| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 23-2424711 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Large accelerated filer ☐ | Accelerated filer ☑ | Non-accelerated filer ☐ | Smaller reporting company ☑ | |||||
Emerging growth company ☐ |
| Title of Each Class | Trading Symbols | Name of Each Exchange on Which Registered | ||
Class A Common Stock, $.01 par value | DGICA | The NASDAQ Global Select Market | ||
Class B Common Stock, $.01 par value | DGICB | The NASDAQ Global Select Market |
| Page | |||||
| PART I | FINANCIAL INFORMATION | ||||
Item 1. | 1 | ||||
| Item 2. | 23 | ||||
Item 3. | 33 | ||||
| Item 4. | 34 | ||||
| PART II | OTHER INFORMATION | ||||
Item 1. | 35 | ||||
Item 1A. | 35 | ||||
Item 2. | 36 | ||||
Item 3. | 36 | ||||
Item 4. | 36 | ||||
Item 5. | 36 | ||||
| Item 6. | 37 | ||||
June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Investments | ||||||||
| Fixed maturities | ||||||||
| Held to maturity, at amortized cost | $ | 700,335,137 | $ | 668,104,568 | ||||
| Available for sale, at fair value | 507,046,119 | 532,629,015 | ||||||
| Equity securities, at fair value | 45,260,978 | 63,419,973 | ||||||
| Short-term investments, at cost, which approximates fair value | 46,684,715 | 12,692,341 | ||||||
| Total investments | 1,299,326,949 | 1,276,845,897 | ||||||
| Cash | 21,810,717 | 57,709,375 | ||||||
| Accrued investment income | 8,466,487 | 8,214,971 | ||||||
| Premiums receivable | 190,324,020 | 168,862,580 | ||||||
| Reinsurance receivable | 445,150,797 | 455,411,009 | ||||||
| Deferred policy acquisition costs | 74,247,225 | 68,028,373 | ||||||
| Deferred tax asset, net | 17,563,660 | 6,685,619 | ||||||
| Prepaid reinsurance premiums | 172,405,900 | 176,935,842 | ||||||
| Property and equipment, net | 2,841,509 | 2,956,930 | ||||||
| Accounts receivable - securities | 1,978 | 2,252 | ||||||
| Federal income taxes recoverable | 6,936,463 | 5,290,938 | ||||||
| Receivable from Michigan Catastrophic Claims Association | 0 | 18,112,800 | ||||||
| Due from affiliate | 2,345,917 | 1,922,717 | ||||||
| Goodwill | 5,625,354 | 5,625,354 | ||||||
| Other intangible assets | 958,010 | 958,010 | ||||||
| Other | 1,843,350 | 1,612,732 | ||||||
| Total assets | $ | 2,249,848,336 | $ | 2,255,175,399 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Liabilities | ||||||||
| Losses and loss expenses | $ | 1,083,354,464 | $ | 1,077,620,301 | ||||
| Unearned premiums | 601,939,060 | 572,958,422 | ||||||
| Accrued expenses | 4,796,689 | 4,028,659 | ||||||
| Reinsurance balances payable | 4,051,428 | 3,946,105 | ||||||
| Borrowings under lines of credit | 35,000,000 | 35,000,000 | ||||||
| Cash dividends declared to stockholders | 0 | 4,915,268 | ||||||
| Cash refunds due to Michigan policyholders | 0 | 18,112,800 | ||||||
| Accounts payable - securities | 1,111,200 | 0 | ||||||
| Other | 8,573,013 | 7,557,757 | ||||||
| Total liabilities | 1,738,825,854 | 1,724,139,312 | ||||||
| Stockholders’ Equity | ||||||||
Preferred stock, $0.01 par value, authorized 2,000,000 shares; NaN issued | 0 | 0 | ||||||
Class A common stock, $0.01 par value, authorized 50,000,000 shares, issued 29,621,151 and 28,756,203 shares and outstanding 26,618,563 and 25,753,615 shares | 296,212 | 287,562 | ||||||
Class B common stock, $0.01 par value, authorized 10,000,000 shares, issued 5,649,240 shares and outstanding 5,576,775 shares | 56,492 | 56,492 | ||||||
| Additional paid-in capital | 317,940,000 | 304,889,481 | ||||||
| Accumulated other comprehensive (loss) income | (29,476,763 | ) | 3,283,551 | |||||
| Retained earnings | 263,432,898 | 263,745,358 | ||||||
| Treasury stock, at cost | (41,226,357 | ) | (41,226,357 | ) | ||||
| Total stockholders’ equity | 511,022,482 | 531,036,087 | ||||||
| Total liabilities and stockholders’ equity | $ | 2,249,848,336 | $ | 2,255,175,399 | ||||
June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
Assets | ||||||||
Investments | ||||||||
Fixed maturities | ||||||||
Held to maturity, at amortized cost | $ | 643,847,647 | $ | 586,609,439 | ||||
Available for sale, at fair value | 522,580,264 | 555,136,017 | ||||||
Equity securities, at fair value | 72,757,031 | 58,556,173 | ||||||
Short-term investments, at cost, which approximates fair value | 22,767,372 | 20,900,155 | ||||||
Total investments | 1,261,952,314 | 1,221,201,784 | ||||||
Cash | 88,004,738 | 103,094,236 | ||||||
Accrued investment income | 8,175,750 | 7,936,879 | ||||||
Premiums receivable | 189,383,783 | 169,596,332 | ||||||
Reinsurance receivable | 422,198,101 | 408,908,850 | ||||||
Deferred policy acquisition costs | 69,687,624 | 59,156,958 | ||||||
Deferred tax asset, net | 5,134,455 | 5,683,113 | ||||||
Prepaid reinsurance premiums | 186,451,557 | 169,418,333 | ||||||
Property and equipment, net | 3,350,691 | 4,390,377 | ||||||
Accounts receivable - securities | 79,402 | 67,676 | ||||||
Federal income taxes recoverable | 4,018,210 | 3,089,369 | ||||||
Goodwill | 5,625,354 | 5,625,354 | ||||||
Other intangible assets | 958,010 | 958,010 | ||||||
Other | 1,380,569 | 1,393,053 | ||||||
Total assets | $ | 2,246,400,558 | $ | 2,160,520,324 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Liabilities | ||||||||
Losses and loss expenses | $ | 998,658,015 | $ | 962,007,437 | ||||
Unearned premiums | 599,949,617 | 537,189,598 | ||||||
Accrued expenses | 11,465,644 | 29,115,198 | ||||||
Reinsurance balances payable | 4,030,947 | 3,233,523 | ||||||
Borrowings under lines of credit | 35,000,000 | 85,000,000 | ||||||
Cash dividends declared to stockholders | 0 | 4,436,301 | ||||||
Subordinated debentures | 5,000,000 | 5,000,000 | ||||||
Accounts payable - securities | 11,295,765 | 0 | ||||||
Due to affiliate | 22,196,384 | 10,293,495 | ||||||
Other | 8,647,393 | 6,470,652 | ||||||
Total liabilities | 1,696,243,765 | 1,642,746,204 | ||||||
Stockholders’ Equity | ||||||||
Preferred stock, $.01 par value, authorized 2,000,000 shares; 0ne issued | 0— | 0— | ||||||
Class A common stock, $.01 par value, authorized 50,000,000 shares, issued 28,619,866 and 27,651,774 shares and outstanding 25,617,278 and 24,649,186 shares | 286,199 | 276,518 | ||||||
Class B common stock, $.01 par value, authorized 10,000,000 shares, issued 5,649,240 shares and outstanding 5,576,775 shares | 56,492 | 56,492 | ||||||
Additional paid-in capital | 302,510,624 | 289,149,567 | ||||||
Accumulated other comprehensive income | 8,473,471 | 11,130,612 | ||||||
Retained earnings | 280,056,364 | 258,387,288 | ||||||
Treasury stock, at cost | (41,226,357 | ) | (41,226,357 | ) | ||||
