What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-05-05 · 170 added, 93 removed, 198 unchanged (57% of the section changed)

38 unchanged sentences

COVID-19 pandemic and related government mandates and restrictions resulted in various changes from historical claims reporting and settlement trends during 2020 and resulted in significant increases in loss costs in 2021 and 2022 due to a number

of factors, including supply chain disruption, higher used automobile values, increases in the cost of replacement automobile parts and rising labor rates.

These trend changes give rise to greater uncertainty as to the pattern of future loss

Related uncertainties regarding future trends include social inflation, availability and cost of building materials, availability of skilled labor, the rate of plaintiff attorney involvement in claims and the cost of medical

technologies and procedures.

Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure, consistency in judicial

interpretations of insurance coverage and policy provisions and the rate of loss cost inflation.

Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case

reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business and consistency in reinsurance coverage

and collectability of reinsured losses, among other items.

To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in their reserves that they

consider appropriate for such changes.

Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at March 31, 2022.

For every 1% change in our insurance subsidiaries’

loss and loss expense reserves, net of reinsurance recoverable, the effect on our pre-tax results of operations would be approximately $6.3 million.

of factors, including supply chain disruption, higher used automobile values, lengthening of repair completion times, increases in the cost of replacement automobile parts and rising labor rates.

These trend changes give rise to greater uncertainty

as to the pattern of future loss settlements.

and the cost of medical technologies and procedures.

Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure,

consistency in judicial interpretations of insurance coverage and policy provisions and the rate of loss cost inflation.

Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of

claims, payment and case reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business and consistency

in reinsurance coverage and collectability of reinsured losses, among other items.

To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in

their reserves that they consider appropriate for such changes.

Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at June 30, 2022.

For every 1% change in our

insurance subsidiaries’ loss and loss expense reserves, net of reinsurance recoverable, the effect on our pre-tax results of operations would be approximately $6.4 million.

The establishment of appropriate liabilities is an inherently uncertain process and we can provide no assurance that our insurance subsidiaries’ ultimate liability will not exceed our insurance subsidiaries’ loss

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pooling agreement, the intent of the underwriting pool is to produce a more uniform and stable underwriting result from year to year for each company than either would experience individually and to spread the risk of loss between the companies.

Our insurance subsidiaries’ liabilities for losses and loss expenses by major line of business at March 31, 2022 and December 31, 2021 consisted of the following:

Our insurance subsidiaries’ liabilities for losses and loss expenses by major line of business at June 30, 2022 and December 31, 2021 consisted of the following:

(in thousands)

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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:

Percentage Change in Loss

and Loss Expense Reserves

Percentage Change in Loss and Loss Expense Reserves

Net of Reinsurance

Adjusted Loss and Loss Expense Reserves Net of Reinsurance at

March 31, 2022

Percentage Change in Stockholders’ Equity at March 31, 2022(1)

Adjusted Loss and Loss Expense Reserves Net of Reinsurance at December 31, 2021

Percentage Change in Stockholders’ Equity at December 31, 2021(1)

Adjusted Loss and Loss

Expense Reserves Net of

Reinsurance at

June 30, 2022

Percentage Change

in Stockholders’ Equity at

June 30, 2022(1)

Adjusted Loss and Loss

Expense Reserves Net of

Reinsurance at

December 31, 2021

Percentage Change

in Stockholders’ Equity at

December 31, 2021(1)

(dollars in thousands)

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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 months ended March 31, 2022 and 2021:

Three Months Ended March 31,

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, 2022 and 2021:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Net premiums earned

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Combined Ratios

The following table presents comparative details with respect to our GAAP and statutory combined ratios for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

The following table presents comparative details with respect to our GAAP and statutory combined ratios for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30,

Six Months Ended June 30,

GAAP Combined Ratios (Total Lines)

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Total commercial and personal lines

Results of Operations - Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Results of Operations - Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Net Premiums Earned.

Our insurance

subsidiaries’ net premiums earned for the first three months of 2022 were $199.2 million, an increase of $11.9 million, or 6.4 %, compared to $187.3 million for the first three months of 2021, primarily reflecting the inclusion of the business of

the Mountain States Insurance Group in the underwriting pool beginning with policies effective in 2021, as well as solid premium retention and renewal premium increases.

