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, 2023March 31, 2024
OR


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 ClassTrading SymbolsName 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: 27,668,85327,816,654 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 NovemberMay 1, 2023.2024.



DONEGAL GROUP INC.
INDEXINDEX TO FORM 10-Q REPORT

  Page
PART IFINANCIAL INFORMATION 
Item 1.1
Item 2.2320
Item 3.3329
Item 4.3329
   
PART IIOTHER INFORMATION 
Item 1.3430
Item 1A.3430
Item 2.3530
Item 3.3530
Item 4.3530
Item 5.3530
Item 6.3631
3732


PART I. FINANCIAL INFORMATION
Item 1.Financial Statements

Donegal Group Inc. and Subsidiaries
Consolidated Balance Sheets

 
September 30,
2023
  
December 31,
2022
  
March 31,
2024
  
December 31,
2023
 
 (Unaudited)     (Unaudited)    
Assets            
Investments            
Fixed maturities            
Held to maturity, at amortized cost (net of allowance for expected credit losses of $1,358,977 and $0) $683,911,746  $688,439,360 
Held to maturity, at amortized cost (net of allowance for expected credit losses of $1,329,099 and $1,325,847) $683,398,852  $679,497,038 
Available for sale, at fair value  566,539,622   523,791,931   600,761,425   589,348,243 
Equity securities, at fair value  35,463,958   35,104,840   28,883,318   25,902,956 
Short-term investments, at cost, which approximates fair value  20,370,551   57,321,111   18,860,030   32,305,408 
Total investments  1,306,285,877   1,304,657,242   1,331,903,625   1,327,053,645 
Cash  23,718,830   25,123,332   19,805,040   23,792,273 
Accrued investment income  10,477,007   8,861,292   10,497,341   9,945,714 
Premiums receivable  188,633,601   173,846,294   193,160,160   179,591,821 
Reinsurance receivable (net of allowance for expected credit losses of $1,604,771 and $0)  437,888,614   456,522,223 
Reinsurance receivable (net of allowance for expected credit losses of $1,026,016 and $1,394,074)  435,505,126   441,431,334 
Deferred policy acquisition costs  77,920,996   73,170,230   78,857,108   75,043,404 
Deferred tax asset, net  23,790,808   21,603,017   19,483,755   19,532,525 
Prepaid reinsurance premiums  173,147,044   160,591,399   179,757,762   168,724,465 
Property and equipment, net  2,673,580   2,755,105   2,594,056   2,633,405 
Accounts receivable - securities     1,842   32,162   1,501,079 
Federal income taxes recoverable  7,974,138   8,510,897   7,271,415   8,102,321 
Due from affiliate
   8,841,178
    1,907,527
 
Goodwill  5,625,354   5,625,354   5,625,354   5,625,354 
Other intangible assets  958,010   958,010   958,010   958,010 
Other  1,183,162   1,123,098   15,961   451,011 
Total assets $2,260,277,021  $2,243,349,335  $2,294,308,053  $2,266,293,888 
Liabilities and Stockholders’ Equity                
Liabilities                
Losses and loss expenses $1,113,354,318  $1,121,045,758  $1,124,452,191  $1,126,156,838 
Unearned premiums  617,325,983   577,653,130   634,136,621   599,411,468 
Accrued expenses  4,107,224   4,226,390   3,685,534   3,946,974 
Reinsurance balances payable  7,454,490   3,495,824   4,016,080   8,758,976 
Borrowings under lines of credit  35,000,000   35,000,000   35,000,000   35,000,000 
Cash dividends declared to stockholders  

   
5,296,990
   

   
5,569,992
 
Due to affiliate
  1,189,483   5,173,289 
Other  8,505,945   7,864,942   7,931,153   7,704,286 
Total liabilities  1,786,937,443   1,759,756,323   1,809,221,579   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 30,629,636 and 30,120,263 shares and outstanding 27,627,048 and 27,117,675 shares
  306,297   301,203 
Class A common stock, $0.01 par value, authorized 50,000,000 shares, issued 30,819,242 and 30,764,555 shares and outstanding 27,816,654 and 27,761,967 shares
  308,193   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   56,492   56,492 
Additional paid-in capital  333,559,263   325,601,647   336,817,945   335,694,478 
Accumulated other comprehensive loss
  (50,295,321)  (41,703,747)  (34,483,112)  (32,881,822)
Retained earnings  230,939,204   240,563,774   223,613,313   217,794,917 
Treasury stock, at cost  (41,226,357)  (41,226,357)  (41,226,357)  (41,226,357)
Total stockholders’ equity  473,339,578   483,593,012   485,086,474   479,745,354 
Total liabilities and stockholders’ equity $2,260,277,021  $2,243,349,335  $2,294,308,053  $2,266,293,888 

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries
Consolidated Statements of Loss
Income
(Unaudited)

 Three Months Ended September 30,  Three Months Ended March 31, 
 2023
  2022
  2024
  2023
 
Revenues:            
Net premiums earned $224,392,849  $206,121,826  $227,748,679  $215,233,160 
Investment income, net of investment expenses  10,536,488   8,568,671   10,972,327   9,449,078 
Net investment losses (includes ($237,611) and $371,194 accumulated other comprehensive income reclassifications)
  (1,242,521)  (2,357,634)
Net investment gains (losses) (includes ($77,051) and ($2,199,673) accumulated other comprehensive income reclassifications)
  2,113,378  (331,189)
Lease income  85,663   91,679   81,823   89,347 
Installment payment fees  155,771   413,706   224,662   305,375 
Total revenues  233,928,250   212,838,248   241,140,869   224,745,771 
Expenses:                
Net losses and loss expenses  156,683,024   155,754,256   150,896,415   138,105,889 
Amortization of deferred policy acquisition costs  39,332,000   35,513,000   39,602,000   37,798,000 
Other underwriting expenses  37,155,385   33,411,529   41,739,868   40,611,437 
Policyholder dividends  1,399,310   1,239,154   1,054,659   1,343,340 
Interest  156,318   71,430   154,597   152,957 
Other expenses, net  207,127   218,083   444,934   437,715 
Total expenses  234,933,164   226,207,452   233,892,473   218,449,338 
Loss before income tax benefit  (1,004,914)  (13,369,204)
Income tax benefit (includes ($49,898) and $77,951 income tax (benefit) expense from reclassification items)
  (199,613)  (2,993,333)
Net loss 
$
(805,301
)
 
$
(10,375,871
)
Net loss per share:        
Income before income tax expense  7,248,396   6,296,433 
Income tax expense (includes $16,181 and $461,931 income tax benefit from reclassification items)
  1,292,845   1,092,837 
Net income 
$
5,955,551
  
$
5,203,596
 
Net income per share:        
Class A common stock - basic and diluted $(0.02) $(0.33) $0.18  $0.16 
Class B common stock - basic and diluted $(0.02) $(0.30) $0.16  $0.15 

Donegal Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Loss
(Unaudited)

  Three Months Ended September 30, 
  2023
  2022
 
Net loss
 $(805,301) $(10,375,871)
Other comprehensive loss, net of tax        
Unrealized loss on securities:        
Unrealized holding loss during the period, net of income tax benefit of $1,992,787 and $4,572,428
  (8,085,494)  (17,201,046)
Reclassification adjustment for losses (gains) included in net loss, net of income tax (benefit) expense of ($49,898) and $77,951
  187,713  (293,243)
Other comprehensive loss
  (7,897,781)  (17,494,289)
Comprehensive loss $(8,703,082) $(27,870,160)

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries
Consolidated Statements of  Income (Loss)
(Unaudited)

  Nine Months Ended September 30, 
  2023
  2022
 
Revenues:      
Net premiums earned $655,886,046  $609,498,939 
Investment income, net of investment expenses  30,143,025   24,631,398 
Net investment gains (losses) (includes ($2,289,648) and $824,409 accumulated other comprehensive income reclassifications)
  930,302   (10,810,594)
Lease income  261,718   294,529 
Installment payment fees  648,849   1,161,842 
Total revenues  687,869,940   624,776,114 
Expenses:        
Net losses and loss expenses  446,023,609   415,245,619 
Amortization of deferred policy acquisition costs  115,065,000   104,867,000 
Other underwriting expenses  113,715,159   106,753,031 
Policyholder dividends  4,088,288   4,176,649 
Interest  463,911   464,188 
Other expenses, net  968,976   991,671 
Total expenses  680,324,943   632,498,158 
Income (loss) before income tax expense (benefit)
  7,544,997   (7,722,044)
Income tax expense (benefit) (includes ($480,826) and $173,126 income tax (benefit) expense from reclassification items)
  1,149,279   (2,283,445)
Net income (loss)
 $6,395,718  $(5,438,599)
Net income (loss) per share:
        
Class A common stock - basic and diluted $0.20  $(0.17)
Class B common stock - basic and diluted $0.17  $(0.16)

Donegal Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Loss
(Unaudited)

  Nine Months Ended September 30, 
  2023
  2022
 
Net income (loss)
 $6,395,718  $(5,438,599)
Other comprehensive loss, net of tax        
Unrealized loss on securities:        
Unrealized holding loss during the period, net of income tax benefit of $3,353,482 and $13,185,692
  (13,204,298)  (49,603,320)
Reclassification adjustment for losses (gains) included in net income (loss), net of income tax (benefit) expense of ($480,826) and $173,126
  1,808,822   (651,283)
Other comprehensive loss
  (11,395,476)  (50,254,603)
Comprehensive loss $(4,999,758) $(55,693,202)
  Three Months Ended March 31, 
  2024
  2023
 
Net income $5,955,551 $5,203,596
Other comprehensive (loss) income, net of tax        
Unrealized (loss) income on securities:        
Unrealized holding (loss) income during the period, net of income tax (benefit) expense of ($441,850) and $603,390
  (1,662,160)  2,269,896
Reclassification adjustment for losses included in net income, net of income
tax benefit of $16,181 and $461,931
  60,870   1,737,742
Other comprehensive (loss) income
  (1,601,290)  4,007,638
Comprehensive income
 $4,354,261 $9,211,234

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Unaudited)
NineThree Months Ended September 30,March 31, 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 

Three Months Ended March 31, 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.

Donegal Group Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Unaudited)
Nine Months Ended September 30, 2022

 
Class A
Shares
  
Class B
Shares
  
Class A
Amount
  
Class B
Amount
  
Additional
Paid-In Capital
  
Accumulated
Other
Comprehensive
Income
(Loss)
  
Retained
Earnings
  
Treasury
Stock
  
Total
Stockholders’
Equity
  
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, 2021  28,756,203   5,649,240  $287,562  $56,492  $304,889,481  $3,283,551  $263,745,358  $(41,226,357) $531,036,087 
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)
  33,407      335      423,665            424,000   35,045      350      440,746            441,096 
Share-based compensation  900      9      256,451            256,460   143,004      1,431      2,218,355            2,219,786 
Net income                    13,145,029      13,145,029                     5,203,596      5,203,596 
Cash dividends declared                    (5,490)     (5,490)                    (7,057)     (7,057)
Grant of stock options              98,409      (98,409)                    114,724      (114,724)      
Other comprehensive loss
                 (20,590,225)        (20,590,225)
Balance, March 31, 2022  28,790,510   5,649,240  $287,906  $56,492  $305,668,006  $(17,306,674) $276,786,488  $(41,226,357) $524,265,861 
Issuance of common stock
(stock compensation plans)
  54,743      547      736,349            736,896 
Share-based compensation  775,898      7,759      11,476,429            11,484,188 
Net loss                    (8,207,757)     (8,207,757)
Cash dividends declared                    (5,086,617)     (5,086,617)
Grant of stock options              59,216      (59,216)      
Other comprehensive loss
                 (12,170,089)        (12,170,089)
Balance, June 30, 2022  29,621,151   5,649,240  $296,212  $56,492  $317,940,000  $(29,476,763) $263,432,898  $(41,226,357) $511,022,482 
Issuance of common stock
(stock compensation plans)
  23,454      235      270,887            271,122 
Share-based compensation  195,322      1,953      3,013,995            3,015,948 
Net loss
                    (10,375,871)     (10,375,871)
Cash dividends declared                    (5,235,993)     (5,235,993)
Grant of stock options              138,907      (138,907)      
Other comprehensive loss
                 (17,494,289)        (17,494,289)
Balance, September 30, 2022  29,839,927   5,649,240  $298,400  $56,492  $321,363,789  $(46,971,052) $247,682,127  $(41,226,357) $481,203,399 
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 

