What changed in this filing

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Item 1. Financial Statements

2022-05-05 compared with 2021-11-05 · 339 added, 365 removed, 339 unchanged (67% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

September 30,

Fixed maturities

15 unchanged sentences

Federal income taxes recoverable

Receivable from Michigan Catastrophic Claims Association

Due from affiliate

Other intangible assets

4 unchanged sentences

1,071,587,385

1,077,620,301

Unearned premiums

3 unchanged sentences

Cash dividends declared to stockholders

Subordinated debentures

Cash refunds due to Michigan policyholders

Accounts payable - securities

Due to affiliate

Total liabilities

4 unchanged sentences

Class A common stock, $ 0.01 par value, authorized 50,000,000 shares, issued 28,790,510

and 27,651,774 shares and outstanding 25,696,577

and 24,649,186 shares

Class B common stock, $ .01 par value, authorized 10,000,000 shares, issued 5,649,240 shares and outstanding 5,576,775 shares

Additional paid-in

Accumulated other comprehensive income

and 28,756,203 shares and outstanding 25,787,922 and 25,753,615

Class B common stock, $ 0.01 par value, authorized 10,000,000 shares, issued 5,649,240

shares and outstanding 5,576,775 shares

Additional paid-in capital

Accumulated other comprehensive (loss) income

Retained earnings

7 unchanged sentences

and Subsidiaries

Consolidated Statements of (Loss) Income

Three Months Ended

September 30,

Net premiums earned

Investment income, net of investment expenses

Net investment (losses)

gains (includes $ 26,163

and $ 134,795 accumulated other comprehensive income reclassifications)

Installment payment fees

Total revenues

Net losses and loss expenses

Amortization of deferred policy acquisition costs

Other underwriting expenses

Policyholder dividends

Other expenses, net

Total expenses

(Loss) income before income tax (benefit) expense

Income tax (benefit)

expense (includes $ 5,494

and $ 28,307 income tax expense from reclassification items)

Net (loss) income

(Loss) earnings

per common share:

Class A common stock - basic and diluted

Class B common stock - basic and diluted

Donegal Group Inc.

and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

Three Months Ended

September 30,

Net (loss) income

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 (

Reclassification adjustment for gains included in net income, net of income tax expense of

Other comprehensive (loss) income

Comprehensive (loss) income

See accompanying notes to consolidated financial statements.

Donegal Group Inc.

and Subsidiaries

Consolidated Statements of Income

Nine Months Ended September 30,

Three Months Ended March 31,

Net premiums earned

Investment income, net of investment expenses

Net investment gains (losses) (includes $ 476,188

and $ 571,123 accumulated other comprehensive income reclassifications)

Net investment (losses) gains (includes $ 165,354 and ($ 29,186 ) accumulated other comprehensive income reclassifications)

Installment payment fees

7 unchanged sentences

Income before income tax expense

Income tax expense (includes $ 99,999

and $ 119,936 income tax expense from reclassification items)

Income tax expense (includes $ 34,724 and ($ 6,129 ) income tax expense (benefit) from reclassification items)

Earnings per common share:

Class A common stock - basic

Class A common stock - diluted

Class A common stock - basic and diluted

Class B common stock - basic and diluted

1 unchanged sentence

and Subsidiaries

Consolidated Statements of Comprehensive Income

Nine Months Ended September 30,

Other comprehensive (loss) income, net of tax

Unrealized (loss) gain on securities:

Unrealized holding (loss) gain during the period, net of income tax (benefit) expense of ($ 1,046,983 ) and

Reclassification

gains included

Other comprehensive (loss) income

Comprehensive income

Consolidated Statements of Comprehensive (Loss) Income

Three Months Ended March 31,

Other comprehensive loss, net of tax

Unrealized loss on securities:

Unrealized holding loss during the period, net of income tax benefit of ($ 5,438,628 )

and ($ 1,125,625 )

Reclassification adjustment for (gains) losses included in net income, net of income tax expense (benefit) of $ 34,724 and ($ 6,129 )

Other comprehensive loss

Comprehensive (loss) income

See accompanying notes to consolidated financial statements.

