net of investment expenses		10,826,991		10,536,488
Net investment gains (losses) (includes ($69,478) and ($237,611) accumulated other comprehensive income reclassifications)		1,875,466		(1,242,521	)
Lease income		77,335		85,663
Installment payment fees		1,000,702		155,771
Total revenues		251,737,545		233,928,250
Expenses:
Net losses and loss expenses		146,425,777		156,683,024
Amortization of deferred policy acquisition costs		40,200,000		39,332,000
Other underwriting expenses		41,827,018		37,155,385
Policyholder dividends		1,006,645		1,399,310
Interest		367,583		156,318
Other expenses, net		1,499,217		207,127
Total expenses		231,326,240		234,933,164
Income (loss) before income tax expense (benefit)		20,411,305		(1,004,914	)
Income tax expense (benefit) (includes $14,590 and $49,898 income tax benefit from reclassification items)		3,659,775		(199,613	)
Net income (loss)	$	16,751,530	$	(805,301	)
Net income (loss) per share:
Class A common stock - basic and diluted	$	0.51	$	(0.02	)
Class B common stock - basic and diluted	$	0.46	$	(0.02	)

Donegal Group Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Three Months Ended September 30,
	2024		2023
Net income (loss)	$	16,751,530	$	(805,301	)
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) during the period, net of income tax expense (benefit) of $3,682,547 and ($1,992,787)		13,853,387		(8,085,494	)
Reclassification adjustment for losses included in net income (loss), net of income tax benefit of $14,590 and $49,898		54,888		187,713
Other comprehensive income (loss)		13,908,275		(7,897,781	)
Comprehensive income (loss)	$	30,659,805	$	(8,703,082	)

See accompanying notes to consolidated financial statements.

Index

Donegal Group Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Nine Months Ended September 30,
	2024		2023
Revenues:
Net premiums earned	$	700,016,877	$	655,886,046
Investment income, net of investment expenses		32,867,817		30,143,025
Net investment gains (includes ($65,121) and ($2,289,648) accumulated other comprehensive income reclassifications)		4,725,513		930,302
Lease income		236,662		261,718
Installment payment fees		1,804,091		648,849
Total revenues		739,650,960		687,869,940
Expenses:
Net losses and loss expenses		462,682,511		446,023,609
Amortization of deferred policy acquisition costs		120,458,000		115,065,000
Other underwriting expenses		117,604,295		113,715,159
Policyholder dividends		3,247,853		4,088,288
Interest		676,766		463,911
Other expenses, net		2,309,392		968,976
Total expenses		706,978,817		680,324,943
Income before income tax expense		32,672,143		7,544,997
Income tax expense (includes $13,675 and $480,826 income tax benefit from reclassification items)		5,812,285		1,149,279
Net income	$	26,859,858	$	6,395,718
Net income per share:
Class A common stock - basic	$	0.82	$	0.20
Class A common stock - diluted	$	0.81	$	0.20
Class B common stock - basic and diluted	$	0.74	$	0.17

Donegal Group Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Nine Months Ended September 30,
	2024		2023
Net income	$	26,859,858	$	6,395,718
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) during the period, net of income tax expense (benefit) of $3,157,722 and ($3,353,482)		11,879,087		(13,204,298	)
Reclassification adjustment for losses included in net income, net of income tax benefit of $13,675 and $480,826		51,446		1,808,822
Other comprehensive income (loss)		11,930,533		(11,395,476	)
Comprehensive income (loss)	$	38,790,391	$	(4,999,758	)

See accompanying notes to consolidated financial statements.

Index

Donegal Group Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Equity

(Unaudited)

Nine Months Ended September 30, 2024

	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, 2023		30,764,555		5,649,240	$	307,646	$	56,492	$	335,694,478	$	(32,881,822	)	$	217,794,917		$	(41,226,357	)	$	479,745,354
Issuance of common stock (stock compensation plans)		38,287		—		383		—		472,740		—			—			—			473,123
Share-based compensation		16,400		—		164		—		522,460		—			—			—			522,624
Net income		—		—		—		—		—		—			5,955,551			—			5,955,551
Cash dividends declared		—		—		—		—		—		—			(8,888	)		—			(8,888	)
Grant of stock options		—		—		—		—		128,267		—			(128,267	)		—			—
Other comprehensive loss		—		—		—		—		—		(1,601,290	)		—			—			(1,601,290	)
Balance, March 31, 2024		30,819,242		5,649,240	$	308,193	$	56,492	$	336,817,945	$	(34,483,112	)	$	223,613,313		$	(41,226,357	)	$	485,086,474
Issuance of common stock (stock compensation plans)		43,428		—		434		—		604,562		—			—			—			604,996
Share-based compensation		—		—		—		—		278,337		—			—			—			278,337
Net income		—		—		—		—		—		—			4,152,777			—			4,152,777
Cash dividends declared		—		—		—		—		—		—			(5,670,265	)		—			(5,670,265	)
Grant of stock options		—		—		—		—		72,106		—			(72,106	)		—			—
Other comprehensive loss		—		—		—		—		—		(376,452	)		—			—			(376,452	)
Balance, June 30, 2024		30,862,670		5,649,240	$	308,627	$	56,492	$	337,772,950	$	(34,859,564	)	$	222,023,719		$	(41,226,357	)	$	484,075,867
Issuance of common stock (stock compensation plans)		33,899		—		339		—		370,784		—			—			—			371,123
Share-based compensation		257,919		—		2,579		—		3,939,010		—			—			—			3,941,589
Net income		—		—		—		—		—		—			16,751,530			—			16,751,530
Cash dividends declared		—		—		—		—		—		—			(5,678,338	)		—			(5,678,338	)
Grant of stock options		—		—		—		—		103,658		—			(103,658	)		—			—
Other comprehensive income		—		—		—		—		—		13,908,275			—			—			13,908,275
Balance, September 30, 2024		31,154,488		5,649,240	$	311,545	$	56,492	$	342,186,402	$	(20,951,289	)	$	232,993,253		$	(41,226,357	)	$	513,370,046