Total stockholders’ equity | 550,156,793 | 517,774,120 | ||||||
Total liabilities and stockholders’ equity | $ | 2,246,400,558 | $ | 2,160,520,324 | ||||
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Net premiums earned | $ | 204,128,489 | $ | 192,488,665 | ||||
| Investment income, net of investment expenses | 8,203,846 | 7,652,180 | ||||||
Net investment (losses) gains (includes $287,861 and $479,211 accumulated other comprehensive income reclassifications) | (8,376,713 | ) | 4,241,031 | |||||
| Lease income | 98,222 | 108,038 | ||||||
| Installment payment fees | 257,305 | 656,029 | ||||||
| Total revenues | 204,311,149 | 205,145,943 | ||||||
| Expenses: | ||||||||
| Net losses and loss expenses | 141,608,361 | 113,956,652 | ||||||
| Amortization of deferred policy acquisition costs | 35,172,000 | 33,103,000 | ||||||
| Other underwriting expenses | 36,235,198 | 36,229,677 | ||||||
| Policyholder dividends | 1,288,744 | 1,629,499 | ||||||
| Interest | 239,725 | 217,290 | ||||||
| Other expenses, net | 346,200 | 313,000 | ||||||
| Total expenses | 214,890,228 | 185,449,118 | ||||||
| (Loss) income before income tax (benefit) expense | (10,579,079 | ) | 19,696,825 | |||||
Income tax (benefit) expense (includes $60,451 and $100,634 income tax expense from reclassification items) | (2,371,322 | ) | 3,532,789 | |||||
| Net (loss) income | $ | (8,207,757 | ) | $ | 16,164,036 | |||
| (Loss) earnings per common share: | ||||||||
| Class A common stock - basic and diluted | $ | (0.26 | ) | $ | 0.53 | |||
| Class B common stock - basic and diluted | $ | (0.24 | ) | $ | 0.48 | |||
Three Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
Revenues: | ||||||||
Net premiums earned | $ | 192,488,665 | $ | 184,373,768 | ||||
Investment income, net of investment expenses | 7,652,180 | 7,172,144 | ||||||
Net investment gains (includes $479,211 and $14,493 accumulated other comprehensive income reclassifications) | 4,241,031 | 6,485,896 | ||||||
Lease income | 108,038 | 109,205 | ||||||
Installment payment fees | 656,029 | 758,759 | ||||||
Total revenues | 205,145,943 | 198,899,772 | ||||||
Expenses: | ||||||||
Net losses and loss expenses | 113,956,652 | 105,349,019 | ||||||
Amortization of deferred policy acquisition costs | 33,103,000 | 29,634,000 | ||||||
Other underwriting expenses | 36,229,677 | 33,567,266 | ||||||
Policyholder dividends | 1,629,499 | 1,683,658 | ||||||
Interest | 217,290 | 428,092 | ||||||
Other expenses, net | 313,000 | 249,688 | ||||||
Total expenses | 185,449,118 | 170,911,723 | ||||||
Income before income tax expense | 19,696,825 | 27,988,049 | ||||||
Income tax expense (includes $100,634 and $3,044 income tax expense from reclassification items) | 3,532,789 | 5,309,271 | ||||||
Net income | $ | 16,164,036 | $ | 22,678,778 | ||||
Earnings per common share: | ||||||||
Class A common stock - basic | $ | 0.53 | $ | 0.80 | ||||
Class A common stock - diluted | $ | 0.53 | $ | 0.79 | ||||
Class B common stock - basic and diluted | $ | 0.48 | $ | 0.72 | ||||
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net (loss) income | $ | (8,207,757 | ) | $ | 16,164,036 | |||
| Other comprehensive (loss) income, net of tax | ||||||||
| Unrealized (loss) gain on securities: | ||||||||
Unrealized holding (loss) gain during the period, net of income tax (benefit) expense of ($3,174,636) and $511,306 | (11,942,679 | ) | 1,928,551 | |||||
Reclassification adjustment for gains included in net (loss) income, net of income tax expense of $ 60,451 and $100,634 | (227,410 | ) | (378,577 | ) | ||||
| Other comprehensive (loss) income | (12,170,089 | ) | 1,549,974 | |||||
| Comprehensive (loss) income | $ | (20,377,846 | ) | $ | 17,714,010 | |||
Three Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
Net income | $ | 16,164,036 | $ | 22,678,778 | ||||
Other comprehensive income, net of tax | ||||||||
Unrealized gain on securities: | ||||||||
Unrealized holding gain during the period, net of income tax expense of $511,306 and $1,774,279 | 1,928,551 | 6,674,664 | ||||||
Reclassification adjustment for gains included in net income, net of income tax expense of $100,634 and $3,044 | (378,577 | ) | (11,449 | ) | ||||
Other comprehensive income | 1,549,974 | 6,663,215 | ||||||
Comprehensive income | $ | 17,714,010 | $ | 29,341,993 | ||||
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Net premiums earned | $ | 403,377,113 | $ | 379,740,265 | ||||
| Investment income, net of investment expenses | 16,062,727 | 15,162,758 | ||||||
Net investment (losses) gains (includes $453,215 and $450,025 accumulated other comprehensive income reclassifications) | (8,452,960 | ) | 6,710,085 | |||||
| Lease income | 202,850 | 215,805 | ||||||
| Installment payment fees | 748,136 | 1,286,928 | ||||||
| Total revenues | 411,937,866 | 403,115,841 | ||||||
| Expenses: | ||||||||
| Net losses and loss expenses | 259,491,363 | 233,176,399 | ||||||
| Amortization of deferred policy acquisition costs | 69,354,000 | 63,282,000 | ||||||
| Other underwriting expenses | 73,341,502 | 70,011,727 | ||||||
| Policyholder dividends | 2,937,495 | 2,923,520 | ||||||
| Interest | 392,758 | 529,616 | ||||||
| Other expenses, net | 773,588 | 745,069 | ||||||
| Total expenses | 406,290,706 | 370,668,331 | ||||||
| Income before income tax expense | 5,647,160 | 32,447,510 | ||||||
Income tax expense (includes $95,175 and $94,505 income tax expense from reclassification items) | 709,888 | 5,753,626 | ||||||
| Net income | $ | 4,937,272 | $ | 26,693,884 | ||||
| Earnings per common share: | ||||||||
| Class A common stock - basic | $ | 0.16 | $ | 0.89 | ||||
| Class A common stock - diluted | $ | 0.16 | $ | 0.88 | ||||
| Class B common stock - basic and diluted | $ | 0.14 | $ | 0.80 | ||||
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net income | $ | 4,937,272 | $ | 26,693,884 | ||||
| Other comprehensive loss, net of tax | ||||||||
| Unrealized loss on securities: | ||||||||
Unrealized holding loss during the period, net of income tax benefit of ($8,613,264) and ($614,319) | (32,402,274 | ) | (2,301,621 | ) | ||||
Reclassification adjustment for gains included in net income, net of income tax expense of $95,175 and $94,505 | (358,040 | ) | (355,520 | ) | ||||
| Other comprehensive loss | (32,760,314 | ) | (2,657,141 | ) | ||||
| Comprehensive (loss) income | $ | (27,823,042 | ) | $ | 24,036,743 | |||
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 | ||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||