2 unchanged sentences

Consolidated Statement of Stockholders’ Equity

Nine Months Ended September 30, 2021

Three Months Ended

March 31, 2022

Paid-In Capital

Comprehensive

Income (Loss)

Treasury Stock

1 unchanged sentence

Balance, December 31, 2021

compensation plans)

Issuance of common stock

(stock compensation plans)

Share-based compensation

3 unchanged sentences

Balance, March 31, 2022

compensation plans)

Share-based compensation

Cash dividends declared

Grant of stock options

Other comprehensive income

Balance, June 30, 2021

compensation plans)

Share-based compensation

Cash dividends declared

Grant of stock options

Other comprehensive loss

Balance, September 30, 2021

See accompanying notes to consolidated financial

Donegal Group Inc.

and Subsidiaries

Consolidated Statement of Stockholders’ Equity

Nine Months Ended September 30, 2020

Three Months Ended

March 31, 2021

Paid-In Capital

3 unchanged sentences

Balance, December 31, 2020

Issuance of common stock (stock compensation plans)

Issuance of common stock

(stock compensation plans)

Share-based compensation

1 unchanged sentence

Grant of stock options

Other comprehensive income

Other comprehensive loss

Balance, March 31, 2021

Issuance of common stock (stock compensation plans)

Share-based compensation

Cash dividends declared

Grant of stock options

Other comprehensive income

Balance, June 30, 2020

Issuance of common stock (stock compensation plans)

Share-based compensation

Cash dividends declared

Grant of stock options

Other comprehensive income

Balance, September 30, 2020

See accompanying notes to consolidated financial statements.

2 unchanged sentences

Consolidated Statements of Cash Flows

Nine Months Ended September 30,

Three Months Ended March 31,

Cash Flows from Operating Activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation, amortization and other non-cash

Net investment (gains) losses

Depreciation, amortization and other non-cash items

Net investment losses (gains)

Changes in assets and liabilities:

7 unchanged sentences

Accrued investment income

Due to affiliate

Due from affiliate

Reinsurance balances payable

5 unchanged sentences

Purchases of fixed maturities, held to maturity

( 106,290,824

( 110,914,229

Purchases of fixed maturities, available for sale

( 118,899,756

( 143,743,351

Purchases of equity securities, available for sale

2 unchanged sentences

Available for sale

Sales of fixed maturities, available for sale

Sales of equity securities, available for sale

Net sales (purchases) of property and equipment

Net sales of property and equipment

Net sales (purchases) of short-term investments

Net cash used in investing activities

Net cash (used in) provided by investing activities

Cash Flows from Financing Activities:

1 unchanged sentence

Issuance of common stock

Payments on subordinated debentures

Borrowing under lines of credit

Payments on lines of credit

Net cash (used in) provided by financing activities

Net (decrease) increase in cash

Net cash used in financing activities

Net decrease in cash

Cash at beginning of period

7 unchanged sentences

Donegal Mutual Insurance Company (“Donegal Mutual”) organized us as an insurance holding company on August 26, 1986.

Our insurance subsidiaries, Atlantic States Insurance Company (“Atlantic States”), Southern Insurance Company of Virginia (“Southern”), the Peninsula Insurance Group (“Peninsula”), which consists of Peninsula Indemnity Company and The Peninsula Insurance Company, and Michigan Insurance Company (“MICO”), and our affiliates write personal and commercial lines of property and casualty coverages exclusively through independent insurance agents in certain Mid-Atlantic,

Midwestern, New England, Southern and Southwestern states.

We have three segments:

our investment function, our commercial lines of insurance and our personal lines of i n

The commercial lines products of our insurance subsidiaries consist primarily of commercial automobile, commercial multi-peril and workers’ compensation policies.

Our insurance

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

Company and Michigan Insurance Company (“MICO”), and our affiliates write personal and commercial lines of property and casualty coverages exclusively through a network of independent insurance agents in certain Mid-Atlantic, Midwestern, New

England, Southern and Southwestern states.

At March 31, 2022, we had three

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, 2021, Donegal Mutual held approximately 41

% of our outstanding Class A common stock and approximately 84

% of our outstanding Class B common stock.

This ownership provides Donegal Mutual with approximately 70

% of the total voting power of our common stock.

Our insurance subsidiaries and Donegal Mutual have interrelated operations due to a pooling agreement and other intercompany agreements and transactions.

While each company maintains its separate corporate existence, our insurance subsidiaries and Donegal Mutual conduct business together as the Donegal Insurance Group.