Our insurance subsidiaries’ net premiums earned for the second quarter of 2022 were $204.1 million, an increase of $11.6 million, or 6.0%, compared to

$192.5 million for the second quarter of 2021, primarily reflecting the inclusion of the business of the Mountain States Insurance Group in the underwriting pool beginning with policies effective in 2021, as well as solid premium retention and

renewal premium increases.

Net Premiums Written.

insurance subsidiaries’ net premiums written for the three months ended March 31, 2022 were $218.4 million, an increase of $2.5 million, or 1.2%, from the $215.9 million of net premiums written for the first three months of 2021.

Commercial lines

net premiums written increased $2.4 million, or 1.7%, for the first three months of 2022 compared to the first three months of 2021.

We attribute the increase in commercial lines net premiums written primarily to modest new business growth, solid

premium retention and renewal premium increases.

Personal lines net premiums written increased slightly for the first three months of 2022 compared to the first three months of 2021.

Our insurance subsidiaries’ net premiums written for the second quarter of 2022 were $218.4 million, an increase of $8.8 million, or 4.2%, from the

$209.6 million of net premiums written for the second quarter of 2021.

Commercial lines net premiums written increased $5.5 million, or 4.3%, for the second quarter of 2022 compared to the second quarter of 2021.

Personal lines net premiums written

increased $3.3 million, or 4.1%, for the second quarter of 2022 compared to the second quarter of 2021.

We attribute the increase in commercial lines and personal lines net premiums written primarily to modest new business growth, solid premium

retention and renewal premium increases.

Investment Income.

investment income was $7.9 million for the first three months of 2022, compared to $7.5 million for the first three months of 2021.

We attribute the increase primarily to an increase in average invested assets.

Our net investment income was $8.2 million for the second quarter of 2022, compared to $7.7 million for the second quarter of 2021.

We attribute the

increase primarily to an increase in average invested assets.

Net Investment (Losses) Gains.

investment losses for the first three months of 2022 were $76,247, compared to net investment gains of $2.5 million for the first three months of 2021.

The net investment losses and gains for the first three months of 2022 and 2021, respectively,

resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at March 31, 2022 and 2021, respectively.

We did not recognize any impairment losses in our investment portfolio during the first three

months of 2022 or 2021.

Net investment losses for the second quarter of 2022 were $8.4 million, compared to net investment gains of $4.2 million for the second quarter

The net investment losses and gains for the second quarter of 2022 and 2021, respectively, resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at June 30, 2022 and 2021,

respectively.

We did not recognize any impairment losses in our investment portfolio during the second quarter of 2022 or 2021.

Losses and Loss Expenses.

insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 59.2% for the first three months of 2022, a decrease from our insurance subsidiaries’ loss ratio of 63.7% for the first three

months of 2021.

We attribute this decrease primarily to favorable prior year loss development and lower fire losses.

Weather-related losses of $8.0 million, or 4.0 percentage points of the loss ratio, for the first three months of 2022, increased

from $6.8 million, or 3.7 percentage points of the loss ratio, for the first three months of 2021.

Weather-related loss activity for the first three months of 2022 was lower than our previous five-year average of $10.3 million for first quarter

weather-related losses.

On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 57.2% for the first quarter of 2022, compared to 66.3% for the first three months of 2021, primarily due to decreases in the commercial

automobile, commercial multi-peril and workers’ compensation loss ratios.

The personal lines statutory loss ratio of our insurance subsidiaries increased to 63.0% for the first three months of 2022, compared to 61.0% for the first three months of

We attribute this increase primarily to an increase in large homeowner fire losses, which we define as individual fire losses in excess of $50,000.

During the first quarter of 2022, our insurance subsidiaries experienced $6.2 million of

large homeowner fire losses, compared to $2.9 million for the first quarter of 2021.

Our insurance subsidiaries experienced favorable loss reserve development for the first quarter of 2022 of approximately $16.5 million,

or 8.3 percentage points of the loss ratio, compared to $8.2 million that decreased the loss ratio for the first quarter of 2021 by 4.4 percentage points.

Our insurance subsidiaries experienced favorable

development in all lines of business in the first quarter of 2022, with the majority of the impact relating to reserves for accident years 2021 and 2020 in the commercial automobile, personal automobile, commercial multi-peril and workers’

compensation lines of business.

Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 69.4% for the second quarter

of 2022, an increase from our insurance subsidiaries’ loss ratio of 59.2% for the second quarter of 2021.

