Earnings Document

Karin Daly - Vice President, The Equity Group Inc.

Good morning and thank you for joining us today. This morning, Donegal Group issued its Third Quarter 2022 Earnings Release outlining its results. The release and a supplemental investor presentation are available in the Investor Relations section of Donegal's website at www.donegalgroup.com. Please be advised that today's conference was pre-recorded and all participants are in listen-only mode. After management remarks, there will be a question-and-answer session for questions submitted ahead of the call.

Speaking today will be President and Chief Executive Officer, Kevin Burke; Chief Financial Officer, Jeff Miller; Chief Underwriting Officer, Jeff Hay; and Chief Investment Officer, Tony Viozzi.

Please be aware that statements made during this call, that are not historical facts, are "forward-looking statements" and necessarily involve risks and uncertainties that could cause actual results to vary materially. These factors can be found in Donegal Group's filings with the Securities and Exchange Commission, including its annual report on Form 10-K and quarterly reports on Form 10-Q. The Company disclaims any obligation to update or publicly announce the results of any revisions that they may make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

With that, it is my pleasure to tuit over to Mr. Kevin Burke. Kevin?

Kevin Burke - President and Chief Executive Officer

Thank you Karin, and welcome everyone.

I will start the call with an update on our strategic initiatives and then ask Jeff Miller to provide details on our financial results for the third quarter of 2022. Jeff Hay will then highlight our commercial and personal lines segment results; followed by Tony Viozzi with an update on activities and results within our investment portfolio. I will then provide a few closing remarks before we address questions that were submitted to us.

As part of our ongoing state strategy initiatives, we continue to evaluate market opportunity, industry performance and outlook to refine our strategy in each state and line of business. We are pleased with the successful execution of this strategy during the third quarter of 2022, as premiums in states we have identified for profit improvement have, as planned, declined by double-digit percentages, while premiums in growth-targeted states increased by more than twice our overall average growth rate while generating loss ratios that were well below our average loss ratio. We continue to realign resources and further refine our state strategies to focus on specific geographical areas and classes of business we believe represent the most promising opportunities for profitable growth. Based

1

on results to date, we expect the ongoing shift to accelerate underwriting profit improvement over the next few years.

Our new personal lines products and agency portal are now available in 9 of the 10 states in which we offer personal lines, and we remain on schedule to launch the new products in Michigan in early 2023. Personal lines new business production nearly doubled during the quarter compared to the third quarter of 2021, which is slightly ahead of our projections. While the launch of the new personal lines products has been successful in terms of technical execution and market acceptance, we are actively managing new business volumes through rate and comparative rater adjustments to limit growth until we have enough credible data to give us full confidence in the pricing and performance of these new products, particularly in light of current inflationary challenges.

We are making significant strides in our ongoing modernization initiatives, which we believe are positioning us well to excel in the years ahead. We are in the early testing phases of the next deployment, which will include a brand new BOP product and the migration of our commercial auto and commercial umbrella lines to our new operating platform, which will enhance straight-through processing capabilities to increase our operating efficiency and, more importantly, allow us to more effectively compete for smaller commercial accounts. We expect to roll out the new commercial lines capabilities in 25 states starting in the second quarter of 2023.

We are very proud of our dedicated team that has continued to work tirelessly to deliver new products and modernized technology solutions. Our ongoing business transformation goes far beyond a technical infrastructure upgrades. We are truly modernizing our products, processes and capabilities to allow us to compete effectively for profitable accounts that will help us achieve and sustain excellent financial performance.

I would like to take a moment to make a few comments regarding Hurricane Ian. First of all, we are saddened by the loss experienced by individuals and families in Florida and other damaged areas. 2ur hearts go out to all of those recovering from that loss. We do not write insurance in the state of Florida, and we were fortunate in that we had nominal property exposures in the areas of the greatest impact as the storm made its second landfall in South Carolina. We incurred a small number of claims, primarily from Pennsylvania to Virginia, as the remnants of the storm moved into the mainland. That said, we do expect Hurricane Ian losses to result in higher property reinsurance rates, and we have been in discussions with our reinsurance intermediary and many of our reinsurance business partners over the past several weeks to update them on our strategies and CAT risk management practices as we prepare for the 2023 reinsurance renewal. All of our reinsurance treaties renew on January 1, and we will be exploring various options to cost-effectively optimize our reinsurance purchases.

2

At this point, I'll tuthe call over to Jeff Miller for a review of our financial results for the third quarter.

Jeff Miller - Chief Financial Officer

Thank you, Kevin. We continued to see modest premium growth in the third quarter, which was by design in the current environment. Net premiums written for the third quarter grew by 4.7% to $206 million, with the growth primarily related to strong retention results, premium rate increases that averaged 10.5% for all lines other than workers' compensation, and new business writings.

Quarterly underwriting results were impacted by typical third-quarter severe weather activity in our regions and claim severity for large fire losses that exceeded historical norms. The combined ratio was 109.6% for the third quarter of 2022, compared to 107.7% for the prior-year quarter. Claims from weather events and large fires are generally costing more to settle due to ongoing inflationary pressures on repair costs and duration, and we also noted increases in our core loss ratios for the property lines of business that reflect the impact of inflation on smaller claims as well.

As Kevin mentioned, our results did not reflect any material impact from Hurricane Ian. In fact, we did not incur significant losses from any single catastrophe event during the third quarter, but the accumulation of claims from smaller events resulted in total weather-related losses of $19.4 million, or 9.4 percentage points on the loss ratio, which was in line with our previous five-year average weather loss ratio impact for the third quarter.