As such, Donegal Mutual and our insurance subsidiaries share the same business philosophy, the same management, the same employees and the same facilities and offer the same types of insurance products.

At March 31, 2022, Donegal Mutual held approximately 41 % of our outstanding Class A common stock and approximately 84 % of our outstanding Class B

common stock.

This ownership provides Donegal Mutual with approximately 70 % of the total voting power of our common stock.

insurance subsidiaries and Donegal Mutual have interrelated operations due to a pooling agreement and other intercompany agreements and transactions.

While each company maintains its separate corporate existence, our insurance subsidiaries and

Donegal Mutual conduct business together as the Donegal Insurance Group.

As such, Donegal Mutual and our insurance subsidiaries share the same business philosophy, the same management, the same employees and the same facilities and offer the

same types of insurance products.

Atlantic States, our largest subsidiary, participates in a proportional reinsurance agreement, or pooling agreement, with Donegal Mutual.

Under the pooling agreement, Donegal Mutual and Atlantic States contribute substantially all of their respective premiums, losses and loss expenses to the underwriting pool, and the underwriting pool, acting through Donegal Mutual, then allocates 80 % of the pooled business to Atlantic States.

Thus, Donegal Mutual and Atlantic States share the underwriting results of the pooled business in proportion to their respective participation in the underwriting pool.

In addition, Donegal Mutual has a 100 % quota-share reinsurance agreement with Southern Mutual Insurance Company, or Southern Mutual.

allocates 80 % of the pooled business to Atlantic States.

Thus, Donegal Mutual and Atlantic States share the underwriting results of

the pooled business in proportion to their respective participation in the underwriting pool.

In addition, Donegal Mutual has a 100 %

quota-share reinsurance agreement with Southern Mutual Insurance Company, or Southern Mutual.

Donegal Mutual places its assumed business from Southern Mutual into the underwriting pool.

Donegal Mutual completed the merger of Mountain States Mutual Casualty Company, or Mountain States, with and into Donegal Mutual effective May

Donegal Mutual was the surviving company in the merger, and Mountain States’ insurance subsidiaries, Mountain States Indemnity Company and Mountain States Commercial Insurance Company (collectively, the “Mountain States insurance subsidiaries”), became insurance subsidiaries of Donegal Mutual upon completion of the merger.

Upon completion of the merger, Donegal Mutual assumed all of the policy obligations of Mountain States and began to market its products together with the Mountain States insurance subsidiaries as the Mountain States Insurance Group in four Southwestern states.

Donegal Mutual also entered into a 100 % quota-share reinsurance agreement with the Mountain States insurance subsidiaries on the merger date.

Beginning with policies effective in 2021, Donegal Mutual began to place the business of the Mountain States Insurance Group into the underwriting pool.

As a result, our consolidated financial results through December 31, 2020 excluded the results of the Mountain States Insurance Group operations in those Southwestern states.

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.

subsidiaries”), became insurance subsidiaries of Donegal Mutual upon completion of the merger.

Upon completion of the merger, Donegal Mutual assumed all of the policy obligations of Mountain States and began to market its products together with

the Mountain States insurance subsidiaries as the Mountain States Insurance Group in four Southwestern states.

Donegal Mutual also

entered into a 100 % quota-share reinsurance agreement with the Mountain States insurance subsidiaries on the merger date.

with policies effective in 2021, Donegal Mutual began to place the business of the Mountain States Insurance Group into the underwriting pool.

The same executive management and underwriting personnel administer products, classes of business underwritten, pricing practices and

underwriting standards of Donegal Mutual and our insurance subsidiaries.

In addition, as the Donegal Insurance Group, Donegal Mutual and our insurance subsidiaries share a combined business plan to achieve market penetration and underwriting

profitability objectives.

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.

The business Atlantic States derives from the underwriting pool represents a

significant percentage of our total consolidated revenues.

Basis of Presentation

Our financial information for the interim periods included in this Form 10-Q

Report is unaudited;

however, our financial information we include in this Form 10-Q

Report reflects all adjustments, consisting only of normal recurring adjustments that, in the opinion of our management, are necessary for a fair presentation of our financial position, results of operations and cash flows for those interim periods.

Our results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the results of operations we expect for the year ending December 31, 2021.

