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 March 31, 2021

☐	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 ☒

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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: 25,287,115 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 April 30, 2021.

Table of Contents

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		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 4.	Controls and Procedures		24

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		25
Item 1A.	Risk Factors		25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		26
Item 3.	Defaults upon Senior Securities		26
Item 4.	Removed and Reserved		26
Item 5.	Other Information		26
Item 6.	Exhibits		27
Signatures

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Donegal Group Inc. and Subsidiaries

Consolidated Balance Sheets


	March 31, 2021			December 31, 2020
	(Unaudited)
Assets
Investments
Fixed maturities
Held to maturity, at amortized cost	$	613,485,144		$	586,609,439
Available for sale, at fair value		497,654,660			555,136,017
Equity securities, at fair value		68,639,946			58,556,173
Short-term investments, at cost, which approximates fair value		21,098,394			20,900,155

Total investments		1,200,878,144			1,221,201,784
Cash		102,391,547			103,094,236
Accrued investment income		8,946,304			7,936,879
Premiums receivable		181,608,350			169,596,332
Reinsurance receivable		426,339,825			408,908,850
Deferred policy acquisition costs		64,530,713			59,156,958
Deferred tax asset, net		6,718,013			5,683,113
Prepaid reinsurance premiums		181,099,859			169,418,333
Property and equipment, net		3,650,378			4,390,377
Accounts receivable - securities		72,387			67,676
Federal income taxes recoverable		940,613			3,089,369
Goodwill		5,625,354			5,625,354
Other intangible assets		958,010			958,010
Other		1,461,163			1,393,053

Total assets	$	2,185,220,660		$	2,160,520,324

Liabilities and Stockholders’ Equity
Liabilities
Losses and loss expenses	$	996,978,876		$	962,007,437
Unearned premiums		577,481,172			537,189,598
Accrued expenses		23,562,671			29,115,198
Reinsurance balances payable		3,814,566			3,233,523
Borrowings under lines of credit		35,000,000			85,000,000
Cash dividends declared to stockholders		—			4,436,301
Subordinated debentures		5,000,000			5,000,000
Accounts payable - securities		2,177,340			—
Due to affiliate		3,921,089			10,293,495
Other		8,050,456			6,470,652

Total liabilities		1,655,986,170			1,642,746,204

Stockholders’ Equity
Preferred stock, $.01 par value, authorized 2,000,000 shares; none issued		—			—
Class A common stock, $.01 par value, authorized 50,000,000 shares, issued 28,031,234 and 27,651,774 shares and outstanding 25,028,646 and 24,649,186 shares		280,313			276,518
Class B common stock, $.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		294,397,593			289,149,567
Accumulated other comprehensive income		6,923,497			11,130,612
Retained earnings		268,802,952			258,387,288
Treasury stock, at cost		(41,226,357	)		(41,226,357	)

Total stockholders’ equity		529,234,490			517,774,120

Total liabilities and stockholders’ equity	$	2,185,220,660		$	2,160,520,324

See accompanying notes to consolidated financial statements.

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Donegal Group Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)


	Three Months Ended March 31,
	2021			2020
Revenues:
Net premiums earned	$	187,251,600		$	187,252,778
Investment income, net of investment expenses		7,510,578			7,376,284
Net investment gains (losses) (includes ($ 29,186 ) and $421,835 accumulated other comprehensive income reclassifications)		2,469,054			(10,694,843	)
Lease income		107,767			109,267
Installment payment fees		630,899			867,720

Total revenues		197,969,898			184,911,206
Expenses:
Net losses and loss expenses		119,219,747			117,246,526
Amortization of deferred policy acquisition costs		30,179,000			29,937,000
Other underwriting expenses		33,782,050			32,597,629
Policyholder dividends		1,294,021			1,842,000
Interest		312,326			224,330
Other expenses, net		432,069			560,550

Total expenses		185,219,213			182,408,035

Income before income tax expense (benefit)		12,750,685			2,503,171
Income tax expense (benefit) (includes ($ 6,129 ) and $88,585 income tax (benefit) expense from reclassification items)		2,220,837			(1,227,950	)