Issuance of common stock (stock compensation plans) | 33,407 | 0 | 335 | 0 | 423,665 | 0 | 0 | 0 | 424,000 | |||||||||||||||||||||||||||
| Share-based compensation | 900 | 0 | 9 | 0 | 256,451 | 0 | 0 | 0 | 256,460 | |||||||||||||||||||||||||||
| Net income | — | — | 0 | 0 | 0 | 0 | 13,145,029 | 0 | 13,145,029 | |||||||||||||||||||||||||||
| Cash dividends declared | — | — | 0 | 0 | 0 | 0 | (5,490 | ) | 0 | (5,490 | ) | |||||||||||||||||||||||||
| Grant of stock options | — | — | 0 | 0 | 98,409 | 0 | (98,409 | ) | 0 | 0 | ||||||||||||||||||||||||||
| Other comprehensive loss | — | — | 0 | 0 | 0 | (20,590,225 | ) | 0 | 0 | (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 | 0 | 547 | 0 | 736,349 | 0 | 0 | 0 | 736,896 | |||||||||||||||||||||||||||
| Share-based compensation | 775,898 | 0 | 7,759 | 0 | 11,476,429 | 0 | 0 | 0 | 11,484,188 | |||||||||||||||||||||||||||
| Net loss | — | — | 0 | 0 | 0 | 0 | (8,207,757 | ) | 0 | (8,207,757 | ) | |||||||||||||||||||||||||
| Cash dividends declared | — | — | 0 | 0 | 0 | 0 | (5,086,617 | ) | 0 | (5,086,617 | ) | |||||||||||||||||||||||||
| Grant of stock options | — | — | 0 | 0 | 59,216 | 0 | (59,216 | ) | 0 | 0 | ||||||||||||||||||||||||||
| Other comprehensive loss | — | — | 0 | 0 | 0 | (12,170,089 | ) | 0 | 0 | (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 | ||||||||||||||||||
Class A Shares | Class B Shares | Class A Amount | Class B Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Retained Earnings | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 27,651,774 | 5,649,240 | $ | 276,518 | $ | 56,492 | $ | 289,149,567 | $ | 11,130,612 | $ | 258,387,288 | $ | (41,226,357 | ) | $ | 517,774,120 | |||||||||||||||||||
Issuance of common stock (stock compensation plans) | 33,336 | 0 | 334 | 0 | 419,454 | 0 | 0 | 0 | 419,788 | |||||||||||||||||||||||||||
| Share-based compensation | 346,124 | 0 | 3,461 | 0 | 4,719,388 | 0 | 0 | 0 | 4,722,849 | |||||||||||||||||||||||||||
| Net income | — | — | 0 | 0 | 0 | 0 | 10,529,848 | 0 | 10,529,848 | |||||||||||||||||||||||||||
| Cash dividends declared | — | — | 0 | 0 | 0 | 0 | (5,000 | ) | 0 | (5,000 | ) | |||||||||||||||||||||||||
| Grant of stock options | — | — | 0 | 0 | 109,184 | 0 | (109,184 | ) | 0 | 0 | ||||||||||||||||||||||||||
| Other comprehensive loss | — | — | 0 | 0 | 0 | (4,207,115 | ) | 0 | 0 | (4,207,115 | ) | |||||||||||||||||||||||||
| Balance, March 31, 2021 | 28,031,234 | 5,649,240 | $ | 280,313 | $ | 56,492 | $ | 294,397,593 | $ | 6,923,497 | $ | 268,802,952 | $ | (41,226,357 | ) | $ | 529,234,490 | |||||||||||||||||||
Issuance of common stock (stock compensation plans) | 49,613 | 0 | 496 | 0 | 730,005 | 0 | 0 | 0 | 730,501 | |||||||||||||||||||||||||||
| Share-based compensation | 539,019 | 0 | 5,390 | 0 | 7,313,031 | 0 | 0 | 0 | 7,318,421 | |||||||||||||||||||||||||||
| Net income | — | — | 0 | 0 | 0 | 0 | 16,164,036 | 0 | 16,164,036 | |||||||||||||||||||||||||||
| Cash dividends declared | — | — | 0 | 0 | 0 | 0 | (4,840,629 | ) | 0 | (4,840,629 | ) | |||||||||||||||||||||||||
| Grant of stock options | — | — | 0 | 0 | 69,995 | 0 | (69,995 | ) | 0 | 0 | ||||||||||||||||||||||||||
Other comprehensive income | — | — | 0 | 0 | 0 | 1,549,974 | 0 | 0 | 1,549,974 | |||||||||||||||||||||||||||
| Balance, June 30, 2021 | 28,619,866 | 5,649,240 | $ | 286,199 | $ | 56,492 | $ | 302,510,624 | $ | 8,473,471 | $ | 280,056,364 | $ | (41,226,357 | ) | $ | 550,156,793 | |||||||||||||||||||
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income | $ | 4,937,272 | $ | 26,693,884 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation, amortization and other non-cash items | 2,606,357 | 3,083,025 | ||||||
| Net investment losses (gains) | 8,452,960 | (6,710,085 | ) | |||||
| Changes in assets and liabilities: | ||||||||
| Losses and loss expenses | 5,734,163 | 36,650,578 | ||||||
| Unearned premiums | 28,980,638 | 62,760,019 | ||||||
| Premiums receivable | (21,461,440 | ) | (19,787,451 | ) | ||||
| Deferred acquisition costs | (6,218,852 | ) | (10,530,666 | ) | ||||
| Deferred income taxes | (2,169,602 | ) | 1,266,870 | |||||
| Reinsurance receivable | 10,260,212 | (13,289,251 | ) | |||||
| Prepaid reinsurance premiums | 4,529,942 | (17,033,224 | ) | |||||
| Accrued investment income | (251,516 | ) | (238,871 | ) | ||||
| Due from affiliate | (423,200 | ) | 11,902,889 | |||||
| Reinsurance balances payable | 105,323 | 797,424 | ||||||
| Current income taxes | (1,645,525 | ) | (928,841 | ) | ||||
| Accrued expenses | 768,030 | (17,649,554 | ) | |||||
| Other, net | 784,642 | 2,189,225 | ||||||
| Net adjustments | 30,052,132 | 32,482,087 | ||||||
| Net cash provided by operating activities | 34,989,404 | 59,175,971 | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of fixed maturities, held to maturity | (59,637,406 | ) | (80,315,578 | ) | ||||
| Purchases of fixed maturities, available for sale | (61,330,076 | ) | (73,023,551 | ) | ||||
| Purchases of equity securities, available for sale | (5,276,815 | ) | (25,332,194 | ) | ||||
| Maturity of fixed maturities: | ||||||||
| Held to maturity | 28,714,632 | 23,650,172 | ||||||
| Available for sale | 43,862,739 | 111,197,663 | ||||||
| Sales of equity securities, available for sale | 14,529,635 | 17,391,396 | ||||||
| Net sales of property and equipment | 28,289 | 935,029 | ||||||
| Net purchases of short-term investments | (33,992,374 | ) | (1,867,217 | ) | ||||
| Net cash used in investing activities | (73,101,376 | ) | (27,364,280 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Cash dividends paid | (10,007,375 | ) | (9,281,930 | ) | ||||
| Issuance of common stock | 12,220,689 | 12,380,741 | ||||||
| Payments on lines of credit | 0 | (50,000,000 | ) | |||||
| Net cash provided by (used in) financing activities | 2,213,314 | (46,901,189 | ) | |||||
| Net decrease in cash | (35,898,658 | ) | (15,089,498 | ) | ||||
| Cash at beginning of period | 57,709,375 | 103,094,236 | ||||||
| Cash at end of period | $ | 21,810,717 | $ | 88,004,738 | ||||
| Cash paid during period - Interest | $ | 307,747 | $ | 659,222 | ||||
| Net cash paid during period - Taxes | $ | 4,500,000 | $ | 5,400,000 | ||||
Six Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
Revenues: | ||||||||
Net premiums earned | $ | 379,740,265 | $ | 371,626,546 | ||||
Investment income, net of investment expenses | 15,162,758 | 14,548,428 | ||||||
Net investment gains (losses) (includes $450,025 and $436,328 accumulated other comprehensive income reclassifications) | 6,710,085 | (4,208,947 | ) | |||||