We attribute this increase primarily to higher weather-related losses and reduced favorable prior year loss reserve development.

Weather-related losses of $19.6 million, or 9.6 percentage points of the loss ratio, for the second quarter of 2022, increased from $11.7 million, or 6.1 percentage points of the loss ratio, for the second

quarter of 2021.

Weather-related loss activity for the second quarter of 2022 was higher than our previous five-year average of $17.1 million for second quarter weather-related losses.

On a statutory basis, our insurance subsidiaries’ commercial

lines loss ratio was 66.2% for the second quarter of 2022, compared to 56.4% for the second quarter of 2021, primarily due to an increase in the commercial multi-peril loss ratio.

The personal lines statutory loss ratio of our insurance

subsidiaries increased to 75.2% for the second quarter of 2022, compared to 63.9% for the second quarter of 2021.

We attribute this increase primarily to an increase in homeowner weather-related losses.

Our insurance subsidiaries experienced

favorable loss reserve development for the second quarter of 2022 of approximately $7.9 million, or 3.9 percentage points of the loss ratio, compared to $13.4 million

that decreased the loss ratio for the second quarter of 2021 by 6.9 percentage points.

Our insurance subsidiaries experienced favorable development primarily relating to reserves for accident years 2021 and 2020 in the commercial automobile,

personal automobile and workers’ compensation lines of business.

Underwriting Expenses.

ratio for an insurance company is the ratio of policy acquisition costs and other underwriting expenses to premiums earned.

The expense ratio of our insurance subsidiaries was 35.8% for the first three months of 2022, compared to 34.1% for the

first three months of 2021.

The increase in the expense ratio primarily reflected an increase in our underwriting-based incentive costs for our agents and employees and higher technology system-related expenses due to an increased allocation of

costs from Donegal Mutual to our insurance subsidiaries related to our ongoing systems modernization project.

The expense ratio for an insurance company is the ratio of policy acquisition costs and other underwriting expenses to premiums earned.

ratio of our insurance subsidiaries was 35.0% for the second quarter of 2022, compared to 36.0% for the second quarter of 2021.

The decrease in the expense ratio primarily reflected a decrease in our underwriting-based incentive costs for our

agents and employees, offset partially by higher technology system-related expenses due to an increased allocation of costs from Donegal Mutual to our insurance subsidiaries related to our ongoing systems modernization project.

Combined Ratio.

ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of policyholder dividends incurred to premiums earned.

Our insurance subsidiaries’ combined ratios were 95.8% and 98.5% for the three months

ended March 31, 2022 and 2021, respectively.

We attribute the decrease in the combined ratio primarily to a decrease in the loss ratio for the first three months of 2022 compared to the first three months of 2021.

The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of policyholder dividends incurred to

premiums earned.

Our insurance subsidiaries’ combined ratios were 105.0% and 96.1% for the three months ended June 30, 2022 and 2021, respectively.

We attribute the increase in the combined ratio primarily to an increase in the loss ratio for the

second quarter of 2022 compared to the second quarter of 2021.

Income Tax (Benefit) Expense.

We recorded an income tax benefit of $2.4 million for the second quarter of 2022.

We recorded income tax

expense of $3.5 million for the second quarter of 2021, representing an effective tax rate of 17.9%.

The income tax expense for the second quarter of 2022 and 2021 represented estimates based on our projected annual taxable income and effective tax

Net (Loss) Income and (Loss) Income Per Share.

Our net loss for the second quarter of 2022 was $8.2 million, or $.26 per share of Class A common stock and $.24 per share of

Class B common stock, compared to net income of $16.2 million, or $.53 per share of Class A common stock on a diluted basis and $.48 per share of Class B common stock, for the second quarter of 2021.

We had 26.6 million and 25.6 million Class A

shares outstanding at June 30, 2022 and 2021, respectively.

We had 5.6 million Class B shares outstanding at the end of both periods.

Results of Operations - Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Net Premiums Earned.

Our insurance subsidiaries’ net premiums earned for the first half of 2022 were $403.4 million, an increase of $23.7 million, or 6.2%, compared to $379.7

million for the first half of 2021, primarily reflecting the inclusion of the business of the Mountain States Insurance Group in the underwriting pool beginning with policies effective in 2021, as well as solid premium retention and renewal premium

Net Premiums Written.

Our insurance subsidiaries’ net premiums written for the six months ended June 30, 2022 were $436.9 million, an increase of $11.4 million, or 2.7%, from

the $425.5 million of net premiums written for the first half of 2021.