Net income	$	10,529,848		$	3,731,121

Earnings per common share:
Class A common stock - basic and diluted	$	0.35		$	0.13

Class B common stock - basic and diluted	$	0.32		$	0.12


Donegal Group Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Unaudited)
	Three Months Ended March 31,
	2021			2020
Net income	$	10,529,848		$	3,731,121
Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain during the period, net of income tax (benefit) expense of ($ 1,125,625 ) and $939,175		(4,230,172	)		3,533,090
Reclassification adjustment for losses (gains) included in net income, net of income tax (benefit) expense of ( $6,129 ) and $ 88,585		23,057			(333,250	)

Other comprehensive (loss) income		(4,207,115	)		3,199,840

Comprehensive income	$	6,322,733		$	6,930,961

See accompanying notes to consolidated financial statements.

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Donegal Group Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(Unaudited)

Three Months Ended March 31, 2021


	Class A Shares		Class B Shares		Class A Amount		Class B Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income			Retained Earnings			Treasury Stock			Total Stockholders’ Equity
Balance, December 31, 2020		27,651,774		5,649,240	$	276,518	$	56,492	$	289,149,567	$	11,130,612		$	258,387,288		$	(41,226,357	)	$	517,774,120
Issuance of common stock (stock compensation plans)		33,336		—		334		—		419,454		—			—			—			419,788
Share-based compensation		346,124		—		3,461		—		4,719,388		—			—			—			4,722,849
Net income		—		—		—		—		—		—			10,529,848			—			10,529,848
Cash dividends declared		—		—		—		—		—		—			(5,000	)		—			(5,000	)
Grant of stock options		—		—		—		—		109,184		—			(109,184	)		—			—
Other comprehensive loss		—		—		—		—		—		(4,207,115	)		—			—			(4,207,115	)

Balance, March 31, 2021		28,031,234		5,649,240	$	280,313	$	56,492	$	294,397,593	$	6,923,497		$	268,802,952		$	(41,226,357	)	$	529,234,490

Three Months Ended March 31, 2020


	Class A Shares		Class B Shares		Class A Amount		Class B Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income		Retained Earnings			Treasury Stock			Total Stockholders’ Equity
Balance, December 31, 2019		26,203,935		5,649,240	$	262,040	$	56,492	$	268,151,601	$	504,170	$	223,267,573		$	(41,226,357	)	$	451,015,519

Issuance of common stock (stock compensation plans)		28,924		—		289		—		376,539		—		—			—			376,828
Share-based compensation		67,087		—		671		—		1,242,315		—		—			—			1,242,986
Net income		—		—		—		—		—		—		3,731,121			—			3,731,121
Cash dividends declared		—		—		—		—		—		—		(5,363	)		—			(5,363	)
Grant of stock options		—		—		—		—		118,525		—		(118,525	)		—			—
Other comprehensive income		—		—		—		—		—		3,199,840		—			—			3,199,840

Balance, March 31, 2020		26,299,946		5,649,240	$	263,000	$	56,492	$	269,888,980	$	3,704,010	$	226,874,806		$	(41,226,357	)	$	459,560,931

See accompanying notes to consolidated financial statements.

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Donegal Group Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended March 31,
	2021			2020
Cash Flows from Operating Activities:
Net income	$	10,529,848		$	3,731,121

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items		1,654,449			1,737,307
Net investment (gains) losses		(2,469,054	)		10,694,843
Changes in assets and liabilities:
Losses and loss expenses		34,971,439			18,538,450
Unearned premiums		40,291,574			32,130,738
Premiums receivable		(12,012,018	)		(16,331,348	)
Deferred acquisition costs		(5,373,755	)		(1,029,845	)
Deferred income taxes		84,596			(2,001,451	)
Reinsurance receivable		(17,430,975	)		(7,736,560	)
Prepaid reinsurance premiums		(11,681,526	)		(21,146,913	)
Accrued investment income		(1,009,425	)		(734,103	)
Due to affiliate		(6,372,406	)		(2,879,960	)
Reinsurance balances payable		581,043			477,950
Current income taxes		2,148,756			785,998
Accrued expenses		(5,552,527	)		(6,427,828	)
Other, net		1,516,906			1,000,247