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

 Nine Months Ended September 30,  Three Months Ended March 31, 
 2023
  2022
  2024
  2023
 
Cash Flows from Operating Activities:            
Net income (loss)
 $6,395,718  $(5,438,599)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
        
Net income
 $5,955,551  $5,203,596 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
        
Depreciation, amortization and other non-cash items  3,215,399   3,747,654   966,911   1,122,609 
Net investment (gains) losses
  (930,302)  10,810,594   (2,113,378)  331,189 
Changes in assets and liabilities:                
Losses and loss expenses  (7,691,440)  30,505,293   (1,704,647)  2,488,926 
Unearned premiums  39,672,853   22,394,901   34,725,153   32,031,102 
Premiums receivable  (14,787,307)  (12,881,975)  (13,568,339)  (15,699,109)
Deferred acquisition costs  (4,750,766)  (6,355,269)  (3,813,704)  (4,019,366)
Deferred income taxes  600,019   (2,645,695)  474,439   355,524 
Reinsurance receivable  17,501,773   3,564,454   5,926,208   (5,291,035)
Prepaid reinsurance premiums  (12,555,645)  11,222,717   (11,033,297)  (9,960,021)
Accrued investment income  (1,615,715)  (1,608,978)  (551,627)  (1,322,590)
Due to affiliate  (3,983,806)  (1,342,121)
Due from affiliate  (6,933,651)  (7,651,293)
Reinsurance balances payable  3,958,666   (16,695)  (4,742,896)  (220,377)
Current income taxes  536,759   (4,150,265)  830,906   749,813 
Accrued expenses  (119,166)  282,286   (261,440)  465,988 
Other, net  580,936   1,811,243   661,955   734,310 
Net adjustments  19,632,258   55,338,144   (1,137,407)  (5,884,330)
Net cash provided by operating activities
  26,027,976   49,899,545 
Net cash provided by (used in) operating activities
  4,818,144   (680,734)
Cash Flows from Investing Activities:                
Purchases of fixed maturities, held to maturity  (25,226,609)  (68,902,605)  (11,911,672)  (12,092,863)
Purchases of fixed maturities, available for sale  (131,155,483)  (101,328,478)  (46,490,362)  (34,354,601)
Purchases of equity securities, available for sale  (5,128,994)  (12,488,733)  (786,680)  (3,590,015)
Maturity of fixed maturities:                
Held to maturity  29,144,970   41,194,285   8,008,034   6,127,883 
Available for sale  41,318,216   60,346,490   30,922,241   12,365,403 
Sales of fixed maturities:
                
Available for sale  28,154,556   6,568,154   2,995,648   748,250 
Sales of equity securities, available for sale  8,080,764   17,498,036      3,066,129 
Net (purchases) sales of property and equipment  (44,701)  28,289 
Net sales (purchases) of short-term investments
  36,950,560   (23,968,454)
Net cash used in investing activities
  (17,906,721)  (81,053,016)
Net purchases of property and equipment     (44,700)
Net sales of short-term investments
  13,445,378   29,183,513 
Net cash (used in) provided by investing activities
  (3,817,413)  1,408,999 
Cash Flows from Financing Activities:                
Cash dividends paid  (16,339,529)  (15,243,368)  (5,578,880)  (5,304,047)
Issuance of common stock  6,813,772   15,348,793   590,916   2,288,494 
Net cash (used in) provided by financing activities
  (9,525,757)  105,425 
Net cash used in financing activities
  (4,987,964)  (3,015,553)
Net decrease in cash
  (1,404,502)  (31,048,046)  (3,987,233)  (2,287,288)
Cash at beginning of period  25,123,332   57,709,375   23,792,273   25,123,332 
Cash at end of period $23,718,830  $26,661,329  $19,805,040  $22,836,044 
                
Cash paid during period - Interest $463,911  $464,188  $156,292  $156,346 
Net cash paid during period - Taxes $  $4,500,000  $  $ 

See accompanying notes to consolidated financial statements.

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”), Southern Insurance Company of Virginia (“Southern”) and the Peninsula Insurance Group (“Peninsula”), which consists of Peninsula Indemnity Company and The Peninsula Insurance Company and ourits wholly owned subsidiary Peninsula Indemnity Company, and Southern Insurance Company of Virginia (“Southern”). Our insurance subsidiaries and their affiliates write personalcommercial and commercialpersonal lines of property and casualty coverages exclusively through a network of independent insurance agents in certain Mid-Atlantic, Midwestern, New England, Southern and Southwestern states.



At September 30, 2023,March 31, 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, 2023,March 31, 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 or (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.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.

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 ninethree months ended September 30, 2023March 31, 2024 are not necessarily indicative of the results of operations we expect for the year ending December 31, 2023.2024.



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, 2022.2023 that we filed with the Securities and Exchange Commission (“SEC”) on March 6, 2024.

3 -Net Income (Loss) 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 (loss) per share. The two-class method is an earnings allocation formula that determines net income (loss) per share separately for each class of common stock based on dividends we have declared and an allocation of our remaining undistributed net income (loss) using a participation percentage that reflects the dividend rights of each classclass. . The table below presents for the periods indicated a reconciliation of the numerators and denominators we used to compute basic and diluted net income (loss) per share for our Class A common stock and our Class B common stock:

  Three Months Ended September 30, 
  2023
  2022
 
  Class A  Class B  Class A  Class B 
  (in thousands, except per share data) 
Basic net loss per share:            
Numerator:            
Allocation of net loss $(671) $(134) $(8,714) $(1,662)
Denominator:                
Weighted-average shares outstanding  27,595   5,577   26,781   5,577 
Basic net loss per share $(0.02) $(0.02) $(0.33) $(0.30)
                 
Diluted net loss per share:
                
Numerator:                
Allocation of net loss $(671) $(134) $(8,714) $(1,662)
Denominator:                
Number of shares used in basic computation  27,595   5,577   26,781   5,577 
Weighted-average shares effect of dilutive securities:                
Director and employee stock options            
Number of shares used in diluted computation  27,595   5,577   26,781   5,577 
Diluted net loss per share $(0.02) $(0.02) $(0.33) $(0.30)

 Nine Months Ended September 30,  Three Months Ended March 31, 
 2023
  2022
  2024
  2023
 
 Class A  Class B  Class A  Class B  Class A  Class B  Class A  Class B 
 (in thousands, except per share data)  (in thousands, except per share data) 
Basic net income (loss) per share:            
Basic net income per share:
            
Numerator:                        
Allocation of net income (loss)
 $5,421  $975  $(4,529) $(910)
Allocation of net income
 $5,039 $917 $4,387 $817
Denominator:                                
Weighted-average shares outstanding  27,391   5,577   26,216   5,577   27,811   5,577   27,193   5,577 
Basic net income (loss) per share $0.20  $0.17  $(0.17) $(0.16)
Basic net income per share
 $0.18 $0.16 $0.16 $0.15
                                
Diluted net income (loss) per share:                
Diluted net income per share:
                
Numerator:                                
Allocation of net income (loss)
 $5,421  $975  $(4,529) $(910)
Allocation of net income $5,039 $917 $4,387 $817
Denominator:                                
Number of shares used in basic computation  27,391   5,577   26,216   5,577   27,811   5,577   27,193   5,577 
Weighted-average shares effect of dilutive securities:                                
Director and employee stock options  117            35      173    
Number of shares used in diluted computation  27,508   5,577   26,216   5,577   27,846   5,577   27,366   5,577 
Diluted net income (loss) per share $0.20  $0.17  $(0.17) $(0.16)
Diluted net income per share
 $0.18 $0.16 $0.16 $0.15


We did not include outstanding options to purchase the following number of shares of Class A common stock in our computation of diluted net income per share because the exercise price of the options exceeded the average market price of our Class A common stock during the applicable periods.

 Three Months Ended September 30, Nine Months Ended September 30, 
 2023
 2022
 2023
 2022
 
             
Number of options to purchase Class A shares excluded        2,245,435    

  Three Months Ended March 31, 
  2024
  2023
 
         
Number of options to purchase Class A shares excluded  1,693,904   2,307,435 

We did not include any effect of dilutive securities in the computation of diluted net loss per share for the three months ended September 30, 2023 because we sustained a net loss for the period. We did not include any effect of dilutive securities in the computation of diluted net income (loss) per share for the three and nine months ended September 30, 2022 because we sustained a net loss for the respective periods.

4 -Reinsurance



Atlantic States and Donegal Mutual have participated in a pooling agreement since 1986 under which they pool substantially all of their directrespective premiums, written,losses and loss expenses, and Atlantic States and Donegal Mutual then share the underwriting results of the pool in accordance with the terms of the pooling agreement. Atlantic States has an 80% share of the results of the pool, and Donegal Mutual has a 20% share of the results of the pool.



Our insurance subsidiaries and Donegal Mutual participate in a consolidated third-party reinsurance program. The coverage and parameters of the program are common to all of our insurance subsidiaries and Donegal Mutual. The program utilizes several different reinsurers. They require their reinsurers to maintain an A.M. Best rating of A- (Excellent) or better or, with respect to foreign reinsurers, have a financial condition that, in the opinion of our management, is equivalent to a company with at least an A- rating from A.M. Best. The following information describes the external reinsurance Donegal Mutual and our insurance subsidiaries have in place for 2023:2024:


excess of loss reinsurance, under which Donegal Mutual and our insurance subsidiaries recover losses over a set retention of $3.0 million for all losses other than workers’compensationproperty and a set retention of $2.0$4.0 million for workers’ compensationproperty losses; and

catastrophe reinsurance, under which Donegal Mutual and our insurance subsidiaries recover 100% of an accumulation of many losses resulting from a single event, including natural disasters, over a set retention of $25.0 million up to aggregate losses of $175.0 million per occurrence.



For property insurance, our insurance subsidiaries have excess of loss reinsurance that provides coverage of $37.0$36.0 million per loss over a set retention of $3.0$4.0 million. For liability insurance, our insurance subsidiaries have excess of loss reinsurance that provides coverage of $72.0 million per occurrence over a set retention of $3.0 million. For workers’ compensation insurance, our insurance subsidiaries have excess of loss reinsurance that provides coverage of $18.0$17.0 million on any one life over a set retention of $2.0$3.0 million.


In addition to the pooling agreement and third-party reinsurance, our insurance subsidiaries have a catastrophe reinsurance agreement with Donegal Mutual, under which each of our insurance subsidiaries recovers 100% of an accumulation of multiple losses resulting from a single event, including natural disasters, over a set retention of $3.0 million up to aggregate losses of $22.0 million per occurrence. The agreement also provides additional coverage for an accumulation of losses from a single event including a combination of our insurance subsidiaries over a combined retention of $6.0 million. The purpose of the agreement is to lessen the effects of an accumulation of losses arising from one event to levels that are appropriate given each subsidiary’s size, underwriting profile and surplus.



Our insurance subsidiaries and Donegal Mutual also purchase facultative reinsurance to cover certain exposures, including property exposures that exceeded the limits provided by their respective treaty reinsurance.



In order to write automobile insurance in the state of Michigan, Atlantic States, MICO and MICOPeninsula are required to be members of the Michigan Catastrophic Claims Association (“MCCA”).  The MCCA provides reinsurance to Atlantic States, MICO and MICOPeninsula for personal automobile and commercial automobile personal injury claims in the state of Michigan over a set retention.

We report reinsurance receivable net of an allowance for expected credit losses. We base the allowance upon our ongoing review of amounts outstanding, historical loss data, changes in reinsurer credit standing and other relevant factors. We use a probability-of-default methodology, which reflects current and forecasted economic conditions, to estimate the allowance for expected credit losses.