Commercial lines net premiums written increased $7.9 million, or 2.9%, for the first half of 2022 compared to the first half of 2021.

Personal lines net premiums written

increased $3.5 million, or 2.3%, for the first half of 2022 compared to the first half of 2021.

We attribute the increase in commercial lines and personal lines net premiums written primarily to modest new business growth, solid premium retention

and renewal premium increases.

Investment Income.

Our net investment income was $16.1 million for the first half of 2022, compared to $15.2 million for the first half of 2021.

We attribute the increase

primarily to an increase in average invested assets.

Net Investment (Losses) Gains.

Net investment losses for the first half of 2022 were $8.5 million, compared to net investment gains of $6.7 million for the first half of

The net investment losses and gains for the first half of 2022 and 2021, respectively, resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at June 30, 2022 and 2021, respectively.

did not recognize any impairment losses in our investment portfolio during the first half of 2022 or 2021.

Losses and Loss Expenses.

Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 64.3% for the first half of

2022, an increase from our insurance subsidiaries’ loss ratio of 61.4% for the first half of 2021.

We attribute this increase primarily to higher weather-related and fire losses.

Weather-related losses of $27.5 million, or 6.8 percentage points of

the loss ratio, for the first half of 2022, increased from $18.6 million, or 4.9 percentage points of the loss ratio, for the first half of 2021.

Weather-related loss activity for the first half of 2022 was in line with our previous five-year

average of $27.4 million for first half weather-related losses.

On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 61.6% for the first half of 2022, compared to 61.2% for the first half of 2021, primarily due to an

increase in the commercial multi-peril loss ratio.

The personal lines statutory loss ratio of our insurance subsidiaries increased to 69.2% for the first half of 2022, compared to 62.4% for the first half of 2021.

We attribute this increase

primarily to an increase in homeowner weather-related losses.

Our insurance subsidiaries experienced favorable loss reserve development for the first half of 2022 of approximately $24.4 million, or 6.1 percentage

points of the loss ratio, compared to $21.6 million that decreased the loss ratio for the first half of 2021 by 5.7 percentage points.

Our insurance subsidiaries experienced favorable development in all major lines of business in the first half of

2022, with the majority of the impact relating to reserves for accident years 2021 and 2020 in the commercial automobile, personal automobile, commercial multi-peril and workers’ compensation lines of business.

Underwriting Expenses.

The expense ratio for an insurance company is the ratio of policy acquisition costs and other underwriting expenses to premiums earned.

ratio of our insurance subsidiaries was 35.4% for the first half of 2022, compared to 35.1% for the first half of 2021.

The increase in the expense ratio primarily reflected higher technology system-related expenses due to an increased allocation

of costs from Donegal Mutual to our insurance subsidiaries related to our ongoing systems modernization project.

Combined Ratio.

The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of policyholder dividends incurred to

premiums earned.

Our insurance subsidiaries’ combined ratios were 100.4% and 97.3% for the six months ended June 30, 2022 and 2021, respectively.

We attribute the increase in the combined ratio primarily to an increase in the loss ratio for the

first half of 2022 compared to the first half of 2021.

Interest Expense.

expense for the first three months of 2022 was $153,033, compared to $312,326 for the first three months of 2021.

We attribute the decrease to lower average borrowings under our lines of credit during the first three months of 2022 compared to

the first three months of 2021.

Our interest expense for the first half of 2022 was $392,758, compared to $529,616 for the first half of 2021.

We attribute the decrease to lower average

borrowings under our lines of credit during the first half of 2022 compared to the first half of 2021.

Income Tax Expense.

income tax expense of $3.1 million for the first three months of 2022, representing an effective tax rate of 19.0% We recorded income tax expense of $2.2 million for the first three months of 2021,

representing an effective tax rate of 17.4%.

The income tax expense for the first three months of 2022 and 2021 represented estimates based on our projected annual taxable income and effective tax rates.

We recorded income tax expense of $709,888 for the first half of 2022, representing an effective tax rate of 12.5%.

We recorded income tax expense of $5.8

million for the first half of 2021, representing an effective tax rate of 17.7%.

The income tax expense for the first half of 2022 and 2021 represented estimates based on our projected annual taxable income and effective tax rates.

Net Income and Income Per Share.