We recommend you read the interim financial statements we include in this Form 10-Q

Report in conjunction with the financial statements and the notes to our financial statements contained in our Annual Report on Form 10-K

for the year ended December 31, 2020.

Earnings (Loss) Per Share

Our financial information for the interim periods included in this Form 10-Q Report is unaudited;

however, our financial information we

include in this Form 10-Q Report reflects all adjustments, consisting only of normal recurring adjustments that, in the opinion of our management, are necessary for a fair presentation of our financial position, results of operations and cash

flows for those interim periods.

Our results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results of operations we expect for the year ending December 31, 2022.

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, 2021.

Earnings Per Share

We have two classes of common stock, which we refer to as our Class A common stock and our Class B common stock.

Our certificate of incorporation provides that whenever our board of directors declares a dividend on our Class B common stock, our board of directors shall simultaneously declare a dividend on our Class A common stock that is payable to the holders of our Class A common stock at the same time and as of the same record date at a rate that is at least 10 % greater than the rate at which our board of directors declared a dividend on our Class B common stock.

Accordingly, we use the two-class method to compute our earnings (loss) per common share.

The two-class method is an earnings allocation formula that determines earnings (loss) per share separately for each class of common stock based on dividends we have declared and an allocation of our remaining undistributed earnings (loss) using a participation percentage that reflects the dividend rights of each class.

The table below presents for the periods indicated a reconciliation of the numerators and denominators we used to compute basic and diluted net income (loss) per share for our Class A common stock and our Class B common stock:

Three Months Ended September 30,

(in thousands, except per share data)

Basic (loss) earnings per share:

Allocation of net (loss) income

Weighted-average shares outstanding

Basic (loss) earnings per share

Diluted (loss) earnings per share:

Allocation of net (loss) income

Number of shares used in basic computation

Weighted-average shares effect of dilutive securities:

Director and employee stock options

Number of shares used in diluted computation

Diluted (loss) earnings per share

Nine Months Ended September 30,

Our certificate of

incorporation provides that whenever our board of directors declares a dividend on our Class B common stock, our board of directors shall simultaneously declare a dividend on our Class A common stock that is payable to the holders of our

Class A common stock at the same time and as of the same record date at a rate that is at least 10 % greater than the rate at which

our board of directors declared a dividend on our Class B common stock.

Accordingly, we use the two-class method to compute our earnings per common share.

The two-class method is an earnings allocation formula that determines earnings per

share separately for each class of common stock based on dividends we have declared and an allocation of our remaining undistributed earnings using a participation percentage that reflects the dividend rights of each class.

The table below presents for the periods indicated a reconciliation of the numerators and denominators we used to compute basic and diluted net income per share for our Class A common stock and our Class B

common stock:

Three Months Ended March 31,

(in thousands, except per share data)

6 unchanged sentences

Number of shares used in basic computation

Weighted-average shares effect of dilutive sec u

Weighted-average shares effect of dilutive securities:

Director and employee stock options

1 unchanged sentence

Diluted earnings per share

We did not include outstanding options to purchase the following number of shares of Class A common stock in our computation of diluted earnings (loss) 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,

We did not include outstanding options to purchase the following number of shares of Class A common stock in our computation of diluted

earnings 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 March 31,

Number of options to purchase Class A shares excluded

We did not include any effect of dilutive securities in the computation of diluted earnings (loss) per share for the three months ended September 30, 2021 because we sustained a net loss for this period.

Atlantic States and Donegal Mutual have participated in a pooling agreement since 1986 under which they pool their direct premiums written, 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.

Atlantic States and Donegal Mutual have participated in a pooling agreement since 1986 under which they pool their direct premiums written,

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

Donegal Mutual began placing the business of the Mountain States Insurance Group into the pool beginning with policies effective in 2021.

Our insurance subsidiaries and Donegal Mutual have a combined third-party reinsurance program.

The coverage and parameters of the program are common to all of our insurance subsidiaries and Donegal Mutual.

Our insurance subsidiaries and Donegal Mutual use several different reinsurers.

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.

The following information describes the external reinsurance our insurance subsidiaries have in place for 2021:

excess of loss reinsurance, under which the losses of Donegal Mutual and our insurance subsidiaries are automatically reinsured, through a series of contracts, over a set retention of $ 2.0 million;

catastrophe reinsurance, under which Donegal Mutual and our insurance subsidiaries recover, through a series of reinsurance agreements, 100 % of an accumulation of many losses resulting from a single event, including natural disasters, over a set retention of $ 15.0 million up to aggregate losses of $ 185.0 million per occurrence.