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 Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2024			2023
Cash Flows from Operating Activities:
Net income	$	26,859,858		$	6,395,718
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items		2,877,843			3,215,399
Net investment gains		(4,725,513	)		(930,302	)
Changes in assets and liabilities:
Losses and loss expenses		8,695,604			(7,691,440	)
Unearned premiums		47,458,942			39,672,853
Premiums receivable		(14,662,164	)		(14,787,307	)
Deferred acquisition costs		(3,441,052	)		(4,750,766	)
Deferred income taxes		73,149			600,019
Reinsurance receivable		7,353,674			17,501,773
Prepaid reinsurance premiums		(16,639,438	)		(12,555,645	)
Accrued investment income		(864,579	)		(1,615,715	)
Due from affiliate		(15,492,085	)		(3,983,806	)
Reinsurance balances payable		(5,369,148	)		3,958,666
Current income taxes		5,726,637			536,759
Accrued expenses		(959,576	)		(119,166	)
Other, net		2,346,248			580,936
Net adjustments		12,378,542			19,632,258
Net cash provided by operating activities		39,238,400			26,027,976
Cash Flows from Investing Activities:
Purchases of fixed maturities, held to maturity		(38,788,763	)		(25,226,609	)
Purchases of fixed maturities, available for sale		(103,059,218	)		(131,155,483	)
Purchases of equity securities, available for sale		(6,680,114	)		(5,128,994	)
Maturity of fixed maturities:
Held to maturity		23,520,685			29,144,970
Available for sale		80,297,679			41,318,216
Sales of fixed maturities:
Available for sale		3,943,799			28,154,556
Sales of equity securities, available for sale		1,574,265			8,080,764
Net purchases of property and equipment		—			(44,701	)
Net sales of short-term investments		16,500,623			36,950,560
Net cash used in investing activities		(22,691,044	)		(17,906,721	)
Cash Flows from Financing Activities:
Cash dividends paid		(16,927,483	)		(16,339,529	)
Issuance of common stock		5,238,628			6,813,772
Net cash used in financing activities		(11,688,855	)		(9,525,757	)
Net increase (decrease) in cash		4,858,501			(1,404,502	)
Cash at beginning of period		23,792,273			25,123,332
Cash at end of period	$	28,650,774		$	23,718,830

Cash paid during period - Interest	$	632,363		$	463,911
Net cash paid during period - Taxes	$	—		$	—

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 are Atlantic States Insurance Company (“Atlantic States”), Michigan Insurance Company (“MICO”), the Peninsula Insurance Group (“Peninsula”), which consists of The Peninsula Insurance Company and its wholly owned subsidiary Peninsula Indemnity Company, and Southern Insurance Company of Virginia (“Southern”). Our insurance subsidiaries and their affiliates write commercial and personal lines of property and casualty coverages exclusively through a network of independent insurance agents in certain Mid-Atlantic, Midwestern, Southern and Southwestern states.

At September 30, 2024, 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, 2024, 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 (the “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, 2024 are not necessarily indicative of the results of operations we expect for the year ending December 31, 2024.

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, 2023 that we filed with the Securities and Exchange Commission (“SEC”) on March 6, 2024.

3 -	Net Income 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 per share. The two-class method is an earnings allocation formula that determines net income per share separately for each class of common stock based on dividends we have declared and an allocation of our remaining undistributed net income 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 per share for our Class A common stock and our Class B common stock:

	Three Months Ended September 30,
	2024				2023
	Class A		Class B		Class A			Class B
	(in thousands, except per share data)
Basic net income (loss) per share:
Numerator:
Allocation of net income (loss)	$	14,189	$	2,563	$	(671	)	$	(134	)
Denominator:
Weighted-average shares outstanding		27,978		5,577		27,595			5,577
Basic net income (loss) per share	$	0.51	$	0.46	$	(0.02	)	$	(0.02	)

Diluted net income (loss) per share:
Numerator:
Allocation of n

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