Lease income | 215,805 | 218,472 | ||||||
Installment payment fees | 1,286,928 | 1,626,479 | ||||||
Total revenues | 403,115,841 | 383,810,978 | ||||||
Expenses: | ||||||||
Net losses and loss expenses | 233,176,399 | 222,595,545 | ||||||
Amortization of deferred policy acquisition costs | 63,282,000 | 59,571,000 | ||||||
Other underwriting expenses | 70,011,727 | 66,164,895 | ||||||
Policyholder dividends | 2,923,520 | 3,525,658 | ||||||
Interest | 529,616 | 652,422 | ||||||
Other expenses, net | 745,069 | 810,238 | ||||||
Total expenses | 370,668,331 | 353,319,758 | ||||||
Income before income tax expense | 32,447,510 | 30,491,220 | ||||||
Income tax expense (includes $94,505 and $91,629 income tax expense from reclassification items) | 5,753,626 | 4,081,321 | ||||||
Net income | $ | 26,693,884 | $ | 26,409,899 | ||||
Earnings per common share: | ||||||||
Class A common stock - basic | $ | 0.89 | $ | 0.93 | ||||
Class A common stock - diluted | $ | 0.88 | $ | 0.92 | ||||
Class B common stock - basic and diluted | $ | 0.80 | $ | 0.84 | ||||
Six Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
Net income | $ | 26,693,884 | $ | 26,409,899 | ||||
Other comprehensive (loss) income, net of tax | ||||||||
Unrealized (loss) gain on securities: | ||||||||
Unrealized holding (loss) gain during the period, net of income tax (benefit) expense of ($614,319) and $2,713,454 | (2,301,621 | ) | 10,207,754 | |||||
Reclassification adjustment for gains included in net income, net of income tax expense of $94,505 and $91,629 | (355,520 | ) | (344,699 | ) | ||||
Other comprehensive (loss) income | (2,657,141 | ) | 9,863,055 | |||||
Comprehensive income | $ | 24,036,743 | $ | 36,272,954 | ||||
| Class A Shares | Class B Shares | Class A Amount | Class B Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Retained Earnings | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||
Balance, December 31, 2020 | 27,651,774 | 5,649,240 | $ | 276,518 | $ | 56,492 | $ | 289,149,567 | $ | 11,130,612 | $ | 258,387,288 | $ | (41,226,357 | ) | $ | 517,774,120 | |||||||||||||||||||
Issuance of common stock (stock compensation plans) | 33,336 | — | 334 | — | 419,454 | — | — | — | 419,788 | |||||||||||||||||||||||||||
Share-based compensation | 346,124 | — | 3,461 | — | 4,719,388 | — | — | — | 4,722,849 | |||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 10,529,848 | — | 10,529,848 | |||||||||||||||||||||||||||
Cash dividends declared | — | — | — | — | — | — | (5,000 | ) | — | (5,000 | ) | |||||||||||||||||||||||||
Grant of stock options | — | — | — | — | 109,184 | — | (109,184 | ) | — | — | ||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (4,207,115 | ) | — | — | (4,207,115 | ) | |||||||||||||||||||||||||
Balance, March 31, 2021 | 28,031,234 | 5,649,240 | $ | 280,313 | $ | 56,492 | $ | 294,397,593 | $ | 6,923,497 | $ | 268,802,952 | $ | (41,226,357 | ) | $ | 529,234,490 | |||||||||||||||||||
Issuance of common stock (stock compensation plans) | 49,613 | — | 496 | — | 730,005 | — | — | — | 730,501 | |||||||||||||||||||||||||||
Share-based compensation | 539,019 | — | 5,390 | — | 7,313,031 | — | — | — | 7,318,421 | |||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 16,164,036 | — | 16,164,036 | |||||||||||||||||||||||||||
Cash dividends declared | — | — | — | — | — | — | (4,840,629 | ) | — | (4,840,629 | ) | |||||||||||||||||||||||||
Grant of stock options | — | — | — | — | 69,995 | — | (69,995 | ) | — | — | ||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 1,549,974 | — | — | 1,549,974 | |||||||||||||||||||||||||||
Balance, June 30, 2021 | 28,619,866 | 5,649,240 | $ | 286,199 | $ | 56,492 | $ | 302,510,624 | $ | 8,473,471 | $ | 280,056,364 | $ | (41,226,357 | ) | $ | 550,156,793 | |||||||||||||||||||
| Class A Shares | Class B Shares | Class A Amount | Class B Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Retained Earnings | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 26,203,935 | 5,649,240 | $ | 262,040 | $ | 56,492 | $ | 268,151,601 | $ | 504,170 | $ | 223,267,573 | $ | (41,226,357 | ) | $ | 451,015,519 | |||||||||||||||||||
Issuance of common stock (stock compensation plans) | 28,924 | — | 289 | — | 376,539 | — | — | — | 376,828 | |||||||||||||||||||||||||||
| Share-based compensation | 67,087 | — | 671 | — | 1,242,315 | — | — | — | 1,242,986 | |||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 3,731,121 | — | 3,731,121 | |||||||||||||||||||||||||||
| Cash dividends declared | — | — | — | — | — | — | (5,363 | ) | — | (5,363 | ) | |||||||||||||||||||||||||
| Grant of stock options | — | — | — | — | 118,525 | — | (118,525 | ) | — | — | ||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 3,199,840 | — | — | 3,199,840 | |||||||||||||||||||||||||||
| Balance, March 31, 2020 | 26,299,946 | 5,649,240 | $ | 263,000 | $ | 56,492 | $ | 269,888,980 | $ | 3,704,010 | $ | 226,874,806 | $ | (41,226,357 | ) | $ | 459,560,931 | |||||||||||||||||||
Issuance of common stock (stock compensation plans) | 52,964 | — | 530 | — | 720,018 | — | — | — | 720,548 | |||||||||||||||||||||||||||
| Share-based compensation | 160,869 | — | 1,608 | — | 2,490,136 | — | — | — | 2,491,744 | |||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 22,678,778 | — | 22,678,778 | |||||||||||||||||||||||||||
| Cash dividends declared | — | — | — | — | — | — | (4,255,882 | ) | — | (4,255,882 | ) | |||||||||||||||||||||||||
| Grant of stock options | — | — | — | — | 76,354 | — | (76,354 | ) | — | — | ||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 6,663,215 | — | — | 6,663,215 | |||||||||||||||||||||||||||
Balance, June 30, 2020 | 26,513,779 | 5,649,240 | $ | 265,138 | $ | 56,492 | $ | 273,175,488 | $ | 10,367,225 | $ | 245,221,348 | $ | (41,226,357 | ) | $ | 487,859,334 | |||||||||||||||||||
Six Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 26,693,884 | $ | 26,409,899 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation, amortization and other non-cash items | 3,083,025 | 3,502,046 | ||||||
Net investment (gains) losses | (6,710,085 | ) | 4,208,947 | |||||
Changes in assets and liabilities: | ||||||||
Losses and loss expenses | 36,650,578 | 32,149,773 | ||||||
Unearned premiums | 62,760,019 | 52,796,454 | ||||||
Premiums receivable | (19,787,451 | ) | (21,717,231 | ) | ||||
Deferred acquisition costs | (10,530,666 | ) | (2,865,674 | ) | ||||
Deferred income taxes | 1,266,870 | (837,202 | ) | |||||
Reinsurance receivable | (13,289,251 | ) | (12,319,334 | ) | ||||
Prepaid reinsurance premiums | (17,033,224 | ) | (32,483,228 | ) | ||||