5 -Investments



The amortized cost and estimated fair values of our fixed maturities at September 30, 2023March 31, 2024 were as follows:

 Carrying Value
  
Allowance for
Credit Losses
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
 
Carrying
Value
 
Allowance for
Credit Losses
 Amortized Cost 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
 
      (in thousands) (in thousands) 
Held to Maturity                          
U.S. Treasury securities and obligations of U.S. government corporations and agencies $
91,484  $
55  $91,539  $  $12,921  $78,618  $91,551  $55  $91,606  $  $9,550  $82,056 
Obligations of states and political subdivisions  379,764   298   380,062   454   75,269   305,247   376,569   266   376,835   1,057   50,664   327,228 
Corporate securities  202,797   1,000   203,797      24,284   179,513   202,093   1,001   203,094   246   15,565   187,775 
Mortgage-backed securities  9,867   6   9,873      748   9,125   13,186   7   13,193   9   447   12,755 
Totals $
683,912  $
1,359  $685,271  $454  $113,222  $572,503  $683,399  $1,329  $684,728  $1,312  $76,226  $609,814 

 Amortized Cost  
Gross Unrealized
Gains
  
Gross Unrealized
Losses
  
Estimated Fair
Value
  Amortized Cost  
Gross Unrealized
Gains
  
Gross Unrealized
Losses
  
Estimated Fair
Value
 
 (in thousands)  (in thousands) 
Available for Sale                        
U.S. Treasury securities and obligations of U.S. government corporations and agencies $88,636  $  $6,485  $82,151  $91,561  $79  $4,585  $87,055 
Obligations of states and political subdivisions 42,173 7 6,634 35,546  41,893 10 4,164 37,739 
Corporate securities 212,323  19,300 193,023  208,888 74 13,792 195,170 
Mortgage-backed securities  285,619    29,799  255,820   300,874  377  20,454  280,797 
Totals $628,751 $7 $62,218 $566,540  $643,216 $540 $42,995 $600,761 



At September 30, 2023,March 31, 2024, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $225.4$241.5 million and an amortized cost of $280.9$277.9 million. Our holdings at September 30, 2023March 31, 2024 also included special revenue bonds with an aggregate fair value of $115.4$123.5 million and an amortized cost of $141.3$140.8 million. With respect to both categories of those bonds at September 30, 2023,March 31, 2024, we held no securities of any issuer that comprised more than 10% of our holdings of either bond category. Education bonds and water and sewer utility bonds represented 47% and 36%, respectively, of our total investments in special revenue bonds based on the carrying values of these investments at September 30,March 31, 2024. Many of the issuers of the special revenue bonds we held at March 31, 2024 have the authority to impose ad valorem taxes. In that respect, many of the special revenue bonds we held are similar to general obligation bonds.




The amortized cost and estimated fair values of our fixed maturities at December 31, 2023 were as follows:

 
Carrying
Value
 
Allowance
for Credit
Losses
 Amortized Cost 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
 
 (in thousands) 
Held to Maturity            
U.S. Treasury securities and obligations of U.S. government corporations and agencies $91,518  $54  $91,572  $  $8,885  $82,687 
Obligations of states and political subdivisions  376,898   266   377,164   1,449   46,845   331,768 
Corporate securities  201,847   1,000   202,847   207   14,805   188,249 
Mortgage-backed securities  9,234   6   9,240      418   8,822 
Totals $679,497  $1,326  $680,823  $1,656  $70,953  $611,526 

  Amortized Cost  
Gross Unrealized
Gains
  
Gross Unrealized
Losses
  
Estimated Fair
Value
 
  (in thousands) 
Available for Sale            
U.S. Treasury securities and obligations of U.S. government corporations and agencies $89,367  $199  $4,147  $85,419 
Obligations of states and political subdivisions  41,958   12   3,854   38,116 
Corporate securities  211,882   100   15,189   196,793 
Mortgage-backed securities  286,520   594   18,094   269,020 
Totals $629,727  $905  $41,284  $589,348 



At December 31, 2023, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $245.1 million and an amortized cost of $278.3 million. Our holdings also included special revenue bonds with an aggregate fair value of $124.8 million and an amortized cost of $140.8 million. With respect to both categories of bonds, we held no securities of any issuer that comprised more than 10% of that category at December 31, 2023. Education bonds and water and sewer utility bonds represented 47% and 35%, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, 2023. Many of the issuers of the special revenue bonds we held at September 30,December 31, 2023 have the authority to impose ad valorem taxes. In that respect, many of the special revenue bonds we held are similar to general obligation bonds.



The amortized cost and estimated fair values of our fixed maturities at December 31, 2022 were as follows:

  Amortized Cost  
Gross Unrealized
Gains
  
Gross Unrealized
Losses
  
Estimated Fair
Value
 
  (in thousands) 
Held to Maturity            
U.S. Treasury securities and obligations of U.S. government corporations and agencies $103,362  $1  $10,566  $92,797 
Obligations of states and political subdivisions  382,097   1,810   60,494   323,413 
Corporate securities  190,949      20,510   170,439 
Mortgage-backed securities  12,031      635   11,396 
Totals $688,439  $1,811  $92,205  $598,045 

  Amortized Cost  
Gross Unrealized
Gains
  
Gross Unrealized
Losses
  
Estimated Fair
Value
 
  (in thousands) 
Available for Sale            
U.S. Treasury securities and obligations of U.S. government corporations and agencies $68,538  $109  $5,125  $63,522 
Obligations of states and political subdivisions  45,448   34   5,326   40,156 
Corporate securities  218,041   8   15,211   202,838 
Mortgage-backed securities  239,886   155   22,765   217,276 
Totals $571,913  $306  $48,427  $523,792 



At December 31, 2022, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $240.7 million and an amortized cost of $283.5 million. Our holdings also included special revenue bonds with an aggregate fair value of $122.9 million and an amortized cost of $144.0 million. With respect to both categories of bonds, we held no securities of any issuer that comprised more than 10% of that category at December 31, 2022. Education bonds and water and sewer utility bonds represented 48% and 35%, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, 2022. Many of the issuers of the special revenue bonds we held at December 31, 2022 have the authority to impose ad valorem taxes. In that respect, many of the special revenue bonds we held are similar to general obligation bonds.



We have segregated within accumulated other comprehensive loss the net unrealized losses of $15.1 million arising prior to the November 30, 2013 reclassification date for fixed maturities reclassified from available for sale to held to maturity. We are amortizing this balance over the remaining life of the related securities as an adjustment of yield in a manner consistent with the accretion of discount on the same fixed maturities. We recorded amortization of $ 225,07048,577 and $415,153$77,032 in other comprehensive loss(loss) income during the ninethree months ended September 30,March 31, 2024 and 2023, and 2022, respectively. At September 30, 2023March 31, 2024 and December 31, 2022,2023, net unrealized losses of $1.5$1.2 million and $4.7$1.3 million, respectively, remained within accumulated other comprehensive loss.


We show below the amortized cost and estimated fair value of our fixed maturities at September 30, 2023March 31, 2024 by contractual maturity. Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.


  Amortized Cost  
Estimated Fair
Value
 
  (in thousands) 
Held to maturity      
Due in one year or less $22,133  $22,012 
Due after one year through five years  106,022   98,950 
Due after five years through ten years  251,366   217,144 
Due after ten years  295,877   225,272 
Mortgage-backed securities  9,873   9,125 
Total held to maturity $685,271  $572,503 
         
Available for sale        
Due in one year or less $40,101  $39,458 
Due after one year through five years  175,077   161,274 
Due after five years through ten years  102,498   89,399 
Due after ten years  25,456   20,589 
Mortgage-backed securities  285,619   255,820 
Total available for sale $628,751  $566,540 

  Amortized Cost  
Estimated Fair
Value
 
  (in thousands) 
Held to maturity      
Due in one year or less $42,228  $41,549 
Due after one year through five years  130,205   121,873 
Due after five years through ten years  237,241   216,118 
Due after ten years  261,861   217,519 
Mortgage-backed securities  13,193   12,755 
Total held to maturity $684,728  $609,814 
         
Available for sale        
Due in one year or less $62,925  $61,761 
Due after one year through five years  170,058   160,071 
Due after five years through ten years  86,138   77,937 
Due after ten years  23,221   20,195 
Mortgage-backed securities  300,874   280,797 
Total available for sale $643,216  $600,761 


The cost and estimated fair values of our equity securities at September 30, 2023March 31, 2024 were as follows:

  Cost  Gross Gains  Gross Losses  
Estimated Fair
Value
 
  (in thousands) 
Equity securities $27,953  $8,014  $503  $35,464 
  Cost  Gross Gains  Gross Losses  
Estimated Fair
Value
 
  (in thousands) 
Equity securities $19,631  $9,315  $63  $28,883 



The cost and estimated fair values of our equity securities at December 31, 20222023 were as follows:

  Cost  Gross Gains  Gross Losses  
Estimated Fair
Value
 
  (in thousands) 
Equity securities $30,771  $5,666  $1,332  $35,105 
  Cost  Gross Gains  Gross Losses  
Estimated Fair
Value
 
  (in thousands) 
Equity securities $18,844  $7,059  $  $25,903 

1210


We present below gross gains and losses from investments and the change in the difference between fair value and cost of investments:

 Three Months Ended September 30,  Nine Months Ended September 30,
  Three Months Ended March 31, 
 2023
  2022
  2023
  2022
  2024  2023 
 (in thousands)  (in thousands)  (in thousands) 
Gross realized gains:                  
Fixed maturities $  $326  $295  $998  $4  $22 
Equity securities  108   400   393   1,243      285 
Real estate
           477 
  108   726   688   2,718   4   307 
Gross realized losses:                        
Fixed maturities  237   73   2,585   173   81   2,222 
Equity securities  424   249   475   1,073      46 
  661   322   3,060   1,246   81   2,268 
Net realized (losses) gains
  (553)  404   (2,372)  1,472 
Net realized losses
  (77)  (1,961)
Gross unrealized gains on equity securities
  (735)  117   3,940   123   2,256   2,202 
Gross unrealized losses on equity securities
  80   (2,879)  (547)  (12,406)  (63)  (485)
Fixed maturities - credit impairment charges  (35)     (91)     (3)  (87)
Net investment (losses) gains
 $(1,243) $(2,358) $930  $(10,811)
Net investment gains (losses) $2,113  $(331)



We held fixed maturities with unrealized losses representing declines that we considered temporary at September 30, 2023March 31, 2024 as follows:

 Less Than 12 Months  More Than 12 Months  Less Than 12 Months  More Than 12 Months 
 Fair Value  Unrealized Losses  Fair Value  Unrealized Losses  Fair Value  Unrealized Losses  Fair Value  Unrealized Losses 
 (in thousands)  (in thousands) 
U.S. Treasury securities and obligations of U.S. government corporations and agencies $51,076  $1,224 $109,693 $18,182  $37,188  $299 $125,533 $13,836 
Obligations of states and political subdivisions 38,870 1,965 281,436 79,938  29,747 251 304,139 54,577 
Corporate securities 33,707 2,325 338,829 41,259  18,034 431 343,673 28,926 
Mortgage-backed securities  89,676  3,221  175,269  27,326   58,891  656  187,697  20,245 
Totals $213,329 $8,735 $905,227 $166,705  $143,860 $1,637 $961,042 $117,584 



We held fixed maturities with unrealized losses representing declines that we considered temporary at December 31, 20222023 as follows:

 Less Than 12 Months  More Than 12 Months  Less Than 12 Months  More Than 12 Months 
 Fair Value  Unrealized Losses  Fair Value  Unrealized Losses  Fair Value  Unrealized Losses  Fair Value  Unrealized Losses 
 (in thousands)  (in thousands) 
U.S. Treasury securities and obligations of U.S. government corporations and agencies $90,245  $5,327 $47,238 $10,364  $32,224  $217 $116,538 $12,815 
Obligations of states and political subdivisions 261,465 49,327 47,945 16,493  13,097 68 307,429 50,631 
Corporate securities 298,706 22,272 72,959 13,449  13,066 324 353,863 29,670 
Mortgage-backed securities  143,886  10,941  69,879  12,459   46,964  221  178,113  18,291 
Totals $794,302 $87,867 $238,021 $52,765  $105,351 $830 $955,943 $111,407 


We make estimates concerning the valuation of our investments and, as applicable, the recognition of declines in the value of our investments.  For equity securities, we measure investments at fair value, and we recognize changes in fair value in our results of operations. With respect to an available-for-sale debt security that is in an unrealized loss position, we first assess if we intend to sell the debt security. If we determine we intend to sell the debt security, we recognize the impairment loss in our results of operations. If we do not intend to sell the debt security, we determine whether it is more likely than not that we will be required to sell the debt security prior to recovery. If we determine it is more likely than not that we will be required to sell the debt security prior to recovery, we recognize the impairment loss in our results of operations. If we determine it is more likely than not that we will not be required to sell the debt security prior to recovery, we then evaluate whether a credit loss has occurred with respect to that security. We determine whether a credit loss has occurred by comparing the amortized cost of the debt security to the present value of the cash flows we expect to collect. If we expect a cash flow shortfall, we consider that a credit loss has occurred. If we determine that a credit loss has occurred, we establish an allowance for credit loss. We then recognize the amount of the allowance in our results of operations, and we recognize the remaining portion of the impairment loss in our other comprehensive income, net of applicable taxes. We regularly review the allowance for credit losses and recognize changes in the allowance in our results of operations. In addition, we may write down securities in an unrealized loss position based on a number of other factors, including when the fair value of an investment is significantly below its cost, when the financial condition of the issuer of a security has deteriorated, the occurrence of industry, issuer or geographic events that have negatively impacted the value of a security and rating agency downgrades. For held-to-maturity debt securities, we make estimates concerning expected credit losses at an aggregated level rather that monitoring individual debt securities for credit losses. We establish an allowance for expected credit losses based on an ongoing review of securities held, historical loss data, changes in issuer credit standing and other relevant factors. We utilize a probability-of-default methodology, which reflects current and forecasted economic conditions, to estimate the allowance for expected credit losses and recognize changes to the allowance in our results of operations. We held 931893 debt securities that were in an unrealized loss position at September 30, 2023.March 31, 2024. Based upon our analysis of general market conditions and underlying factors impacting these debt securities, we considered these declines in value to be temporary.