Our non-weather loss ratio was 66.2%, elevated relative to our target but in line with 66.3% for the third quarter of 2021. Compared to the prior-year quarter, modest core loss ratio improvement and favorable reserve development were offset by higher large fire losses. We experienced an unprecedented quarterly impact from fire losses in the third quarter, totaling $17.4 million, or 8.4 points on the overall loss ratio, compared to $12.7 million, or 6.5 points on the loss ratio for the prior-year quarter. Similar to many other insurance carriers, we have experienced an elevated fire loss trend since early 2021. While the frequency of fire losses has not significantly increased compared to pre-pandemic periods, severity has accelerated. Current inflationary increases in repair and replacement costs are certainly driving higher severity when major losses occur, and Jeff Hay will provide more information about what we are doing to address this trend later in the call.

We continued to experience favorable net development of reserves for losses incurred in prior accident years, totaling $6.2 million, or a 3.0-point reduction in the third quarter loss ratio, compared to $4.3 million, or a 2.2-point reduction in the loss ratio, for the prior-year third quarter. Our insurance subsidiaries experienced favorable

3

development primarily related to reserves for accident years 2020 and 2019 in the commercial multi-peril, commercial automobile and personal automobile lines of business.

The expense ratio increased to 33.4% for the third quarter of 2022, compared to 31.5% for the third quarter of 2021. We primarily attribute the increase in expenses to higher technology costs related to our ongoing systems modernization initiatives.

The combination of all of the factors I discussed, along with pre-tax net investment losses of $2.4 million, contributed to a net loss of $10.4 million for the quarter. Excluding the net investment losses, we had an operating loss of $8.5 million, or $0.27 per Class A share, for the third quarter. As we continue to work to mitigate the macroeconomic headwinds that are outside our control, we expect our ongoing premium rate increases and the effect of ongoing strategic initiatives will lead to improved profitability in future periods.

From a capital perspective, on October 20, 2022, we declared regular quarterly cash dividends of 16.5 cents per share for our Class A common stock and 14.75 cents per share for our Class B common stock, which are payable on November 15, 2022 to stockholders of record as of the close of business on November 1, 2022.

With that, let me tuit to Jeff Hay to provide more details about our commercial and personal lines segment results.

Jeff Hay - Chief Underwriting Officer

Thank you, Jeff. I will start with our commercial lines segment where we are generally pleased with the controlled growth momentum in recognition of the challenging economic environment. Third quarter net premiums written increased 2.0% for the segment, which does reflects premium reductions in several underperforming states. As Kevin mentioned, we are growing at a faster rate in states we have targeted for growth, and ongoing execution of our state strategies will help sustain favorable loss ratio results while continuing to promote growth in our targeted markets. We generated lower levels of new business versus our business plan goals during the quarter, which is consistent with previous quarters. Renewal premium retention for the quarter held strongly in the high-80s across most of our commercial lines of business and regions. As a reminder, retaining these well-performing accounts drives margin expansion and assists in our efforts to keep up with inflationary pressures. Given the ongoing uncertainty surrounding loss trends, we continue to carefully review new business opportunities to ensure we can obtain adequate pricing.

4

During the quarter, commercial renewal rate increases averaged 10.6%, excluding workers' compensation which does continues to feel pressure from filed bureau loss costs. This average rate increase represents an incremental increase from the second quarter of 2022 across all major lines of business and policy size bands, and we expect to maintain our current rate posture as we enter 2023. Last quarter, I mentioned an initiative to introduce more refined rate strategies to deliver guidance to the commercial underwriters on price adequacy for each individual risk to allow them to pursue higher rate increases on policies our models have identified for margin improvement across the business. We began this approach in Commercial Auto, which continued to provide positive results in the third quarter, as we achieved stronger rate increases in our lowest margin business and higher retention levels in our highest margin business.

The commercial lines statutory combined ratio for the third quarter of 2022 was 112.1%, compared to 109.4% for the prior-year quarter. The deterioration in our profitability was primarily attributable to significant fire losses which accounted for approximately 10.4 points on the commercial loss ratio, compared to 7.1 points in the third quarter of 2021. We have been evaluating correlations across covered peril but have not yet found anything significant, and, as mentioned earlier, this trend appears to be an industry phenomenon. To give further color on the trend for Donegal, from 2018-2020, fire losses accounted for approximately 6% of our property losses. Since the pandemic, fire losses ticked up to approximately 10%. Now that we have several years of increased fire loss data, we will be diving deeper to determine if there are any risk factors contributing to the elevated trend that should be considered in our underwriting process. The increase is partially driven by increases in the costs and duration of repairs due to supply and labor shortages, and that inflationary impact is also evident in most of our major lines of business, with core severity increasing considerably in our property and auto physical damage coverages. We have been and will remain diligent in determining the current value of property exposures as we price new business and renewal policies, and we are using external data sources that go down to a zip-code level when determining current property values. On the casualty side, we are beginning to see a modest uptick in severity for workers' compensation indemnity as employers are increasing pay rates for their workers, but claim trends for liability coverages otherwise remain fairly consistent. In summary for commercial lines, our continuing double-digit rate achievement with strong retention bodes well for future margin expansion as the higher rate earns through our book.

Moving on to personal lines, we are continuing to build momentum after the introduction of our new personal lines product suite earlier in the year, with net premiums written increasing 8.5% for the segment in the quarter. As Kevin mentioned earlier, the new policy management system rollout continues to go very smoothly, and our new agency portal, product pricing and enhanced policy features have been well received by our agents. Kevin also mentioned that we are closely monitoring the success of these products in the marketplace to ensure overall rate adequacy

5