Accrued investment income | (238,871 | ) | (597,823 | ) | ||||
Due to affiliate | 11,902,889 | (2,053,312 | ) | |||||
Reinsurance balances payable | 797,424 | 144,398 | ||||||
Current income taxes | (928,841 | ) | 4,893,520 | |||||
Accrued expenses | (17,649,554 | ) | (5,005,473 | ) | ||||
Other, net | 2,189,225 | 1,809,764 | ||||||
Net adjustments | 32,482,087 | 21,625,625 | ||||||
Net cash provided by operating activities | 59,175,971 | 48,035,524 | ||||||
Cash Flows from Investing Activities: | ||||||||
Purchases of fixed maturities, held to maturity | (80,315,578 | ) | (55,313,641 | ) | ||||
Purchases of fixed maturities, available for sale | (73,023,551 | ) | (81,210,780 | ) | ||||
Purchases of equity securities, available for sale | (25,332,194 | ) | (5,071,801 | ) | ||||
Maturity of fixed maturities: | ||||||||
Held to maturity | 23,650,172 | 18,812,367 | ||||||
Available for sale | 111,197,663 | 70,379,590 | ||||||
Sales of fixed maturities, available for sale | — | 15,251,996 | ||||||
Sales of equity securities, available for sale | 17,391,396 | 3,202,672 | ||||||
Net sales of property and equipment | 935,029 | 32,107 | ||||||
Net purchases of short-term investments | (1,867,217 | ) | (37,311,903 | ) | ||||
Net cash used in investing activities | (27,364,280 | ) | (71,229,393 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Cash dividends paid | (9,281,930 | ) | (8,336,479 | ) | ||||
Issuance of common stock | 12,380,741 | 3,988,784 | ||||||
Borrowing under lines of credit | — | 50,000,000 | ||||||
Payments on lines of credit | (50,000,000 | ) | — | |||||
Net cash (used in) provided by financing activities | (46,901,189 | ) | 45,652,305 | |||||
| Net (decrease) increase in cash | (15,089,498 | ) | 22,458,436 | |||||
| Cash at beginning of period | 103,094,236 | 49,318,930 | ||||||
Cash at end of period | $ | 88,004,738 | $ | 71,777,366 | ||||
Cash paid during period - Interest | $ | 659,222 | $ | 664,342 | ||||
Net cash paid during period - Taxes | $ | 5,400,000 | $ | — | ||||
1 - | Organization |
2 - | Basis of Presentation |
3 - | (Loss) Earnings Per Share |
| Three Months Ended June 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Class A | Class B | Class A | Class B | |||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
| Basic (loss) earnings per share: | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Allocation of net (loss) income | $ | (6,866 | ) | $ | (1,342 | ) | $ | 13,482 | $ | 2,682 | ||||||
| Denominator: | ||||||||||||||||
| Weighted-average shares outstanding | 26,070 | 5,577 | 25,342 | 5,577 | ||||||||||||
| Basic (loss) earnings per share | $ | (0.26 | ) | $ | (0.24 | ) | $ | 0.53 | $ | 0.48 | ||||||
| Diluted (loss) earnings per share: | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Allocation of net (loss) income | $ | (6,866 | ) | $ | (1,342 | ) | $ | 13,482 | $ | 2,682 | ||||||
| Denominator: | ||||||||||||||||
| Number of shares used in basic computation | 26,070 | 5,577 | 25,342 | 5,577 | ||||||||||||
| Weighted-average shares effect of dilutive securities: | ||||||||||||||||
| Director and employee stock options | 0 | 0 | 252 | 0 | ||||||||||||
| Number of shares used in diluted computation | 26,070 | 5,577 | 25,594 | 5,577 | ||||||||||||
| Diluted (loss) earnings per share | $ | (0.26 | ) | $ | (0.24 | ) | $ | 0.53 | $ | 0.48 | ||||||
| Six Months Ended June 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Class A | Class B | Class A | Class B | |||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
| Basic earnings per share: | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Allocation of net income | $ | 4,140 | $ | 797 | $ | 22,223 | $ | 4,471 | ||||||||
| Denominator: | ||||||||||||||||
| Weighted-average shares outstanding | 25,929 | 5,577 | 25,057 | 5,577 | ||||||||||||
| Basic earnings per share | $ | 0.16 | $ | 0.14 | $ | 0.89 | $ | 0.80 | ||||||||
| Diluted earnings per share: | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Allocation of net income | $ | 4,140 | $ | 797 | $ | 22,223 | $ | 4,471 | ||||||||
| Denominator: | ||||||||||||||||
| Number of shares used in basic computation | 25,929 | 5,577 | 25,057 | 5,577 | ||||||||||||
| Weighted-average shares effect of dilutive securities: | ||||||||||||||||
| Director and employee stock options | 123 | 0 | 190 | 0 | ||||||||||||
| Number of shares used in diluted computation | 26,052 | 5,577 | 25,247 | 5,577 | ||||||||||||
| Diluted earnings per share | $ | 0.16 | $ | 0.14 | $ | 0.88 | $ | 0.80 | ||||||||
Three Months Ended June 30, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
| Class A | Class B | Class A | Class B | |||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
Basic earnings per share: | ||||||||||||||||
Numerator: | ||||||||||||||||
Allocation of net income | $ | 13,482 | $ | 2,682 | $ | 18,665 | $ | 4,014 | ||||||||
Denominator: | ||||||||||||||||
Weighted-average shares outstanding | 25,342 | 5,577 | 23,451 | 5,577 | ||||||||||||
Basic earnings per share | $ | 0.53 | $ | 0.48 | $ | 0.80 | $ | 0.72 | ||||||||
Diluted earnings per share: | ||||||||||||||||
Numerator: | ||||||||||||||||
Allocation of net income | $ | 13,482 | $ | 2,682 | $ | 18,665 | $ | 4,014 | ||||||||
Denominator: | ||||||||||||||||
Number of shares used in basic computation | 25,342 | 5,577 | 23,451 | 5,577 | ||||||||||||
Weighted-average shares effect of dilutive securities: | ||||||||||||||||
Director and employee stock options | 252 | — | 199 | — | ||||||||||||
Number of shares used in diluted computation | 25,594 | 5,577 | 23,650 | 5,577 | ||||||||||||
Diluted earnings per share | $ | 0.53 | $ | 0.48 | $ | 0.79 | $ | 0.72 | ||||||||
Six Months Ended June 30, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
| Class A | Class B | Class A | Class B | |||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
Basic earnings per share: | ||||||||||||||||
Numerator: | ||||||||||||||||
Allocation of net income | $ | 22,223 | $ | 4,471 | $ | 21,721 | $ | 4,689 | ||||||||
Denominator: | ||||||||||||||||
Weighted-average shares outstanding | 25,057 | 5,577 | 23,356 | 5,577 | ||||||||||||
Basic earnings per share | $ | 0.89 | $ | 0.80 | $ | 0.93 | $ | 0.84 | ||||||||
Diluted earnings per share: | ||||||||||||||||
Numerator: | ||||||||||||||||
Allocation of net income | $ | 22,223 | $ | 4,471 | $ | 21,721 | $ | 4,689 | ||||||||
Denominator: | ||||||||||||||||
Number of shares used in basic computation | 25,057 | 5,577 | 23,356 | 5,577 | ||||||||||||
Weighted-average shares effect of dilutive securities: | ||||||||||||||||