We amortize premiums and discounts on debt securities over the life of the security as an adjustment to yield using the effective interest method. We compute realized investment gains and losses using the specific identification method.



We amortize premiums and discounts on mortgage-backed debt securities using anticipated prepayments.

6 -Segment Information



We evaluate the performance of our personal lines and commercial lines segments based upon the underwriting results of our insurance subsidiaries using statutory accounting principles (“SAP”) that various state insurance departments prescribe or permit. Our management uses SAP to measure the performance of our insurance subsidiaries instead of United States generally accepted accounting principles (“GAAP”). SAP financial measures are considered non-GAAP financial measures under applicable SEC rules because they include or exclude certain items that the most comparable GAAP financial measures do not ordinarily include or exclude.


1412


Financial data by segment for the three and nine months ended September 30,March 31, 2024 and 2023 and 2022 is as follows:


 Three Months Ended September 30,  Three Months Ended March 31, 
 2023
  2022
  2024
  2023
 
 (in thousands)  (in thousands) 
Revenues:            
Premiums earned:            
Commercial lines $135,432  $127,497  $132,092  $133,187 
Personal lines  88,961   78,625   95,657   82,046 
GAAP premiums earned  224,393   206,122   227,749   215,233 
Net investment income  10,536   8,569   10,972   9,449 
Investment losses  (1,243)  (2,358)
Investment gains (losses)  2,113   (331)
Other  242   505   307   395 
Total revenues $233,928  $212,838  $241,141  $224,746 
Loss before income tax benefit:
        
Underwriting gain (loss):        
Income before income tax expense:
        
Underwriting (loss) gain:        
Commercial lines $9,957  $(12,100) $(10,371) $(7,912)
Personal lines  (20,016)  (9,126)  (532)  879 
SAP underwriting loss  (10,059)  (21,226)  (10,903)  (7,033)
GAAP adjustments  (118)  1,430   5,359   4,407 
GAAP underwriting loss  (10,177)  (19,796)  (5,544)  (2,626)
Net investment income  10,536   8,569   10,972   9,449 
Investment losses  (1,243)  (2,358)
Investment gains (losses)
  2,113   (331)
Other  (121)  216   (293)  (196)
Loss before income tax benefit
 $(1,005) $(13,369)
Income before income tax expense $7,248  $6,296 

  Nine Months Ended September 30, 
  2023
  2022
 
  (in thousands) 
Revenues:
      
Premiums earned:      
Commercial lines 
$
399,427
  
$
378,680
 
Personal lines  
256,459
   
230,819
 
GAAP premiums earned  
655,886
   
609,499
 
Net investment income  
30,143
   
24,631
 
Investment gains (losses)
  
930
   
(10,811
)
Other  
911
   
1,457
 
Total revenues
 
$
687,870
  
$
624,776
 
Income (loss) before income tax expense (benefit):
        
Underwriting loss:        
Commercial lines 
$
(4,024
)
 
$
(16,873
)
Personal lines  
(24,950
)
  
(12,654
)
SAP underwriting loss
  
(28,974
)
  
(29,527
)
GAAP adjustments  
5,968
   
7,984
 
GAAP underwriting loss  
(23,006
)
  
(21,543
)
Net investment income  
30,143
   
24,631
 
Investment gains (losses)
  
930
   
(10,811
)
Other  
(522
)
  
1
 
Income (loss) before income tax expense (benefit)
 
$
7,545
  
$
(7,722
)

7 -Borrowings

Lines of Credit


In August 2020, we entered into a credit agreement with Manufacturers and Traders Trust Company (“M&T”) that related to a $20.0 million unsecured demand line of credit. The line of credit has no expiration date, no annual fees and no covenants. At September 30, 2023,March 31, 2024, we had no outstanding borrowings from M&T and had the ability to borrow up to $20.0 million at an interest rate equal to the then-current Term SOFR rate plus 2.11%.



Atlantic States is a member of the FHLB of Pittsburgh. Through its membership, Atlantic States has the ability to issue debt to the FHLB of Pittsburgh in exchange for cash advances. Atlantic States has a fixed-rate cash advance of $35.0 million that was outstanding at September 30, 2023.March 31, 2024. The cash advance carries a fixed interest rate of 1.74% and is due in August 2024. The table below presents the amount of FHLB of Pittsburgh stock Atlantic States purchased, collateral pledged and assets related to Atlantic States’ membership in the FHLB of Pittsburgh at September 30, 2023.March 31, 2024.

FHLB of Pittsburgh stock purchased and owned $1,591,800  $1,591,800 
Collateral pledged, at par (carrying value $42,167,218) 47,017,596 
Collateral pledged, at par (carrying value $41,087,980) 44,459,589 
Borrowing capacity currently available 4,456,902  3,579,560 

1613

8 -Share–Based Compensation



We measure all share-based payments to employees, including grants of stock options, and use a fair-value-based method for the recording of related compensation expense in our results of operations. In determining the expense we record for stock options granted to directors and employees of our subsidiaries and affiliates, we estimate the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The significant assumptions we utilize in applying the Black-Scholes option pricing model are the risk-free interest rate, the expected term, the dividend yield and the expected volatility.



We recorded compensation expense related to our stock compensation plans of $182,185$286,001 and $158,966$251,773 for the three months ended September 30,March 31, 2024 and 2023, and 2022, respectively, with a corresponding income tax benefit of $38,259$60,060 and $33,383, respectively. We recorded compensation expense related to our stock compensation plans of $683,439 and $644,751 for the nine months ended September 30, 2023 and 2022, respectively, with a corresponding income tax benefit of $143,522 and $135,398,$52,872, respectively. At September 30, 2023,March 31, 2024, we had $966,925$1.6 million of unrecognized compensation expense related to nonvested share-based compensation granted under our stock compensation plans that we expect to recognize over a weighted average period of approximately 1.51.8 years.



We received cash from option exercises under all stock compensation plans during the three months ended September 30,March 31, 2024 and 2023 and 2022 of $ 848,891236,624 and $2.9 million, respectively. We received cash from option exercises under all stock compensation plans during the nine months ended September 30, 2023 and 2022 of $5.5 million and $14.1$2.0 million, respectively. We realized actual tax benefits for the tax deductions related to those option exercises of $ 13,5011,719 and $65,030$46,188 for the three months ended September 30,March 31, 2024 and 2023, and 2022, respectively. We realized actual tax benefits for the tax deductions related to those option exercises of $126,644 and $329,842 for the nine months ended September 30, 2023 and 2022, respectively. 

9 -Fair Value Measurements



We account for financial assets using a framework that establishes a hierarchy that ranks the quality and reliability of the inputs, or assumptions, we use in the determination of fair value, and we classify financial assets and liabilities carried at fair value in one of the following three categories:


Level 1 – quoted prices in active markets for identical assets and liabilities;



Level 2 – directly or indirectly observable inputs other than Level 1 quoted prices; and



Level 3 – unobservable inputs not corroborated by market data.



For investments that have quoted market prices in active markets, we use the quoted market price as fair value and include these investments in Level 1 of the fair value hierarchy. We classify publicly-traded equity securities as Level 1. When quoted market prices in active markets are not available, we base fair values on quoted market prices of comparable instruments or price estimates we obtain from independent pricing services and include these investments in Level 2 of the fair value hierarchy. We classify our fixed maturity investments and non-publicly traded equity securities as Level 2. Our fixed maturity investments consist of U.S. Treasury securities and obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, corporate securities and mortgage-backed securities.


We present our investments in available-for-sale fixed maturity and equity securities at estimated fair value. The estimated fair value of a security may differ from the amount that could be realized if we sold the security in a forced transaction. In addition, the valuation of fixed maturity investments is more subjective when markets are less liquid, increasing the potential that the estimated fair value does not reflect the price at which an actual transaction would occur. We utilize nationally recognized independent pricing services to estimate fair values or obtain market quotations for substantially all of our fixed maturity and equity investments. We generally obtain two prices per security. These pricing services utilize market quotations for fixed maturity and equity securities that have quoted prices in active markets. For fixed maturity securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements based predominantly on observable market inputs. The pricing services do not use broker quotes in determining the fair values of our investments. Our investment personnel review the estimates of fair value the pricing services provide to verify that the estimates we obtain from the pricing services are representative of fair values based upon our investment personnel’s general knowledge of the market, their research findings related to unusual fluctuations in value and their comparison of such values to execution prices for similar securities. Our investment personnel monitor the market and are familiar with current trading ranges for similar securities and the pricing of specific investments. Our investment personnel review all pricing estimates that we receive from the pricing services against their expectations with respect to pricing based on fair market curves, security ratings, coupon rates, security types and recent trading activity. Our investment personnel periodically review documentation with respect to the pricing services’ pricing methodology that they obtain to determine if the primary pricing sources, market inputs and pricing frequency for various security types are reasonable. At September 30, 2023,March 31, 2024, we received two estimates per security from the pricing services, and we priced substantially all of our Level 1 and Level 2 investments using those prices. In our review of the estimates the pricing services provided at September 30, 2023,March 31, 2024, we did not identify any material discrepancies, and we did not make any adjustments to the estimates the pricing services provided.


1714


We present our cash and short-term investments at estimated fair value. We classify these items as Level 1.



The carrying values we report in our balance sheet for premium receivables, reinsurance receivables related to paid losses and loss expenses and reinsurance balances payable approximate their fair values. The carrying amounts we report in our balance sheets for our borrowings under lines of credit approximate their fair values. We classify these items as Level 3.



We evaluate our assets and liabilities to determine the appropriate level at which to classify them for each reporting period.