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 $ 2.0 million up to aggregate losses of $ 13.0 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 $ 5.0 million.

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.

The amortized cost and estimated fair values of our fixed maturities at September 30, 2021 were as follows:

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.

The following information describes the external reinsurance Donegal Mutual and our

insurance subsidiaries have in place for 2022:

excess of loss reinsurance, under which Donegal Mutual and our insurance subsidiaries recover losses over a set retention of $ 2.0 million;

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 $ 15.0

million up to aggregate losses of $ 185.0 million per occurrence.

insurance, our insurance subsidiaries have excess of loss reinsurance that provide for coverage of $ 38.0 million per loss over a set

retention of $ 2.0 million.

For liability insurance, our insurance subsidiaries have excess of loss reinsurance that provide for

coverage of $ 73.0 million per occurrence over a set retention of $ 2.0 million.

For workers’ compensation insurance, our insurance subsidiaries have excess of loss reinsurance that provide for coverage of $ 18.0 million on any one life over a set retention of $ 2.0

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 $ 2.0 million up to aggregate losses of $ 13.0 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 $ 5.0 million.

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.

order to write automobile insurance in the state of Michigan, MICO is required to be a member of the Michigan Catastrophic Claims Association (“MCCA”).

The MCCA provides reinsurance to MICO for personal automobile and commercial automobile

personal injury claims in the state of Michigan over a set retention.

In November 2021, the MCCA approved the return of approximately $ 3.0

billion of its estimated surplus to its member insurance companies and provided guidance to those companies with respect to the payment of refunds to Michigan policyholders in the first half of 2022.

We recorded a receivable from the MCCA and

a corresponding payable for cash refunds due to Michigan policyholders in the amount of $ 18.1 million on our balance sheet as of

December 31, 2021.

In March 2022, we received such payment from the MCCA and subsequently paid the refunds due to our Michigan policyholders.

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

Amortized Cost

20 unchanged sentences

Mortgage-backed securities

At September 30, 2021, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $ 275.4 million and an amortized cost of $ 264.2 million.

Our holdings at September 30, 2021 also included special revenue bonds with an aggregate fair value of $ 154.9 million and an amortized cost of $ 148.5 million.

With respect to both categories of those bonds at September 30, 2021, 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 35 %, respectively, of our total investments in special revenue bonds based on the carrying values of these investments at September 30, 2021.

Many of the issuers of the special revenue bonds we held at September 30, 2021 have the authority to impose ad valorem taxes.

In that respect, many of the special revenue bonds we held at September 30, 2021 are similar to general obligation bonds.

At March 31, 2022, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair

value of $ 283.6 million and an amortized cost of $ 296.1 million.

Our holdings at March 31, 2022 also included special revenue bonds with an aggregate fair value of $ 152.9

million and an amortized cost of $ 157.5 million.

With respect to both categories of those bonds at March 31, 2022, 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 48 % and 35 %,

respectively, of our total investments in special revenue bonds based on the carrying values of these investments at March 31, 2022.

Many of the issuers of the special revenue bonds we held at March 31, 2022 have the authority to impose ad

valorem taxes.

In that respect, many of the special revenue bonds we held at March 31, 2022 are similar to general obligation bonds.

The amortized cost and estimated fair values of our fixed maturities at December 31, 2021 were as follows:

5 unchanged sentences

Held to Maturity

Treasury securities and obligations of U.S.

government corporations and agencies

Obligations of states and political subdivisions

7 unchanged sentences

Available for Sale

Treasury securities and obligations of U.S.

government corporations and agencies

Obligations of states and political subdivisions

1 unchanged sentence

Mortgage-backed securities

At December 31, 2020, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $ 263.6 million and an amortized cost of $ 247.5 million.

At December 31, 2021, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate

fair value of $ 284.9 million and an amortized cost of $ 272.7 million.

Our holdings also included special revenue bonds with an aggregate fair value of $ 160.8 million and an amortized cost of $ 154.2 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, 2020.

respect to both categories of bonds, we held no securities of any issuer that comprised more than 10 % of that category at December

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, 2021.