Director and employee stock options | 190 | — | 193 | — | ||||||||||||
Number of shares used in diluted computation | 25,247 | 5,577 | 23,549 | 5,577 | ||||||||||||
Diluted earnings per share | $ | 0.88 | $ | 0.80 | $ | 0.92 | $ | 0.84 | ||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Number of options to purchase Class A shares excluded | 0 | 4,952,276 | 731,600 | 4,952,276 | ||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Number of options to purchase Class A shares excluded | 4,952,276 | 6,183,992 | 4,952,276 | 6,183,992 | ||||||||||||
4 - | Reinsurance |
| • | excess of loss reinsurance, under which Donegal Mutual and our insurance subsidiaries recover losses over a set retention of $2.0 million; and |
5 - | Investments |
| 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 | $ | 101,072 | $ | 5 | $ | 6,817 | $ | 94,260 | ||||||||
| Obligations of states and political subdivisions | 396,933 | 2,961 | 46,936 | 352,958 | ||||||||||||
| Corporate securities | 188,541 | 95 | 14,816 | 173,820 | ||||||||||||
| Mortgage-backed securities | 13,789 | 0 | 210 | 13,579 | ||||||||||||
| Totals | $ | 700,335 | $ | 3,061 | $ | 68,779 | $ | 634,617 | ||||||||
| 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 | $ | 37,004 | $ | 0 | $ | 3,330 | $ | 33,674 | ||||||||
| Obligations of states and political subdivisions | 55,677 | 95 | 4,498 | 51,274 | ||||||||||||
| Corporate securities | 219,666 | 175 | 10,365 | 209,476 | ||||||||||||
| Mortgage-backed securities | 227,130 | 23 | 14,531 | 212,622 | ||||||||||||
| Totals | $ | 539,477 | $ | 293 | $ | 32,724 | $ | 507,046 | ||||||||
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 | $ | 89,716 | $ | 2,839 | $ | 649 | $ | 91,906 | ||||||||
Obligations of states and political subdivisions | 346,517 | 20,073 | 788 | 365,802 | ||||||||||||
Corporate securities | 188,162 | 15,061 | 267 | 202,956 | ||||||||||||
Mortgage-backed securities | 19,453 | 1,005 | 0 | 20,458 | ||||||||||||
Totals | $ | 643,848 | $ | 38,978 | $ | 1,704 | $ | 681,122 | ||||||||
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 | $ | 22,508 | $ | 257 | $ | 439 | $ | 22,326 | ||||||||
Obligations of states and political subdivisions | 59,378 | 2,366 | 31 | 61,713 | ||||||||||||
Corporate securities | 201,634 | 9,644 | 202 | 211,076 | ||||||||||||
Mortgage-backed securities | 222,814 | 5,068 | 417 | 227,465 | ||||||||||||
Totals | $ | 506,334 | $ | 17,335 | $ | 1,089 | $ | 522,580 | ||||||||
| 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 | $ | 89,268 | $ | 1,923 | $ | 1,015 | $ | 90,176 | ||||||||
| Obligations of states and political subdivisions | 371,436 | 17,857 | 948 | 388,345 | ||||||||||||
| Corporate securities | 191,147 | 11,576 | 773 | 201,950 | ||||||||||||
| Mortgage-backed securities | 16,254 | 676 | 0 | 16,930 | ||||||||||||
| Totals | $ | 668,105 | $ | 32,032 | $ | 2,736 | $ | 697,401 | ||||||||
| 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 | $ | 32,501 | $ | 144 | $ | 461 | $ | 32,184 | ||||||||
| Obligations of states and political subdivisions | 55,459 | 2,002 | 83 | 57,378 | ||||||||||||
| Corporate securities | 215,669 | 6,817 | 874 | 221,612 | ||||||||||||
| Mortgage-backed securities | 219,664 | 3,001 | 1,210 | 221,455 | ||||||||||||
| Totals | $ | 523,293 | $ | 11,964 | $ | 2,628 | $ | 532,629 | ||||||||
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 | $ | 77,435 | $ | 3,984 | $ | 223 | $ | 81,196 | ||||||||
Obligations of states and political subdivisions | 312,319 | 23,212 | 143 | 335,388 | ||||||||||||
Corporate securities | 173,270 | 18,172 | 206 | 191,236 | ||||||||||||
Mortgage-backed securities | 23,585 | 1,236 | 0 | 24,821 | ||||||||||||
Totals | $ | 586,609 | $ | 46,604 | $ | 572 | $ | 632,641 | ||||||||
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 | $ | 47,512 | $ | 424 | $ | 121 | $ | 47,815 | ||||||||
Obligations of states and political subdivisions | 66,287 | 2,690 | 12 | 68,965 | ||||||||||||
Corporate securities | 202,396 | 10,496 | 184 | 212,708 | ||||||||||||
Mortgage-backed securities | 218,763 | 6,902 | 17 | 225,648 | ||||||||||||
Totals | $ | 534,958 | $ | 20,512 | $ | 334 | $ | 555,136 | ||||||||
| Amortized Cost | Estimated Fair Value | |||||||
| (in thousands) | ||||||||
| Held to maturity | ||||||||
| Due in one year or less | $ | 45,820 | $ | 46,701 | ||||
| Due after one year through five years | 84,198 | 83,346 | ||||||
| Due after five years through ten years | 237,451 | 217,914 | ||||||
| Due after ten years | 319,077 | 273,077 | ||||||
| Mortgage-backed securities | 13,789 | 13,579 | ||||||
| Total held to maturity | $ | 700,335 | $ | 634,617 | ||||
| Available for sale | ||||||||
| Due in one year or less | $ | 22,726 | $ | 22,718 | ||||
| Due after one year through five years | 150,825 | 144,006 | ||||||
| Due after five years through ten years | 107,916 | 100,391 | ||||||
| Due after ten years | 30,880 | 27,309 | ||||||
| Mortgage-backed securities | 227,130 | 212,622 | ||||||
| Total available for sale | $ | 539,477 | $ | 507,046 | ||||
Amortized Cost | Estimated Fair Value | |||||||
| (in thousands) | ||||||||
Held to maturity | ||||||||
Due in one year or less | $ | 38,641 | $ | 39,762 | ||||
Due after one year through five years | 83,282 | 88,929 | ||||||
Due after five years through ten years | 224,135 | 237,348 | ||||||
Due after ten years | 278,337 | 294,625 | ||||||
Mortgage-backed securities | 19,453 | 20,458 | ||||||
Total held to maturity | $ | 643,848 | $ | 681,122 | ||||
Available for sale | ||||||||
Due in one year or less | $ | 26,146 | $ | 26,621 | ||||
Due after one year through five years | 131,837 | 138,624 | ||||||
Due after five years through ten years | 96,413 | 99,711 | ||||||
Due after ten years | 29,124 | 30,159 | ||||||
Mortgage-backed securities | 222,814 | 227,465 | ||||||
Total available for sale | $ | 506,334 | $ | 522,580 | ||||
| Cost | Gross Gains | Gross Losses | Estimated Fair Value | |||||||||||||
| (in thousands) | ||||||||||||||||
| Equity securities | $ | 35,305 | $ | 10,968 | $ | 1,012 | $ | 45,261 | ||||||||
Cost | Gross Gains | Gross Losses | Estimated Fair Value | |||||||||||||
| (in thousands) | ||||||||||||||||
Equity securities | $ | 50,864 | $ | 22,007 | $ | 114 | $ | 72,757 | ||||||||
| Cost | Gross Gains | Gross Losses | Estimated Fair Value | |||||||||||||
| (in thousands) | ||||||||||||||||
| Equity securities | $ | 43,263 | $ | 20,413 | $ | 256 | $ | 63,420 | ||||||||
Cost | Gross Gains | Gross Losses | Estimated Fair Value | |||||||||||||