Our net income for the first three months of 2022 was $13.1 million, or $.43 per share of Class A common stock on a diluted basis and $.39 per share of Class B common stock, compared to net income of $10.5 million, or $.35 per share of Class A

common stock on a diluted basis and $.32 per share of Class B common stock, for the first three months of 2021.

We had 25.8 million and 25.0 million Class A shares outstanding at March 31, 2022 and 2021, respectively.

We had 5.6 million Class B

shares outstanding at the end of both periods.

Our net income for the first half of 2022 was $4.9 million, or $.16 per share of Class A common stock on a diluted basis and $.14 per share

of Class B common stock, compared to net income of $26.7 million, or $.88 per share of Class A common stock on a diluted basis and $.80 per share of Class B common stock, for the first half of 2021.

We had 26.6 million and 25.6 million Class A

shares outstanding at June 30, 2022 and 2021, respectively.

We had 5.6 million Class B shares outstanding at the end of both periods.

Liquidity and Capital Resources

11 unchanged sentences

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 three months of 2022 and 2021 of $20.7 million

Our operating activities provided net cash flows in the first six months of 2022 and 2021 of $35.0 million

and $59.2 million, respectively.

At March 31, 2022, we had no outstanding borrowings under our line of credit with M&T and had the ability to borrow up to $20.0 million at interest rates equal to the then-current LIBOR rate plus 2.00%.

At June 30, 2022, we had no outstanding borrowings under our line of credit with M&T and had the ability to borrow up to $20.0 million at interest rates equal to the then-current LIBOR rate plus 2.00%.

30, 2022, Atlantic States had a $35.0 million outstanding advance with the FHLB of Pittsburgh that carries a fixed interest rate of 1.74%.

11 unchanged sentences

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 three months ended March 31, 2022 or

We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through March 31, 2022.

On April 21, 2022, our board of directors declared quarterly cash dividends of 16.50 cents per share of our Class A common stock and 14.75 cents

per share of our Class B common stock, payable on May 16, 2022 to our stockholders of record as of the close of business on May 2, 2022.

We are not subject to any restrictions on our payment of dividends to our stockholders, although there are

state law restrictions on the payment of dividends by our insurance subsidiaries to us.

We did not purchase any shares of our Class A common stock under this program during the six months ended June 30, 2022 or

We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through June 30, 2022.

On July 21, 2022, our board of directors declared quarterly cash dividends of 16.5 cents per share of our Class A common stock and 14.75 cents

per share of our Class B common stock, payable on August 15, 2022 to our stockholders of record as of the close of business on August 1, 2022.

We are not subject to any restrictions on our payment of dividends to our stockholders, although there

are state law restrictions on the payment of dividends by our insurance subsidiaries to us.

Dividends from our insurance subsidiaries are our principal source of cash for payment of dividends to our stockholders.

Our insurance subsidiaries are subject

to regulations that restrict the payment of dividends from statutory surplus and may require prior approval of their domiciliary insurance regulatory authorities.

Our insurance subsidiaries are

subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval of their domiciliary insurance regulatory authorities.

Our insurance subsidiaries are also subject to risk based capital (“RBC”)

2 unchanged sentences

including the RBC requirements, by a significant margin.

Our insurance subsidiaries did not pay any dividends to us during the first three months of 2022.

Our insurance subsidiaries did not pay any dividends to us during the first six months of 2022.

Amounts remaining available for distribution to us as dividends from our insurance

1 unchanged sentence

approximately $47.3 million.

At March 31, 2022, we had no material commitments for capital expenditures.

At June 30, 2022, we had no material commitments for capital expenditures.

Equity Price Risk

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Our insurance subsidiaries maintain reinsurance agreements with Donegal Mutual and with a number of other major unaffiliated authorized reinsurers.

Quantitative and Qualitative Disclosures About Market Risk.

Our market risk generally represents the risk of gain or loss that may result from the potential change in the fair value of the securities we hold in our investment portfolio as a result of fluctuations in prices

and interest rates and, to a lesser extent, our debt obligations.

We manage our interest rate risk by maintaining an appropriate relationship between the average duration of our investment portfolio and the approximate duration of our liabilities,

i.e., policy claims of our insurance subsidiaries and our debt obligations.

There have been no material changes to our quantitative or qualitative market risk exposure from December 31, 2021 through June 30, 2022.

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 2. Management’s Discussion and Analysis