The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at September 30, 2023:March 31, 2024:

 Fair Value Measurements Using  Fair Value Measurements Using 
 Fair Value  
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
  
Significant
Other
Observable
Inputs (Level 2)
  
Significant
Unobservable
Inputs (Level 3)
  Fair Value  
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
  
Significant
Other
Observable
Inputs (Level 2)
  
Significant
Unobservable
Inputs (Level 3)
 
 (in thousands)  (in thousands) 
U.S. Treasury securities and obligations of U.S. government corporations and agencies $82,151 $  $82,151 $  $87,055  $  $87,055  $ 
Obligations of states and political subdivisions 35,546  35,546    37,739      37,739    
Corporate securities 193,023  193,023    195,170      195,170    
Mortgage-backed securities 255,820  255,820    280,797      280,797    
Equity securities  35,464  33,472  1,992     28,883   26,891   1,992    
Total investments in the fair value hierarchy $602,004 $33,472 $568,532 $  $629,644  $26,891  $602,753  $ 


The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at December 31, 2022:2023:

 Fair Value Measurements Using  Fair Value Measurements Using 
 Fair Value  
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
  
Significant
Other
Observable
Inputs (Level 2)
  
Significant
Unobservable
Inputs (Level 3)
  Fair Value  
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
  
Significant
Other
Observable
Inputs (Level 2)
  
Significant
Unobservable
Inputs (Level 3)
 
 (in thousands)  (in thousands) 
U.S. Treasury securities and obligations of U.S. government corporations and agencies $63,522 $ $63,522 $  $85,419  $  $85,419  $ 
Obligations of states and political subdivisions 40,156  40,156    38,116      38,116    
Corporate securities 202,838  202,838    196,793      196,793    
Mortgage-backed securities 217,276  217,276    269,020      269,020    
Equity securities  35,105  32,821  2,284     25,903   23,911   1,992    
Totals $558,897 $32,821 $526,076 $  $615,251  $23,911  $591,340  $ 

10 -Income Taxes



At September 30, 2023March 31, 2024 and December 31, 2022,2023, respectively, we had no material unrecognized tax benefits or accrued interest and penalties. TaxIn 2019, the Internal Revenue Service (“IRS”) began a federal income tax audit of our consolidated tax returns for tax years 2016 through 2022 remained open for examination at September 30, 2023. to 2018. No material issues have been raised and no adjustments have been proposed as a result of this ongoing audit. We provide a valuation allowance when we believe it is more likely than not that we will not realize some portion of our tax assets. We established a valuation allowance of $8.1 million for our net state operating loss carryforward.carryforward, which will expire between 2024 and 2043. We have determined that we are not required to establish a valuation allowance for our other deferred tax assets of $43.4$39.4 million and $39.8$38.4 million at September 30, 2023March 31, 2024 and December 31, 2022,2023, respectively, because it is more likely than not that we will realize these deferred tax assets through reversals of existing temporary differences, future taxable income and the implementation of tax planning strategies.
11 -
Liabilities for Losses and Loss Expenses


The establishment of appropriate liabilities for losses and loss expenses is an inherently uncertain process, and we can provide no assurance that our insurance subsidiaries’ ultimate liabilities for losses and loss expenses will not exceed their loss and loss expense reserves and have an adverse effect on our results of operations and financial condition. For example, legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries to pay losses for damages that their policies explicitly excluded or did not intend to cover. Furthermore, we cannot predict the timing, frequency and extent of adjustments to our insurance subsidiaries’ estimated future liabilities, because the historical conditions and events that serve as a basis for our insurance subsidiaries’ estimates of ultimate claim costs may change. As is the case for substantially all property and casualty insurance companies, our insurance subsidiaries have found it necessary in the past to increase their estimated future liabilities for losses and loss expenses in certain periods, and, in other periods, their estimated future liabilities for losses and loss expenses have exceeded their actual liabilities for losses and loss expenses. Changes in our insurance subsidiaries’ estimate of their liabilities for losses and loss expenses generally reflect actual payments and their evaluation of information received subsequent to the prior reporting period.



We summarize activity in our insurance subsidiaries’ liabilities for losses and loss expenses as follows:

 
Nine Months Ended September 30,
  
Three Months Ended March 31,
 
 2023
  2022
  2024
  2023
 
 (in thousands)  (in thousands) 
Balance at January 1 $1,121,046  $1,077,620  $1,126,157  $1,121,046 
Less reinsurance recoverable  (451,184)  (451,261)  (437,014)  (451,184)
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1  1,132         1,132 
Net balance at January 1  670,994   626,359   689,143   670,994 
Incurred related to:                
Current year  461,799   445,855   159,289   146,413 
Prior years  (15,775)  (30,609)  (8,393)  (8,307)
Total incurred  446,024   415,246   150,896   138,106 
Paid related to:                
Current year  230,214   209,051   47,886   41,205 
Prior years  204,842   170,129   98,197   98,820 
Total paid  435,056   379,180   146,083   140,025 
Net balance at end of period  681,962   662,425   693,956   669,075 
Plus reinsurance recoverable  431,392   445,701   430,496   454,460 
Balance at end of period $1,113,354  $1,108,126  $1,124,452  $1,123,535 


Our insurance subsidiaries recognized a decrease in their liabilities for losses and loss expenses of prior years of $15.8$8.4 million and $30.6$8.3 million for the ninethree months ended September 30,March 31, 2024 and 2023, and 2022, respectively. Our insurance subsidiaries made no significant changes in their reserving philosophy or claims management personnel, and they have made no significant offsetting changes in estimates that increased or decreased their loss and loss expense reserves in those years. The 20232024 development represented 2.4%1.2% of the December 31, 20222023 net carried reserves and resulted from lower-than-expected loss emergence or severity primarily in the commercial multi-peril, commercial automobilepersonal automobile and homeowners lines of business. The majority of the 2024 development related to decreases in the liabilities for losses and loss expenses of prior years for Atlantic States and MICO. The 2023 development represented 1.2% of the December 31, 2022 net carried reserves and resulted primarily from lower-than-expected loss emergence or severity primarily in the commercial automobile, workers’ compensation and commercial multi-peril lines of business. The majority of the 2023 development related to decreases in the liabilities for losses and loss expenses of prior years for Atlantic States and MICO. The 2022 development represented 4.9% of the December 31, 2021 net carried reserves and resulted primarily from lower-than-expected loss emergence or severity in nearly all lines of business. The majority of the 2022 development related to decreases in the liabilities for losses and loss expenses of prior years for Atlantic States and MICO.

Short-duration contracts are contracts for which our insurance subsidiaries receive premiums that they recognize as revenue over the period of the contract in proportion to the amount of insurance protection our insurance subsidiaries provide. Our insurance subsidiaries consider the policies they issue to be short-duration contracts. We consider the material lines of business of our insurance subsidiaries to be personal automobile, homeowners, commercial automobile, commercial multi-peril and workers’ compensation.



Our insurance subsidiaries determine incurred but not reported (“IBNR”) reserves by subtracting the cumulative loss and loss expense amounts our insurance subsidiaries have paid and the case reserves our insurance subsidiaries have established at the balance sheet date from their actuaries’ estimate of the ultimate cost of losses and loss expenses. Accordingly, the IBNR reserves of our insurance subsidiaries include their actuaries’ projections of the cost of unreported claims as well as their actuaries’ projected development of case reserves on known claims and reopened claims. Our insurance subsidiaries’ methodology for estimating IBNR reserves has been in place for many years, and their actuaries made no significant changes to that methodology during the ninethree months ended September 30, 2023.March 31, 2024.


The actuaries for our insurance subsidiaries generally prepare an initial estimate for ultimate losses and loss expenses for the current accident year by multiplying earned premium by an ‘‘a priori,’’ or expected, loss ratio for each line of business our insurance subsidiaries write. Expected loss ratios represent the actuaries’ expectation of losses at the time our insurance subsidiaries price and write their policies and before the emergence of any actual claims experience. The actuaries determine an expected loss ratio by analyzing historical experience and adjusting for loss cost trends, loss frequency and severity trends, premium rate level changes, reported and paid loss emergence patterns and other known or observed factors.



The actuaries use a variety of actuarial methods to estimate the ultimate cost of losses and loss expenses. These methods include paid loss development, incurred loss development and the Bornhuetter-Ferguson method from which the actuaries select loss development factor assumptions. The actuaries base their selection of a point estimate on a judgmental weighting of the estimates each of these methods produce.



The actuaries consider loss frequency and severity trends when they develop expected loss ratios and point estimates. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors that affect loss frequency include changes in weather patterns and economic activity. Factors that affect loss severity include changes in policy limits, reinsurance retentions, inflation rates and judicial interpretations.



Our insurance subsidiaries create a claim file when they receive notice of an actual demand for payment, an event that may lead to a demand for payment or when they otherwise determine that a demand for payment could potentially lead to a future demand for payment on another coverage under the same policy or another policy they have issued. In recent years, our insurance subsidiaries have noted an increase in the period of time between the occurrence of a casualty loss event and the date at which they receive notice of a liability claim. Changes in the length of time between the loss occurrence date and the claim reporting date affect the actuaries’ ability to predict loss frequency accurately and the amount of IBNR reserves our insurance subsidiaries require.



Our insurance subsidiaries generally create a claim file for a policy at the claimant level by type of coverage and generally recognize one count for each claim event. In certain lines of business where it is common for multiple parties to claim damages arising from a single claim event, our insurance subsidiaries recognize one count for each claimant involved in the event. Atlantic States recognizes one count for each claim event, or claimant involved in a multiple-party claim event, related to losses Atlantic States assumes through its participation in its pooling agreement with Donegal Mutual. Our insurance subsidiaries accumulate the claim counts and report them by line of business.

2017

12 -Allowance for Expected Credit Losses


We make estimates with respect to the potential impairment of financial instruments and recognize expected credit losses as an allowance rather than impairments as credit losses are incurred. We have established allowances for expected credit losses with respect to held-to-maturity debt securities and reinsurance recoverable.


Held-to-Maturity Fixed-Maturity Securities



For held-to-maturity debt securities, we make estimates concerning expected credit losses at an aggregated level rather that monitoring individual debt securities for credit losses. We establish an allowance for expected credit losses based on an ongoing review of securities held, historical loss data, changes in issuer credit standing and other relevant factors. We utilize a probability-of-default methodology, which reflects current and forecasted economic conditions, to estimate the allowance for expected credit losses and recognize changes to the allowance in our results of operations.


The following table presents the balances for fixed maturities classified as held-to-maturity, net of the allowance for expected credit losses, at September 30,March 31, 2024 and 2023 and 2022 and changes in the allowance for expected credit losses for the three and nine months ended September 30, 2023March 31, 2024 and 2022.2023.



At and For the Three Months
Ended September 30, 2023
  
At and For the Three Months
Ended September 30, 2022
  
At and For the Three Months
Ended March 31, 2024
  
At and For the Three Months
Ended March 31, 2023
 
Held-to-
Maturity, Net
of Allowance
for Expected
Credit Losses
  
Allowance
for Expected
Credit
Losses
  
Held-to-
Maturity, Net
of Allowance
for Expected
Credit Losses
  
Allowance
for Expected
Credit
Losses
  
Held-to-
Maturity, Net
of Allowance
for Expected
Credit Losses
  
Allowance
for Expected
Credit
Losses
  
Held-to-
Maturity, Net
of Allowance
for Expected
Credit Losses
  
Allowance
for Expected
Credit
Losses
 
(in thousands)  (in thousands) 
Balance at beginning of period
 $685,402  $1,324  $700,335  $  $679,497  $1,326  $668,439  $ 
Cumulative effect of adoption of updated accounting guidance for credit losses
             1,268 
Current period change for expected credit losses      35             3       87 
Balance at end of period $683,912  $1,359  $696,392  $  $683,399  $1,329  $693,779  $1,355 


  
At and For the Nine Months
Ended September 30, 2023
  
At and For the Nine Months
Ended September 30, 2022
 
  
Held-to-
Maturity, Net
of Allowance
for Expected
Credit Losses
  
Allowance
for Expected
Credit
Losses
  
Held-to-
Maturity, Net
of Allowance
for Expected
Credit Losses
  
Allowance
for Expected
Credit
Losses
 
  (in thousands) 
Balance at beginning of period $688,439  $  $668,105  $ 
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1
      1,268        
Current period change for expected credit losses      91        
Balance at end of period $683,912  $1,359  $696,392  $ 


Reinsurance Receivable



For reinsurance receivable, we establish an allowance for expected credit losses based upon our ongoing review of amounts outstanding, historical loss data, changes in reinsurer credit standing and other relevant factors. We utilize a probability-of-default methodology, which reflects current and forecasted economic conditions, to estimate the allowance for expected credit losses and recognize changes to the allowance in our results of operations.


The following table presents the balances for reinsurance receivable, net of the allowance for expected credit losses, at September 30,March 31, 2024 and 2023, and 2022, and the changes in the allowance for expected credit losses for the three and nine months ended September 30, 2023March 31, 2024 and 2022.2023.