Many of the issuers of the special revenue bonds we held at December 31, 2020 have the authority to impose ad valorem taxes.

Many of the issuers of the special revenue bonds

we held at December 31, 2021 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 made reclassifications from available for sale to held to maturity of certain fixed maturities at fair value on November 30, 2013.

We segregated within accumulated other comprehensive income the net unrealized losses of $ 15.1 million arising prior to the November 30, 2013 reclassifications.

We are amortizing this balance over the remaining life of the related securities as an adjustment to yield in a manner consistent with the accretion of discount on the same fixed maturities.

We recorded amortization of $ 738,815

and $ 1.1 million in other comprehensive income (loss)

during the nine months ended September 30, 2021 and 2020, respectively.

At September 30, 2021 and December 31, 2020, net unrealized losses of $ 5.3

million and $ 6.1 million, respectively, remained within accumulated other comprehensive income.

We show below the amortized cost and estimated fair value of our fixed maturities at September 30, 2021 by contractual maturity.

Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or pre p

ay obligations with or without call or prepayment penalties .

We have segregated within accumulated other comprehensive (loss) income 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 $ 149,475 and $ 371,265 in other

comprehensive loss during the three months ended March 31, 2022 and 2021, respectively.

At March 31, 2022 and December 31, 2021, net unrealized losses of $ 5.0 million and $ 5.2 million, respectively, remained within accumulated other comprehensive

(loss) income.

We show below the amortized cost and estimated fair value of our fixed maturities at March 31, 2022 by contractual maturity.

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

15 unchanged sentences

Total available for sale

The cost and estimated fair values of our equity securities at September 30, 2021 were as follows:

The cost and estimated fair values of our equity securities at March 31, 2022 were as follows:

Estimated Fair

5 unchanged sentences

Equity securities

Gross investment gains and losses before applicable income taxes for the three months and nine months ended September 30, 2021 and 2020 were as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

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 March 31,

(in thousands)

Gross investment gains:

Gross realized gains:

Fixed maturities

Equity securities

Gross investment losses:

Gross realized losses:

Fixed maturities

Equity securities

Net realized gains

Gross unrealized gains on equity securities

Gross unrealized losses on equity securities

Net investment (losses) gains

We recognized $ 4.7

million of gains and $ 248,146

of losses on equity securities we held at September 30, 2021 in net investment gains for the nine months ended September 30, 2021.

We recognized $ 5.6 million of gains and $ 3.6 million of losses on equity securities we held at September 30, 2020 in net investment losses for the nine months ended September 30, 2020.

We held fixed maturities with unrealized losses representing declines that we considered temporary at September 30, 2021 as follows:

We held fixed maturities with unrealized losses representing declines that we considered temporary at March 31, 2022 as follows:

Less Than 12 Months

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We make estimates concerning the valuation of our investments and the recognition of other-than-temporary 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 a debt security that is in an unrealized loss position, we first assess if we intend to sell the debt security.

securities, we measure investments at fair value, and we recognize changes in fair value in our results of operations.

With respect to a debt security that is in an unrealized loss position, we first assess if we intend to sell the debt

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 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.

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 consider the impairment to be other than temporary.

We then recognize the amount of the impairment loss related to the credit loss in our results of operations, and we recognize the remaining portion of the impairme n

t loss in our other comprehensive income, net of applicable taxes.

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.

debt securities that were in an unrealized loss position at September 30, 2021.

Based upon our analysis of general market cond i

tions 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.

determine that a credit loss has occurred, we consider the impairment to be other than temporary.

We then recognize the amount of the impairment loss related to the credit loss in our results of operations, and we recognize the remaining

portion of the impairment loss in our other comprehensive income, net of applicable taxes.

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.

We held 593 debt securities that were in an unrealized loss position at March 31, 2022.

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

We compute realized investment gains and losses using the specific identification method.

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Segment Information

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

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.

Financial data by segment for the three and nine months ended September 30, 2021 and 2020 is as follows:

Three Months Ended September 30,

(in thousands)

Premiums earned:

Commercial lines

Personal lines

GAAP premiums earned

Net investment income

Investment (losses)

Total revenues

(Loss) income

before income tax (benefit)

Underwriting (loss)

Commercial lines

Personal lines

SAP underwriting (loss)

GAAP adjustments

GAAP underwriting (loss)

Net investment income

Investment (losses)

(Loss) income

before income tax (benefit)

Nine Months Ended September 30,

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.