Net adjustments		19,347,077			7,077,525

Net cash provided by operating activities		29,876,925			10,808,646

Cash Flows from Investing Activities:
Purchases of fixed maturities, held to maturity		(33,904,795	)		(19,222,869	)
Purchases of fixed maturities, available for sale		(16,747,351	)		(13,558,579	)
Purchases of equity securities, available for sale		(13,885,992	)		(5,020,901	)
Maturity of fixed maturities:
Held to maturity		7,317,449			9,287,575
Available for sale		69,586,285			29,078,287
Sales of equity securities, available for sale		6,300,459			3,202,672
Net sales (purchases) of property and equipment		684,629			(5,905	)
Net purchases of short-term investments		(198,239	)		(58,688,855	)

Net cash provided by (used in) investing activities		19,152,445			(54,928,575	)

Cash Flows from Financing Activities:
Cash dividends paid		(4,441,301	)		(4,080,597	)
Issuance of common stock		4,709,242			1,163,331
Borrowing under lines of credit		—			50,000,000
Payments on lines of credit		(50,000,000	)		—

Net cash (used in) provided by financing activities		(49,732,059	)		47,082,734

Net (decrease) increase in cash		(702,689	)		2,962,805
Cash at beginning of period		103,094,236			49,318,930

Cash at end of period	$	102,391,547		$	52,281,735

Cash paid during period - Interest	$	257,821		$	161,830
Net cash paid during period - Taxes	$	—		$	—

See accompanying notes to consolidated financial statements.

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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”), Southern Insurance Company of Virginia (“Southern”), the Peninsula Insurance Group (“Peninsula”), which consists of Peninsula Indemnity Company and

The Peninsula Insurance Company,

and Michigan Insurance Company (“MICO”),

and our affiliates write personal and commercial lines of property and casualty coverages exclusively through independent insurance agents in certain Mid-Atlantic, Midwestern, New England, Southern and Southwestern states.

We have 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 March 31, 2021, Donegal Mutual held

approximately 41% of our outstanding Class A common stock and approximately 84% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately 70% 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 a 100% quota-share reinsurance agreement with Southern Mutual Insurance Company, or Southern Mutual. Donegal Mutual places its assumed business from Southern Mutual 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.

Donegal Mutual completed the merger of Mountain States Mutual Casualty Company, or Mountain States, with and into Donegal Mutual effective May 25, 2017. Donegal Mutual was the surviving company in the merger, and Mountain States’ insurance subsidiaries, Mountain States Indemnity Company and Mountain States Commercial Insurance Company (collectively, the “Mountain States insurance subsidiaries”), became insurance subsidiaries of Donegal Mutual upon completion

of the merger. Upon completion of the merger, Donegal Mutual assumed all of the policy obligations of Mountain States and began to market its products together with the Mountain States insurance subsidiaries as the Mountain States Insurance Group in four Southwestern states. Donegal Mutual also entered into a 100% quota-share reinsurance agreement with the Mountain States insurance subsidiaries on the merger date. Beginning with policies effective in 2021, Donegal Mutual began to place the business of the Mountain States Insurance Group into the underwriting pool. As a result, our consolidated financial results through December 31, 2020 excluded the results of the Mountain States Insurance Group operations in those Southwestern states.

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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 three months ended March 31, 2021 are not necessarily indicative of the results of operations we expect for the year ending December 31, 2021.

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, 2020.

3 - Earnings 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 earnings per common share. The

two-class

method is an earnings allocation formula that determines earnings per share separately for each class of common stock based on dividends we have declared and an allocation of our remaining undistributed earnings 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 March 31,

2021

2020

Class A

Class B

Class A

Class B

(in thousands, except per share data)

Basic earnings per share:

SEC Form 10-Q filed by Donegal Group, Inc.