 
At and For the Three Months
Ended September 30, 2023
  
At and For the Three Months
Ended September 30, 2022
 
 
Reinsurance
Receivable, Net
of Allowance
for Expected
Credit Losses
  
Allowance
for Expected
Credit
Losses
  
Reinsurance
Receivable, Net
of Allowance
for Expected
Credit Losses
  
Allowance
for Expected
Credit
Losses
 
 (in thousands) 
Balance at beginning of period $460,681  $1,567  $445,151  $ 
Current period change for expected credit losses      38        
Balance at end of period $437,889  $1,605  $451,847  $ 

  
At and For the Three Months
Ended March 31, 2024
  
At and For the Three Months
Ended March 31, 2023
 
  
Reinsurance
Receivable, Net
of Allowance
for Expected
Credit Losses
  
Allowance
for Expected
Credit
Losses
  
Reinsurance
Receivable, Net
of Allowance
for Expected
Credit Losses
  
Allowance
for Expected
Credit
Losses
 
  (in thousands) 
Balance at beginning of period $441,431  $1,394  $456,522  $ 
Cumulative effect of adoption of updated accounting guidance for credit losses             1,132 
Current period change for expected credit losses      (368)      335 
Balance at end of period $435,505  $1,026  $460,681  $1,467 

2118

  
At and For the Nine Months
Ended September 30, 2023
  
At and For the Nine Months
Ended September 30, 2022
 
  
Reinsurance
Receivable, Net
of Allowance
for Expected
Credit Losses
  
Allowance
for Expected
Credit
Losses
  
Reinsurance
Receivable, Net
of Allowance
for Expected
Credit Losses
  
Allowance
for Expected
Credit
Losses
 
  (in thousands) 
Balance at beginning of period
 
$456,522
 
 
$
 
 
$455,411
 
 
$
 
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1
 
 
 
 
 
 
1,132
 
 
 
 
 
 
 
 
Current period change for expected credit losses
 
 
 
 
 
 
473
 
 
 
 
 
 
 
 
Balance at end of period
 
$437,889
 
 
$1,605
 
 
$451,847
 
 
$
 

13 - Impact of New Accounting Standards



In September 2016, the FASB issued guidance that amended previous guidance on the impairment of financial instruments by adding an impairment model that requires an entity to recognize expected credit losses as an allowance rather than impairments as credit losses are incurred. The intent of this guidance is to reduce complexity and result in a more timely recognition of expected credit losses. In November 2019, the FASB issued guidance that delayed the effective date for “smaller reporting companies,” as defined in Item 10(f)(1) of Regulation S-K, to annual and interim reporting periods beginning after December 15, 20222023 from December 15, 2019. We were a smaller reporting company at the time this guidance was issued, and our adoption of this guidance on January 1, 2023 resulted in an after-tax decrease in retained earnings of $1.9 million. The adoption of this guidance did not have a significant impact on our results of operations or cash flows.

2219

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We recommend that you read the following information in conjunction with the historical financial information and the footnotes to that financial information we include in this Quarterly Report on Form 10-Q. We also recommend you read Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022.2023.

Critical Accounting Policies and Estimates

We combine our financial statements with those of our insurance subsidiaries and present our financial statements on a consolidated basis in accordance with United States generally accepted accounting principles (“GAAP”).

Our insurance subsidiaries make estimates and assumptions that can have a significant effect on amounts and disclosures we report in our financial statements. The most significant estimates relate to the liabilities of our insurance subsidiaries for property and casualty insurance losses and loss expenses. While we believe our estimates and the estimates of our insurance subsidiaries are appropriate, the ultimate amounts of these liabilities may differ from the estimates we provided. We regularly review our methods for making these estimates and we reflect any adjustment we consider necessary in our current consolidated results of operations.

Liabilities for Losses and Loss Expenses

Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with respect to incurred policyholder claims based on facts and circumstances the insurer knows at that point in time. For example, legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries to pay losses for damages that their policies explicitly excluded or did not intend to cover. At the time of establishing its estimates, an insurer recognizes that its ultimate liability for losses and loss expenses will exceed or be less than such estimates. Our insurance subsidiaries base their estimates of liabilities for losses and loss expenses on assumptions as to future loss trends, expected claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, our insurance subsidiaries may learn additional facts regarding individual claims, and, consequently, it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates for these liabilities. We reflect any adjustments to the liabilities for losses and loss expenses of our insurance subsidiaries in our consolidated results of operations in the period in which our insurance subsidiaries make adjustments to their estimates.

Our insurance subsidiaries maintain liabilities for the payment of losses and loss expenses with respect to both reported and unreported claims. Our insurance subsidiaries establish these liabilities for the purpose of covering the ultimate costs of settling all losses, including investigation and litigation costs. Our insurance subsidiaries base the amount of their liability for reported losses primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss the policyholder incurred. Our insurance subsidiaries determine the amount of their liability for unreported claims and loss expenses on the basis of historical information by line of insurance. Our insurance subsidiaries account for inflation in the reserving function through analysis of costs and trends and reviews of historical reserving results. Our insurance subsidiaries monitor their liabilities closely and recompute them periodically using new information on reported claims and a variety of statistical techniques. Our insurance subsidiaries do not discount their liabilities for losses and loss expenses.

2320

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 September 30, 2023.March 31, 2024. At September 30, 2023,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 $6.8$6.9 million.

The establishment of appropriate liabilities is an inherently uncertain process and we can provide no assurance that our insurance subsidiaries’ ultimate liability will not exceed our insurance subsidiaries’ loss and loss expense reserves and have an adverse effect on our results of operations and financial condition. Furthermore, we cannot predict the timing, frequency and extent of adjustments to our insurance subsidiaries’ estimated future liabilities, because the historical conditions and events that serve as a basis for our insurance subsidiaries’ estimates of ultimate claim costs may change. As is the case for substantially all property and casualty insurance companies, our insurance subsidiaries have found it necessary in the past to increase their estimated future liabilities for losses and loss expenses in certain periods and, in other periods, their estimated future liabilities for losses and loss expenses have exceeded their actual liabilities for losses and loss expenses. Changes in our insurance subsidiaries’ estimates of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received subsequent to the prior reporting period.

Excluding the impact of severe weather events and the COVID-19 pandemic, our insurance subsidiaries have noted stable amounts in the number of claims incurred and the number of claims outstanding at period ends relative to their premium base in recent years across most of their lines of business. However, the amount of the average claim outstanding has increased gradually over the past several years due to various factors such as rising inflation and increased litigation trends. We have also experienced a general slowing of settlement rates in litigated claims and lengthening of repair completion times for property and automobile claims. Our insurance subsidiaries could have to make further adjustments to their estimates in the future. However, on the basis of our insurance subsidiaries’ internal procedures, which analyze, among other things, their prior assumptions, their experience with similar cases and historical trends such as reserving patterns, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes, we believe that our insurance subsidiaries have made adequate provision for their liability for losses and loss expenses.

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.

2421

Our insurance subsidiaries’ liabilities for losses and loss expenses by major line of business at September 30, 2023March 31, 2024 and December 31, 20222023 consisted of the following:
 
 
September 30,
2023
  
December 31,
2022
  
March 31,
2024
  
December 31,
2023
 
 (in thousands)  (in thousands) 
Commercial lines:            
Automobile $168,342  $174,833  $172,290  $168,749 
Workers’ compensation 123,361  120,539  124,432  122,473 
Commercial multi-peril 213,902  203,567  218,756  217,292 
Other  28,022   23,071   27,845   27,167 
Total commercial lines  533,627   522,010   543,323   535,681 
Personal lines:            
Automobile 108,285  108,715  110,287  112,509 
Homeowners 27,467  28,481  28,075  28,001 
Other  12,583   10,656   12,271   12,952 
Total personal lines  148,335   147,852   150,633   153,462 
Total commercial and personal lines 681,962  669,862  693,956  689,143 
Plus reinsurance recoverable  431,392   451,184   430,496   437,014 
Total liabilities for losses and loss expenses $1,113,354  $1,121,046  $1,124,452  $1,126,157 
 
We have evaluated the effect on our insurance subsidiaries’ loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables we consider in establishing the loss and loss expense reserves of our insurance subsidiaries. We established the range of reasonably likely changes based on a review of changes in accident-year development by line of business and applied those changes to our insurance subsidiaries’ loss and loss expense reserves as a whole. The range we selected does not necessarily indicate what could be the potential best or worst case or the most likely scenario. The following table sets forth the estimated effect on our insurance subsidiaries’ loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables we considered in establishing the loss and loss expense reserves of our insurance subsidiaries:
 
2522

Percentage Change in Loss
and Loss Expense Reserves
Net of Reinsurance
Percentage Change in Loss
and Loss Expense Reserves
Net of Reinsurance
  
Adjusted Loss and Loss
Expense Reserves Net of
Reinsurance at
September 30, 2023
  
Percentage Change
in Stockholders’ Equity at
September 30, 2023(1)
  
Adjusted Loss and Loss
Expense Reserves Net of
Reinsurance at
December 31, 2022
  
Percentage Change
in Stockholders’ Equity at
December 31, 2022(1)
 
Percentage Change in Loss and Loss Expense Reserves
Net of Reinsurance
  
Adjusted Loss and Loss Expense Reserves Net of Reinsurance at
March 31, 2024
  
Percentage Change in Stockholders’ Equity at
March 31, 2024(1)
  
Adjusted Loss and Loss Expense Reserves Net of Reinsurance at
December 31, 2023
  
Percentage Change
in Stockholders’ Equity at
December 31, 2023(1)
 
(dollars in thousands)(dollars in thousands) (dollars in thousands) 
(10.0)% $613,766  11.4% $602,876  10.9%(10.0)%
 $624,560   11.3%
 $620,229   11.3%
(7.5) 630,815  8.5  619,622  8.2 (7.5)
  641,909   8.5   637,457   8.5 
(5.0) 647,864  5.7  636,369  5.5 (5.0)
  659,258   5.7   654,686   5.7 
(2.5) 664,913  2.8  653,115  2.7 (2.5)
  676,607   2.8   671,914   2.8 
BaseBase  681,962    669,862   Base   693,956      689,143    
2.5  699,011  (2.8) 686,609  (2.7)2.5   711,305   (2.8)
  706,372   (2.8)
5.0  716,060  (5.7) 703,355  (5.5)5.0   728,654   (5.7)
  723,600   (5.7)
7.5  733,109  (8.5) 720,102  (8.2)7.5   746,003   (8.5)
  740,829   (8.5)
10.0  750,158  (11.4) 736,848  (10.9)10.0   763,352   (11.3)
  758,057   (11.3)


(1)
Net of income tax effect.

Non-GAAP Information

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”). SAP financial measures are considered non-GAAP financial measures under applicable SEC rules because the SAP financial measures include or exclude certain items that the most comparable GAAP financial measures do not ordinarily include or exclude. Our calculation of non-GAAP financial measures may differ from similar measures other companies use, so investors should exercise caution when comparing our non-GAAP financial measures to the non-GAAP financial measures other companies use.

Because our insurance subsidiaries do not prepare GAAP financial statements, we evaluate the performance of our personal lines and commercial lines segments utilizing SAP financial measures that reflect the growth trends and underwriting results of our insurance subsidiaries. The SAP financial measures we utilize are net premiums written and statutory combined ratio.

Net Premiums Written

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. Net premiums earned is the most comparable GAAP financial measure to net premiums written. Net premiums earned represent the sum of the amount of net premiums written and the change in net unearned premiums during a given period.  Our insurance subsidiaries earn premiums and recognize them as revenue over the terms of their policies, which are one year or less in duration. Therefore, increases or decreases in net premiums earned generally reflect increases or decreases in net premiums written in the preceding 12-month period compared to the comparable period one year earlier.

The following table provides a reconciliation of our net premiums earned to our net premiums written for the three and nine months ended September 30, 2023March 31, 2024 and 2022:2023:
 
 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended March 31, 
 2023  2022  2023  2022  2024  2023 
 (in thousands)  (in thousands) 
Net premiums earned $224,393  $206,122  $655,886  $609,499  $227,749  $215,233 
Change in net unearned premiums  (5,207)  107   27,117   33,618   23,693   22,071 
Net premiums written $219,186  $206,229  $683,003  $643,117  $251,442  $237,304 

Statutory Combined Ratio

The combined ratio is a standard measurement of underwriting profitability for an insurance company. The combined ratio does not reflect investment income, net investment gains or losses, federal income taxes or other non-operating income or expense. A combined ratio of less than 100% generally indicates underwriting profitability.

The statutory combined ratio is a non-GAAP financial measure that is based upon amounts determined under SAP. We calculate our statutory combined ratio as the sum of:

the statutory loss ratio, which is the ratio of calendar-year net incurred losses and loss expenses excluding anticipated salvage and subrogation recoveries, to net premiums earned;
the statutory expense ratio, which is the ratio of expenses incurred for net commissions, premium taxes and underwriting expenses to net premiums written; and
the statutory dividend ratio, which is the ratio of dividends to holders of workers’ compensation policies to net premiums earned.

The calculation of our statutory combined ratio differs from the calculation of our GAAP combined ratio. In calculating our GAAP combined ratio, we do not deduct installment payment fees from incurred expenses, and we base the expense ratio on net premiums earned instead of net premiums written. Differences between our GAAP loss ratio and our statutory loss ratio result from anticipating salvage and subrogation recoveries for our GAAP loss ratio but not for our statutory loss ratio.

Combined Ratios

The following table presents comparative details with respect to our GAAP and statutory combined ratios for the three and nine months ended September 30, 2023March 31, 2024 and 2022:2023:

  Three Months Ended March 31, 
  2024  2023 
GAAP Combined Ratios (Total Lines)      
Loss ratio - core losses  58.7%  56.5%
Loss ratio - weather-related losses  4.7   6.5 
Loss ratio - large fire losses  6.6   5.1 
Loss ratio - net prior-year reserve development  (3.7)  (3.9)
Loss ratio  66.3   64.2 
Expense ratio  35.7   36.4 
Dividend ratio  0.4   0.6 
Combined ratio  102.4%  101.2%
         
Statutory Combined Ratios        
Commercial lines:        
Automobile  99.6%  96.2%
Workers’ compensation  111.2   86.2 
Commercial multi-peril  102.7   114.8 
Other  82.2   79.7 
Total commercial lines  101.6   99.8 
Personal lines:        
Automobile  99.8   103.9 
Homeowners  102.9   100.6 
Other  85.2   49.3 
Total personal lines  100.3   98.9 
Total commercial and personal lines  101.2   99.6 

2725

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2023  2022  2023  2022 
GAAP Combined Ratios (Total Lines)            
Loss ratio - core losses  56.7%  60.8%  56.0%  58.8%
Loss ratio - weather-related losses  11.5   9.4   9.1   7.7 
Loss ratio - large fire losses  4.9   8.4   5.3   6.6 
Loss ratio - net prior-year reserve development  (3.3)  (3.0)  (2.4)  (5.0)
Loss ratio  69.8   75.6   68.0   68.1 
Expense ratio  34.1   33.4   34.9   34.7 
Dividend ratio  0.6   0.6   0.6   0.7 
Combined ratio  104.5%  109.6%  103.5%  103.5%
                 
Statutory Combined Ratios                
Commercial lines:                
Automobile  86.5%  107.0%  94.8%  98.7%
Workers’ compensation  97.7   105.9   93.1   93.9 
Commercial multi-peril  114.8   125.0   113.8   114.9 
Other  76.2   85.9   82.7   81.9 
Total commercial lines  97.5   112.1   100.2   102.4 
Personal lines:                
Automobile  109.8   103.1   106.1   100.2 
Homeowners  128.9   125.0   111.2   118.8 
Other  46.4   54.6   81.3   49.9 
Total personal lines  119.4   107.8   107.2   103.4 
Total commercial and personal lines  105.2   110.1   102.9   102.8 

Results of Operations - Three Months Ended September 30, 2023March 31, 2024 Compared to Three Months Ended September 30, 2022March 31, 2023

Net Premiums Earned. Our insurance subsidiaries’ net premiums earned for the thirdfirst quarter of 20232024 were $224.4$227.7 million, an increase of $18.3$12.5 million, or 8.9%5.8%, compared to $206.1$215.2 million for the thirdfirst quarter of 2022,2023, primarily reflecting solid premium retention and renewal premium increases.

Net Premiums Written. Our insurance subsidiaries’ net premiums written for the thirdfirst quarter of 20232024 were $219.2$251.4 million, an increase of $13.0$14.1 million, or 6.3%6.0%, from the $206.2$237.3 million of net premiums written for the thirdfirst quarter of 2022.2023. Commercial lines net premiums written decreased $2.1$0.9 million, or 1.8%0.5%, for the thirdfirst quarter of 20232024 compared to the thirdfirst quarter of 2022.2023. Personal lines net premiums written increased $15.1$15.0 million, or 17.7%18.5%, for the thirdfirst quarter of 20232024 compared to the thirdfirst quarter of 2022.2023. 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, and loweroffset partially by higher new business writings offset partially by strong premium retention 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.

Investment Income. Our net investment income was $10.5$11.0 million for the thirdfirst quarter of 2023,2024, an increase of $1.9$1.6 million, or 23.0%16.1%, compared to $8.6$9.4 million for the thirdfirst quarter of 2022.2023. We attribute the increase primarily to an increase in the average investment yield relative to the thirdfirst quarter of 2022.2023.

Net Investment Losses.Gains (Losses). Net investment lossesgains for the third quartersfirst quarter of 2023 and 20222024 were $1.2$2.1 million, and $2.4 million, respectively.compared to net investment losses of $331,189 for the first quarter of 2023. The net investment lossesgains for the third quartersfirst quarter of 2023 and 2022, respectively,2024 resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at September 30, 2023 and 2022, respectively.March 31, 2024. We did not recognize any impairment losses for individual securities in our investment portfolio during the thirdfirst quarter of 20232024 or 2022.2023.

Losses and Loss Expenses. Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 69.8%66.3% for the thirdfirst quarter of 2023, a decrease2024, an increase from our insurance subsidiaries’ loss ratio of 75.6%64.2% for the thirdfirst quarter of 2022.2023. We attribute this decreaseincrease primarily to decreasedincreased core losses and large fire losses, which we define as individual fire losses in excess of $50,000, offset partially by increaseddecreased weather-related losses. Loss ratiosThe core loss ratio, which excludes weather-related losses, large fire losses and net favorable development of reserves for both periodslosses incurred in prior accident years, was 58.7% for the automobile and propertyfirst quarter of 2024, compared to 56.5% for the first quarter of 2023. For the commercial lines segment, the core loss ratio of business reflected59.0% for the impactfirst quarter of higher2024 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 of labor, parts and materials.for that segment. Weather-related losses were $25.7$10.8 million, or 11.54.7 percentage points of the loss ratio, for the thirdfirst quarter of 2023,2024, compared to $19.4$14.1 million, or 9.46.5 percentage points of the loss ratio, for the thirdfirst quarter of 2022.2023. The impact of weather-related loss activity to the loss ratio for the thirdfirst quarter of 20232024 was higher thanin line with our previous five-year average of 9.34.7 percentage points for thirdfirst quarter weather-related losses and the highest quarterly impact we have experienced over the past five years.losses. Large fire losses for the thirdfirst quarter of 20232024 were $11.0$15.0 million, or 4.96.6 percentage points of the loss ratio, compared to $17.4$10.9 million, or 8.45.1 percentage points of the loss ratio, for the thirdfirst quarter of 2022.2023. On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 60.9%66.0% for the thirdfirst quarter of 2024, compared to 63.2% for the first quarter of 2023, compared to 74.9% for the third quarter of 2022, primarily due to decreasesincreases in the commercial automobile, workers’ compensation and commercial multi-perilautomobile loss ratios. The personal lines statutory loss ratio of our insurance subsidiaries increased to 86.8%68.5% for the thirdfirst quarter of 2023,2024, compared to 78.7%66.4% for the thirdfirst quarter of 2022.2023. We attribute this increase primarily to an increase in the personal automobile and homeowners loss ratios.ratio. Our insurance subsidiaries experienced favorable loss reserve development for the thirdfirst quarter of 20232024 of approximately $7.3$8.4 million that decreased the loss ratio by 3.33.7 percentage points, compared to $6.2$8.3 million that decreased the loss ratio for the thirdfirst quarter of 20222023 by 3.03.9 percentage points. Our insurance subsidiaries experienced favorable development primarily in the commercial automobile, personalmulti-peril, commercial automobile and other commercialhomeowners lines of business for the thirdfirst quarter of 2023,2024, with the majority of the impact relating to reserves for accident years 20192020 through 2022.2023.

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 34.1%35.7% for the thirdfirst quarter of 2023,2024, compared to 33.4%36.4% for the thirdfirst quarter of 2022.2023. The increasedecrease 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 thirdfirst quarter of 20232024 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.

2926

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 104.5%102.4% and 109.6%101.2% for the thirdfirst quarter of 20232024 and 2022,2023, respectively. We attribute the decreaseincrease in the combined ratio primarily to a decreasean increase in the loss ratio for the thirdfirst quarter of 20232024 compared to the thirdfirst quarter of 2022.2023.

Income Tax Benefit. We recorded an income tax benefit of $199,613 and $3.0 million for the third quarter of 2023 and 2022, respectively. The income tax benefit for the third quarter of 2023 and 2022 represented estimates based on our projected annual taxable income and effective tax rates.

Net Loss and Net Loss Per Share. Our net loss for the third quarter of 2023 was $805,301, or $.02 per share of Class A common stock and $.02 per share of Class B common stock, compared to a net loss of $10.4 million, or $.33 per share of Class A common stock and $.30 per share of Class B common stock, for the third quarter of 2022. We had 27.6 million and 26.8 million Class A shares outstanding at September 30, 2023 and 2022, respectively. We had 5.6 million Class B shares outstanding at the end of both periods.

Results of Operations - Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Net Premiums Earned. Our insurance subsidiaries’ net premiums earned for the first nine months of 2023 were $655.9million, an increase of $46.4 million, or 7.6%, compared to $609.5 million for the first nine months of 2022, primarily reflecting solid premium retention and renewal premium increases.

Net Premiums Written. Our insurance subsidiaries’ net premiums written for the first nine months of 2023 were $683.0 million, an increase of $39.9 million, or 6.2%, from the $643.1 million of net premiums written for the first nine months of 2022. Commercial lines net premiums written decreased $0.6 million, or 0.2%, for the first nine months of 2023 compared to the first nine months of 2022. Personal lines net premiums written increased $40.5 million, or 17.2%, for the first nine months of 2023 compared to the first nine months of 2022. 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, lower new business writings and reinsurance reinstatement premiums on our property excess of loss reinsurance program, offset partially by strong premium retention 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.

Investment Income. Our net investment income was $30.1 million for the first nine months of 2023, an increase of $5.5 million, or 22.4%, compared to $24.6 million for the first nine months of 2022. We attribute the increase primarily to an increase in the average investment yield relative to the first nine months of 2022.

Net Investment Gains (Losses). Net investment gains for the first nine months of 2023 were $930,302, compared to net investment losses of $10.8 million for the first nine months of 2022. The net investment gains and losses for the first nine months of 2023 and 2022, respectively, resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at September 30, 2023 and 2022, respectively. We did not recognize any impairment losses for individual securities in our investment portfolio during the first nine months of 2023 or 2022.

Losses and Loss Expenses. Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 68.0% for the first nine months of 2023, a modest decrease from our insurance subsidiaries’ loss ratio of 68.1% for the first nine months of 2022. We attribute this decrease primarily to decreased core losses and large fire losses, virtually offset by increased weather-related losses and a decreased benefit of net favorable development of reserves for losses incurred in prior accident years. Loss ratios for both periods for the automobile and property lines of business reflected the impact of higher costs of labor, parts and materials. Weather-related losses of $59.5 million, or 9.1 percentage points of the loss ratio, for the first nine months of 2023, increased from $47.0 million, or 7.7 percentage points of the loss ratio, for the first nine months of 2022. The impact of weather-related loss activity to the loss ratio for the first nine months of 2023 was higher than our previous five-year average of 7.7 percentage points for weather-related losses incurred in the first nine months. Large fire losses for the first nine months of 2023 were $34.7 million, or 5.3 percentage points of the loss ratio, compared to $40.4 million, or 6.6 percentage points of the loss ratio, for the first nine months of 2022. On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 63.9% for the first nine months of 2023, compared to 66.1% for the first nine months of 2022, primarily due to decreases in the commercial automobile, workers’ compensation and commercial multi-peril loss ratios. The personal lines statutory loss ratio of our insurance subsidiaries increased to 75.2% for the first nine months of 2023, compared to 72.5% for the first nine months of 2022. We attribute this increase primarily to an increase in the personal automobile loss ratio. Our insurance subsidiaries experienced favorable loss reserve development for the first nine months of 2023 of approximately $15.8 million that decreased the loss ratio by 2.4 percentage points, compared to $30.6 million that decreased the loss ratio for the first nine months of 2022 by 5.0 percentage points. Our insurance subsidiaries experienced favorable development primarily in the commercial automobile, personal automobile and homeowners lines of business for the first nine months of 2023, with the majority of the impact relating to reserves for accident years 2019 through 2022.

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 34.9% for the first nine months of 2023, compared to 34.7% for the first nine months of 2022. The modest increase in the expense ratio primarily reflected higher technology costs related to our ongoing systems modernization initiatives for the first nine months of 2023 compared to the first nine months of 2022.

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 103.5% for the first nine months of 2023 and 2022. The unchanged combined ratio reflected modest decreases in the loss ratio and dividend ratio, offset by a modest increase in the expense ratio for the first nine months of 2023 compared to the first nine months of 2022.

Income Tax Expense (Benefit).Expense. We recorded income tax expense of $1.1$1.3 million for the first nine monthsquarter 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 ratesrate of 15.2%17.4%. We recorded anThe income tax benefit of $2.3milliontax expense for the first nine monthsquarter of 2022. The income tax expense2024 and benefit for the first nine months of 2023 and 2022, respectively, represented estimates based on our projected annual taxable income and effective tax rates.

Net Income (Loss) and Net Income (Loss) Per Share. Our net income for the first nine monthsquarter of 20232024 was $6.4$6.0 million, or $.20$.18 per share of Class A common stock on a diluted basis and $.17$.16 per share of Class B common stock, compared to a net loss of $5.4$5.2 million, or $.17$.16 per share of Class A common stock on a diluted basis and $.16$.15 per share of Class B common stock, for the first nine monthsquarter of 2022.2023. We had 27.627.8 million and 26.827.3 million Class A shares outstanding at September 30,March 31, 2024 and 2023, and 2022, respectively. We had 5.6 million Class B shares outstanding at the end of both periods.

Liquidity and Capital Resources

Liquidity is a measure of an entity’s ability to secure enough cash to meet its contractual obligations and operating needs as such obligations and needs arise. Our major sources of funds from operations are the net cash flows we generate from our insurance subsidiaries’ underwriting results, investment income and investment maturities.

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 ninethree months of 2024 and 2023 and 2022 of $26.0$4.8 million and $49.9 million,($680,734), respectively.

At September 30, 2023,March 31, 2024, we had no outstanding borrowings under our line of credit with M&T and had the ability to borrow up to $20.0 million at an interest rate equal to the then-current Term SOFR rate plus 2.11%. At September 30, 2023,March 31, 2024, Atlantic States had a $35.0 million outstanding advance with the FHLB of Pittsburgh that carries a fixed interest rate of 1.74%.

We estimate the timing of claim payments associated with the liabilities for losses and loss expenses of our insurance subsidiaries based on historical experience and expectations of future payment patterns. We show these liabilities net of reinsurance recoverable on unpaid losses and loss expenses to reflect expected future cash flows related to such liabilities. Amounts Atlantic States assumes pursuant to the pooling agreement with Donegal Mutual represent a substantial portion of our insurance subsidiaries’ gross liabilities for losses and loss expenses, and amounts Atlantic States cedes pursuant to the pooling agreement represent a substantial portion of our insurance subsidiaries’ reinsurance recoverable on unpaid losses and loss expenses. We include cash settlement of Atlantic States’ assumed liabilities from the pool in monthly settlements of pooled activity, as we net amounts ceded to and assumed from the pool. Although Donegal Mutual and we do not anticipate any changes in the pool participation levels in the foreseeable future, any such change would be prospective in nature and therefore would not impact the timing of expected payments by Atlantic States for its percentage share of pooled losses occurring in periods prior to the effective date of such change.

We discuss in Note 7 – Borrowings our estimate of the timing of the amounts payable for the borrowings under our lines of credit based on their contractual maturities.
 
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 ninethree months ended September 30, 2023March 31, 2024 or 2022.2023. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through September 30, 2023.March 31, 2024.

On October 19, 2023,April 18, 2024, our board of directors declared quarterly cash dividends of $.17$.1725 per share of our Class A common stock and $.1525.155 per share of our Class B common stock, payable on November 15, 2023May 22, 2024 to our stockholders of record as of the close of business on November 1, 2023.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, 20222023 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin.  Our insurance subsidiaries paiddid not pay any dividends to us of $6.0 million during the first ninethree months of 2023.2024. Amounts remaining available for distribution to us as dividends from our insurance subsidiaries without prior approval of their domiciliary insurance regulatory authorities in 20232024 are $26.4$27.4 million from Atlantic States, $6.5$7.2 million from Southern, $0MICO and $5.0 million from Peninsula, and $7.5 million from MICO, or a total of approximately $40.4$39.6 million.

At September 30, 2023,March 31, 2024, we had no material commitments for capital expenditures.

Equity Price Risk

Our portfolio of marketable equity securities, which we carry on our consolidated balance sheets at estimated fair value, has exposure to the risk of loss resulting from an adverse change in prices. We manage this risk by having our investment personnel perform an analysis of prospective investments and regular reviews of our portfolio of equity securities.

Credit Risk

Our portfolio of fixed-maturity securities and, to a lesser extent, our portfolio of short-term investments is subject to credit risk, which we define as the potential loss in market value resulting from adverse changes in the borrower’s ability to repay its debt. We manage this risk by having our investment personnel perform an analysis of prospective investments and regular reviews of our portfolio of fixed-maturity securities. We also limit the percentage and amount of our total investment portfolio that we invest in the securities of any one issuer.

Our insurance subsidiaries provide property and casualty insurance coverages through independent insurance agencies. We bill the majority of this business directly to the insured, although we bill a portion of our commercial business through licensed insurance agents to whom our insurance subsidiaries extend credit in the normal course of business.

Because the pooling agreement does not relieve Atlantic States of primary liability as the originating insurer, Atlantic States is subject to a concentration of credit risk arising from the business it cedes to Donegal Mutual. Our insurance subsidiaries maintain reinsurance agreements with Donegal Mutual and with a number of other major unaffiliated authorized reinsurers.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

Our market risk generally represents the risk of gain or loss that may result from the potential change in the fair value of the securities we hold in our investment portfolio as a result of fluctuations in prices and interest rates and, to a lesser extent, our debt obligations. We manage our interest rate risk by maintaining an appropriate relationship between the average duration of our investment portfolio and the approximate duration of our liabilities, i.e., policy claims of our insurance subsidiaries and our debt obligations.

 There have been no material changes to our quantitative or qualitative market risk exposure from December 31, 20222023 through September 30, 2023.March 31, 2024.

Item 4.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, at September 30, 2023,March 31, 2024, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information we are required to disclose in the reports that we file or submit under the Exchange Act, and our disclosure controls and procedures were also effective to ensure that information we disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

Donegal Mutual implemented a new application system that Donegal Mutual andThere has been no change in our insurance subsidiaries began to utilize during 2021 for the allocation of expenses and, beginning in 2022, for reinsurance premiums and commissions. Donegal Mutual and our insurance subsidiaries expanded the utilization of this application system in 2023 to include the preparation of financial statements based on SAP state insurance regulators prescribe or permit. The SAP financial statements of our insurance subsidiaries serve as the starting point for our financial statements prepared using GAAP. The new application system provides for further automation of, and enhanced internal controlscontrol over these processes. The implementation of the new system is part of a multi-year accounting systems and process modernization initiative Donegal Mutual is implementing to achieve various benefits for Donegal Mutual and our insurance subsidiaries, including streamlined financial reporting workflows and a more efficient control environment.

Such changes resulted in changesduring the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to procedures related to our financial reporting. Prior to the implementation of the new systems, we identified and designed new internal controls that we incorporated into our internal controlsaffect materially, over financial reporting. Following the implementation, we validated these new controls according to our established processes. We did not implement these changes in internal controls to respond to any actual or perceived significant deficiencies in our internal control over financial reporting.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

We base all statements contained in this Quarterly Report on Form 10-Q 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, 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 (including from changing climate conditions), our ability to maintain profitable operations (including our ability to underwrite risks effectively and charge adequate premium rates), prolonged economic challenges resulting from the COVID-19 pandemic, 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.

Part II. Other Information

Item 1.Legal Proceedings.

None.

Item 1A.Risk Factors.

Our business, results of operations and financial condition, and, therefore, the value of our Class A common stock and our Class B common stock, are subject to a number of risks. For a description of certain risks, we refer to “Risk Factors” in our 20222023 Annual Report on Form 10-K that we filed with the SEC on March 6, 2023.2024. There have been no material changes in the risk factors we disclosed in that Form 10-K Report during the ninethree months ended September 30, 2023.March 31, 2024.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

Period
(a) Total Number of
Shares (or Units)
Purchased
(b) Average Price Paid per
Share (or Unit)
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced Plans
or Programs
(d) Maximum Number (or
Approximate Dollar
Value) of Shares (or Units)
that May Yet Be
Purchased Under the
Plans or Programs
Month #1
July 1-31, 2023
Class A – None
Class B – None
Class A – None
Class B – None
Class A – None
Class B – None
Month #2
August 1-31, 2023
Class A – 167,876
Class B – None
Class A – $14.76
Class B – None
Class A – 167,876
Class B – None
(1)
Month #3
September 1-30, 2023
Class A – 17,141
Class B – None
Class A – $14.66
Class B – None
Class A – 17,141
Class B – None
(1)
Total
Class A – 185,017
Class B – None
Class A – $14.76
Class B – None
Class A – 185,017
Class B – None

None.

(1)
Donegal Mutual purchased these shares pursuant to its announcement on April 29, 2022 that it will, at its discretion,         purchase shares of our Class A common stock and Class B common stock at market prices prevailing from time to time in the open market subject to the provisions of SEC Rule 10b-18 and in privately negotiated transactions.  Such announcement did not stipulate a maximum number of shares that may be purchased under this program.

Item 3.Defaults upon Senior Securities.

None.

Item 4.Mine Safety Disclosure.

Not Applicable.

Item 5.Other Information.

None.

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Item 6.Exhibits.

Exhibit No. Description Reference
Management Contracts and Compensatory Plans or Arrangements
    
Donegal Group Inc. 2024 Equity Incentive Plan for Employees.(a)
Donegal Group Inc. 2024 Equity Incentive Plan for Directors.(a)
Other Exhibits
 Certification of Chief Executive OfficerOfficer.Filed herewith
    
 Certification of Chief Financial OfficerOfficer.Filed herewith
    
 Statement of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of Title 18 of the United States CodeCode.Filed herewith
    
 Statement of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of Title 18 of the United States CodeCode.Filed herewith
    
Exhibit 101.INS XBRL Instance DocumentFiled herewith
    
Exhibit 101.SCH XBRL Taxonomy Extension Schema DocumentFiled herewith
    
Exhibit 101.PRE XBRL Taxonomy Presentation Linkbase DocumentFiled herewith
    
Exhibit 101.CAL XBRL Taxonomy Calculation Linkbase DocumentFiled herewith
    
Exhibit 101.LAB XBRL Taxonomy Label Linkbase DocumentFiled herewith
    
Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase DocumentFiled herewith
    
Exhibit 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)Filed herewith


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(a)We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form S-8 Registration Statement filed on April 25, 2024.

Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 DONEGAL GROUP INC.
   
NovemberMay 3, 20232024By:/s/ Kevin G. Burke
  Kevin G. Burke, President and Chief Executive Officer

November
May 3, 20232024By:/s/ Jeffrey D. Miller
  Jeffrey D. Miller, Executive Vice President
 and Chief Financial Officer


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