Financial data by segment for the three months ended March 31, 2022 and 2021 is as follows:

Three Months Ended March 31,

(in thousands)

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Net investment income

Investment gains (losses)

Investment (losses) gains

Total revenues

Income before income tax expense:

Underwriting (loss) income:

Underwriting income (loss):

Commercial lines

Personal lines

SAP underwriting (loss) income

SAP underwriting income (loss)

GAAP adjustments

GAAP underwriting (loss)

GAAP underwriting income

Net investment income

Investment gains (losses)

Investment (losses) gains

Income before income tax expense

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The line of credit has no expiration date, no annual fees and no covenants.

At September 30, 2021, we had no outstanding borrowings from M&T and had the ability to borrow up to $ 20.0 million at interest rates equal to the then-current LIBOR rate plus 2.00 % .

At March 31, 2022, we had

no outstanding borrowings from M&T and had the ability to borrow up to $ 20.0 million at interest rates equal to the then-current LIBOR rate plus 2.00 %.

Atlantic States is a member of the FHLB of Pittsburgh.

Through its membership, Atlantic States h a

s 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, 2021.

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

March 31, 2022.

The cash advance carries a fixed interest rate of 1.74 % and is due in August 2024 .

In March 2020, Atlantic States issued $ 50.0 million of debt to the FHLB of Pittsburgh in exchange for a cash advance in the same amount that carried a fixed interest rate of 0.83 %.

Atlantic States obtained this contingent liquidity funding in light of uncertainty surrounding the economic impact of the COVID-19

In March 2020, Atlantic States issued $ 50.0

million of debt to the FHLB of Pittsburgh in exchange for a cash advance in the same amount that carried a fixed interest rate of 0.83 %.

Atlantic States obtained this contingent liquidity funding in light of uncertainty surrounding the economic impact of the COVID-19 pandemic.

Atlantic States repaid this advance when it became due in March 2021 .

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, 2021.

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 March 31, 2022.

FHLB of Pittsburgh stock purchased and owned

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Borrowing capacity currently available

ubordinated Debentures

In September 2021, upon receipt of approval from the Michigan Department of Insurance and Financial Services, MIC

O repaid in full the $ 5.0 million surplus note held previously by Donegal Mutual, along with accrued interest of $ 178,082 .

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.

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 $

181,595 and $ 219,051 for the three months ended September 30, 2021 and 2020, respectively, with a corresponding income tax benefit of $ 38,135 and $ 46,001 , respectively.

We recorded compensation expense related to our stock compensation plans of $ 778,763 and $ 863,592 for the nine months ended September 30, 2021 and 2020, respectively, with a corresponding income tax benefit of $ 163,540 and $ 181,354 , respectively.

At September 30, 2021, we had $ 852,888 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 1.4 years.

We received cash from option exercises under all stock compensation plans during the three months ended September 30, 2021 and 2020 of $ 764,956

and $ 8.1 million, respectively.

We received cash from option exercises under all stock compensation plans during the nine months ended September 30, 2021 and 2020 of $ 12.2

million and $ 11.2 million, respectively.

We realized actual tax benefits for the tax deductions related to those option exercises of $ 16,655

and $ 163,245 for the three months ended September 30, 2021 and 2020, respectively.

We realized actual tax benefits for the tax deductions related to those option exercises of $ 437,790

and $ 232,123 for the nine months ended September 30, 2021 and 2020, respectively.

We recorded compensation expense related to our stock compensation plans of $ 244,140 and $ 292,795 for the three months ended March 31,

2022 and 2021, respectively, with a corresponding income tax benefit of $ 51,269 and $ 61,487 , respectively.

At March 31, 2022, we had $ 1.2 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 1.8 years.

We received cash from option exercises under all stock compensation plans during the three months ended March 31, 2022 and 2021 of $ 12,321 and $ 4.4 million,

respectively.

We realized actual tax benefits for the tax deductions related to those option exercises of $ 153 and $ 149,156 for the three months ended March 31, 2022 and 2021, respectively.

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:

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;

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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.

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 as Level 2.

Our fixed maturity investments consist of U.S.