| (in thousands) | ||||||||||||||||
Equity securities | $ | 42,410 | $ | 17,103 | $ | 957 | $ | 58,556 | ||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Gross realized gains: | ||||||||||||||||
| Fixed maturities | $ | 438 | $ | 479 | $ | 672 | $ | 524 | ||||||||
| Equity securities | 0 | 553 | 843 | 626 | ||||||||||||
| Real estate | 0 | 0 | 477 | 0 | ||||||||||||
| 438 | 1,032 | 1,992 | 1,150 | |||||||||||||
| Gross realized losses: | ||||||||||||||||
| Fixed maturities | 31 | 0 | 100 | 74 | ||||||||||||
| Equity securities | 0 | 354 | 824 | 354 | ||||||||||||
| 31 | 354 | 924 | 428 | |||||||||||||
Net realized gains | 407 | 678 | 1,068 | 722 | ||||||||||||
| Gross unrealized gains on equity securities | 0 | 3,563 | 6 | 6,102 | ||||||||||||
| Gross unrealized losses on equity securities | (8,784 | ) | 0 | (9,527 | ) | (114 | ) | |||||||||
| Net investment (losses) gains | $ | (8,377 | ) | $ | 4,241 | $ | (8,453 | ) | $ | 6,710 | ||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
Gross investment gains: | ||||||||||||||||
Fixed maturities | $ | 479 | $ | 229 | $ | 524 | $ | 652 | ||||||||
Equity securities | 3,762 | 6,474 | 6,728 | 3,355 | ||||||||||||
| 4,241 | 6,703 | 7,252 | 4,007 | |||||||||||||
Gross investment losses: | ||||||||||||||||
Fixed maturities | 0 | 217 | 74 | 218 | ||||||||||||
Equity securities | 0 | 0 | 468 | 7,998 | ||||||||||||
| 0 | 217 | 542 | 8,216 | |||||||||||||
Net investment gains (losses) | $ | 4,241 | $ | 6,486 | $ | 6,710 | $ | (4,209 | ) | |||||||
| Less Than 12 Months | More Than 12 Months | |||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||
| (in thousands) | ||||||||||||||||
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 90,365 | $ | 5,082 | $ | 33,226 | $ | 5,065 | ||||||||
| Obligations of states and political subdivisions | 280,663 | 44,718 | 28,139 | 6,716 | ||||||||||||
| Corporate securities | 306,511 | 20,417 | 31,213 | 4,764 | ||||||||||||
| Mortgage-backed securities | 178,211 | 8,731 | 44,199 | 6,010 | ||||||||||||
| Totals | $ | 855,750 | $ | 78,948 | $ | 136,777 | $ | 22,555 | ||||||||
Less Than 12 Months | More Than 12 Months | |||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||
| (in thousands) | ||||||||||||||||
U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 38,202 | $ | 1,088 | $ | — | $ | — | ||||||||
Obligations of states and political subdivisions | 45,446 | 819 | 0 | 0 | ||||||||||||
Corporate securities | 38,846 | 344 | 3,375 | 125 | ||||||||||||
Mortgage-backed securities | 55,930 | 415 | 487 | 2 | ||||||||||||
Totals | $ | 178,424 | $ | 2,666 | $ | 3,862 | $ | 127 | ||||||||
| Less Than 12 Months | More Than 12 Months | |||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||
| (in thousands) | ||||||||||||||||
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 27,691 | $ | 412 | $ | 28,426 | $ | 1,064 | ||||||||
| Obligations of states and political subdivisions | 56,655 | 899 | 7,091 | 132 | ||||||||||||
| Corporate securities | 92,737 | 1,610 | 1,463 | 37 | ||||||||||||
| Mortgage-backed securities | 90,006 | 1,128 | 2,361 | 82 | ||||||||||||
| Totals | $ | 267,089 | $ | 4,049 | $ | 39,341 | $ | 1,315 | ||||||||
Less Than 12 Months | More Than 12 Months | |||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||
| (in thousands) | ||||||||||||||||
U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 29,144 | $ | 345 | $ | — | $ | — | ||||||||
Obligations of states and political subdivisions | 9,362 | 154 | — | — | ||||||||||||
Corporate securities | 26,143 | 115 | 8,230 | 276 | ||||||||||||
Mortgage-backed securities | 3,091 | 15 | 236 | 1 | ||||||||||||
Totals | $ | 67,740 | $ | 629 | $ | 8,466 | $ | 277 | ||||||||
6 - | Segment Information |
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
| Revenues: | ||||||||
| Premiums earned: | ||||||||
| Commercial lines | $ | 126,854 | $ | 115,300 | ||||
| Personal lines | 77,274 | 77,189 | ||||||
| GAAP premiums earned | 204,128 | 192,489 | ||||||
| Net investment income | 8,204 | 7,652 | ||||||
| Investment (losses) gains | (8,377 | ) | 4,241 | |||||
| Other | 356 | 764 | ||||||
| Total revenues | $ | 204,311 | $ | 205,146 | ||||
(Loss) income before income tax (benefit) expense: | ||||||||
| Underwriting (loss) income: | ||||||||
| Commercial lines | $ | (4,848 | ) | $ | 1,767 | |||
| Personal lines | (8,170 | ) | 547 | |||||
| SAP underwriting (loss) income | (13,018 | ) | 2,314 | |||||
| GAAP adjustments | 2,842 | 5,256 | ||||||
| GAAP underwriting (loss) income | (10,176 | ) | 7,570 | |||||
| Net investment income | 8,204 | 7,652 | ||||||
| Investment (losses) gains | (8,377 | ) | 4,241 | |||||
| Other | (230 | ) | 234 | |||||
(Loss) income before income tax (benefit) expense | $ | (10,579 | ) | $ | 19,697 | |||
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
Revenues: | ||||||||
| Premiums earned: | ||||||||
| Commercial lines | $ | 251,183 | $ | 224,525 | ||||
| Personal lines | 152,194 | 155,215 | ||||||
| GAAP premiums earned | 403,377 | 379,740 | ||||||
| Net investment income | 16,063 | 15,163 | ||||||
| Investment (losses) gains | (8,453 | ) | 6,710 | |||||
| Other | 951 | 1,503 | ||||||
Total revenues | $ | 411,938 | $ | 403,116 | ||||
Income before income tax expense: | ||||||||
| Underwriting (loss) income: | ||||||||
| Commercial lines | $ | (4,773 | ) | $ | (6,475 | ) | ||
| Personal lines | (3,528 | ) | 5,584 | |||||
| SAP underwriting loss | (8,301 | ) | (891 | ) | ||||
| GAAP adjustments | 6,554 | 11,238 | ||||||
| GAAP underwriting (loss) income | (1,747 | ) | 10,347 | |||||
| Net investment income | 16,063 | 15,163 | ||||||
| Investment (losses) gains | (8,453 | ) | 6,710 | |||||
| Other | (216 | ) | 228 | |||||
Income before income tax expense | $ | 5,647 | $ | 32,448 | ||||
Three Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
| (in thousands) | ||||||||
Revenues: | ||||||||
Premiums earned: | ||||||||
Commercial lines | $ | 115,300 | $ | 101,870 | ||||
Personal lines | 77,189 | 82,504 | ||||||
GAAP premiums earned | 192,489 | 184,374 | ||||||
Net investment income | 7,652 | 7,172 | ||||||
Investment gains | 4,241 | 6,486 | ||||||
Other | 764 | 868 | ||||||
Total revenues | $ | 205,146 | $ | 198,900 | ||||
Income before income tax expense: | ||||||||
Underwriting income: | ||||||||
Commercial lines | $ | 1,767 | $ | 4,472 | ||||
Personal lines | 547 | 8,290 | ||||||
SAP underwriting income | 2,314 | 12,762 | ||||||
GAAP adjustments | 5,256 | 1,378 | ||||||
GAAP underwriting income | 7,570 | 14,140 | ||||||
Net investment income | 7,652 | 7,172 | ||||||
Investment gains | 4,241 | 6,486 | ||||||
Other | 234 | 190 | ||||||
Income before income tax expense | $ | 19,697 | $ | 27,988 | ||||
Six Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
| (in thousands) | ||||||||
Revenues: | ||||||||
Premiums earned: | ||||||||
Commercial lines | $ | 224,525 | $ | 203,645 | ||||
Personal lines | 155,215 | 167,982 | ||||||
GAAP premiums earned | 379,740 | 371,627 | ||||||
Net investment income | 15,163 | 14,548 | ||||||
Investment gains (losses) | 6,710 | (4,209 | ) | |||||
Other | 1,503 | 1,845 | ||||||
Total revenues | $ | 403,116 | $ | 383,811 | ||||
Income before income tax expense: | ||||||||
Underwriting (loss) income: | ||||||||
Commercial lines | $ | (6,475 | ) | $ | 3,906 | |||
Personal lines | 5,584 | 13,101 | ||||||
SAP underwriting (loss) income | (891 | ) | 17,007 | |||||
GAAP adjustments | 11,238 | 2,762 | ||||||
GAAP underwriting income | 10,347 | 19,769 | ||||||
Net investment income | 15,163 | 14,548 | ||||||
Investment gains (losses) | 6,710 | (4,209 | ) | |||||
Other | 228 | 383 | ||||||
Income before income tax expense | $ | 32,448 | $ | 30,491 | ||||
7 - | Borrowings |
FHLB of Pittsburgh stock purchased and owned | $ | 1,575,600 | $ | 1,573,300 | ||||
Collateral pledged, at par (carrying value $45,226,104) | 44,343,661 | |||||||
| Collateral pledged, at par (carrying value $46,850,969) | 49,384,840 | |||||||
Borrowing capacity currently available | 8,847,792 | 9,116,560 | ||||||
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 $241,645 and $304,373 for the three months ended June 30, $50,745 and $485,785 and $597,168 for the six months ended June 30, $102,015 and 1.7 years. We received cash from option exercises under all stock compensation plans during the three months ended June 30, 2022 and 2021 $ 264,659 and $264,812 and
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 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, 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
The following table presents our fair value measurements for our investments in available-for-sale
At June 30, 20
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. 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:
Our insurance subsidiaries recognized a decrease in their liabilities for losses and loss expenses of prior years of and 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 six months ended June 30, 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 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.
In September 2016, the FASB issued guidance that amends 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 delays 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, 2022 from December 15, 2019. We are a smaller reporting company and are in the process of evaluating our investment portfolio, reinsurance receivable and premiums receivable for the impact of the adoption of this guidance on our financial position, results of operations and cash flows.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 Form10-K for the year ended December 31, 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 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 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 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. 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. COVID-19 pandemic and related government mandates and restrictions resulted in various changes from historical claims reporting and settlement trends during pre-tax results of operations would be approximately 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 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 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 theunderwriting 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. Our insurance subsidiaries’ liabilities for losses and loss expenses by major line of business at June 30,
25
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:
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 ofnon-GAAP financial measures may differ from similar measures other companies use, so investors should exercise caution when comparing ournon-GAAP financial measures to thenon-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 six months ended June 30,
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 six months ended June 30,
28
Results of Operations - Three Months Ended June 30, Net Premiums Earned. Net Premiums Written. Investment Income. Net Investment (Losses) Gains. Losses and Loss Expenses. Underwriting Expenses. Combined Ratio. Net (Loss) Income and (Loss) Income Per Share. per share of Class A common stock on a diluted basis and $.48 per share of Class B common stock, Results of Operations - Six Months Ended June 30, Net Premiums Earned. Net Premiums Written. June 30, Investment Income. Net Investment Losses and Loss Expenses. Underwriting Expenses. Combined Ratio. Interest Expense. Income Net Income and Income Per Share. per share of Class A common stock on a diluted basis and $.80 per share of Class B common stock, 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 net cash flows in the first six months of 2022 and 2021 of $35.0million and At June 30, 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 six months ended June 30, On July 14.75cents per share of our Class B common stock, payable on August At June 30, 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.
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. 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) and15d-15(e) under the Exchange Act). Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, at June 30, Changes in Internal Control Over Financial Reporting Donegal Mutual implemented a new application system that Donegal Mutual and our insurance subsidiaries began to utilize during 2021 for the allocation of expenses and, beginning in 2022, for reinsurance premiums and commissions. The new application system provides for further automation of, and enhanced internal controls 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. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 We base all statements contained in this COVID-19 pandemic, COVID-19 business interruption coverage exclusions, Part II. Other Information None. 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 10-K that we filed with the SEC on March 10-K Report during the six months ended June 30,
None. Not Applicable.
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.
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