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 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 regularly monitor the market, 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, interest 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, 2021, 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, 2021, we did not identify any material discrepancies, and we did not make any adjustments to the estimates the pricing services provided.

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.

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 March 31, 2022, 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 March 31, 2022, we did not identify any material discrepancies, and we did not make any adjustments

to the estimates the pricing services provided.

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 and reinsurance receivables and payables for premiums and paid losses and loss expenses approximate their fair values.

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 subordinated debentures and borrowings under lines of credit approximate their fair values.

We classify these items as Level 3.

We classify these items

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

ed maturity and equity securities at September

The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at

March 31, 2022:

Fair Value Measurements Using

13 unchanged sentences

Total investments in the fair value hierarchy

The following table presents our fair value measurements for our investments in a v

ailable-for-sale

fixed maturity and equity securities at December 31, 2020:

The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at

December 31, 2021:

Fair Value Measurements Using

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Equity securities

At September 30, 2021 and December 31, 2020, respectively, we had no material unrecognized tax benefits or accrued interest and penalties.

Tax years 2016 through 2020 remained open for examination at September 30, 2021.

At March 31, 2022 and December 31, 2021, respectively, we had no material unrecognized tax benefits or accrued interest and penalties.

years 2016 through 2021

remained open for examination at March 31, 2022.

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 $ 7.9

million for our net state operating loss carryforward.

We have determined that we are not required to establish a valuation allowance for our other deferred tax assets of $ 28.1

million and $ 26.7 million at September 30, 2021 and December 31, 2020, 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.

On March 27, 2020, the Coronavirus Aid, Relief and Security Act (the “CARES Act”) was signed into law.

The CARES Act amended net operating loss provisions in effect prior to its enactment.

The CARES Act allows for the carryback of losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021 to each of the five taxable years preceding the taxable year of such loss.

As a result, we filed amended tax returns in 2020 to carry back net operating losses from taxable year 2018 to past tax years.

We recorded a tax benefit of $ 1.6 million in the first quarter of 2020 in anticipation of a refund of taxes we paid in prior years as a result of the carryback.

We established a valuation allowance of $ 7.9 million for our net state operating loss carryforward.

We have determined that we are not required to establish a valuation allowance for our

other deferred tax assets of $ 32.5 million and $ 28.1 million at March 31, 2022 and December 31, 2021, 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.

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.

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.

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.

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.

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:

Three Months Ended March 31,

(in thousands)

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Balance at end of period

Our insurance subsidiaries

recognized a decrease in their liabilities for losses and loss expenses of prior years of $ 25.9

and $ 10.3 million for the nine months ended September 30, 2021 and 2020, respectively.

Our insurance sub s

idiaries 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.

Our insurance subsidiaries recognized a decrease in their liabilities for losses and loss expenses of prior years of $ 16.5 million and $ 8.2 million for

the three months ended March 31, 2022 and 2021, 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 2022 development represented 2.6 %

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 2021 development related to decreases in the liabilities for losses and loss expenses of prior years for Atlantic States and MICO.

The 2020 development represented 2.0 % of the December 31, 2019 net carried reserves and resulted primarily from lower-than-expected severity in nearly all lines of business, with the exception of modest higher-than-expected severity in commercial automobile.

The majority of the 2020 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.

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.

The 2021 development represented 1.5 % of the December 31,

2020 net carried reserves and resulted primarily from lower-than-expected loss emergence or severity in nearly all lines of business.

The majority of the 2021 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 nine months ended September 30, 2021.

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 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 e x

These methods include paid loss development, incurred loss development and the Bornhuetter-Ferguson method.

The actuaries base their selection of a point estimate on a judgmental weighting of the estimates each of these methods produce.

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 three months ended March 31, 2022.

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.

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.

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.

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.

Our insurance

subsidiaries accumulate the claim counts and report them by line of business.

Impact of New Accounting Standards

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.

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 the impact of the adoption of this guidance on our financial position, results of operations and cash flows.

In December 2019, the FASB issued guidance that simplifies accounting for income taxes.

The guidance eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

The guidance was effective January 1, 2021, using the retrospective method or modified retrospective method for certain changes and the prospective method for all other changes, and permits early adoption.

Our adoption of this guidance on January 1, 2021 did not have a significant impact on our financial position, results of operations or cash flows.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements