DONEGAL GROUP INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. We recommend that you read the following information in conjunction with the historical financial information and the footnotes to that financial information we include in this Quarterly Report on Form 10-Q. We also recommend you read Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021. Critical Accounting Policies and Estimates We combine our financial statements with those of our insurance subsidiaries and present our financial statements on a consolidated basis in accordance with GAAP. Our insurance subsidiaries make estimates and assumptions that can have a significant effect on amounts and disclosures we report in our financial statements. The most significant estimates relate to the liabilities of our insurance subsidiaries for property and casualty insurance losses and loss expenses. While we believe our estimates and the estimates of our insurance subsidiaries are appropriate, the ultimate amounts of these liabilities may differ from the estimates we provided. We regularly review our methods for making these estimates and we reflect any adjustment we consider necessary in our current consolidated results of operations. Liabilities for Losses and Loss Expenses Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with respect to incurred policyholder claims based on facts and circumstances the insurer knows at that point in time. For example, legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries to pay losses for damages that their policies explicitly excluded or did not intend to cover. At the time of establishing its estimates, an insurer recognizes that its ultimate liability for losses and loss expenses will exceed or be less than such estimates. Our insurance subsidiaries base their estimates of liabilities for losses and loss expenses on assumptions as to future loss trends, expected claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, our insurance subsidiaries may learn additional facts regarding individual claims, and, consequently, it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates for these liabilities. We reflect any adjustments to the liabilities for losses and loss expenses of our insurance subsidiaries in our consolidated results of operations in the period in which our insurance subsidiaries make adjustments to their estimates. Our insurance subsidiaries maintain liabilities for the payment of losses and loss expenses with respect to both reported and unreported claims. Our insurance subsidiaries establish these liabilities for the purpose of covering the ultimate costs of settling all losses, including investigation and litigation costs. Our insurance subsidiaries base the amount of their liability for reported losses primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss the policyholder incurred. Our insurance subsidiaries determine the amount of their liability for unreported claims and loss expenses on the basis of historical information by line of insurance. Our insurance subsidiaries account for inflation in the reserving function through analysis of costs and trends and reviews of historical reserving results. Our insurance subsidiaries monitor their liabilities closely and recompute them periodically using new information on reported claims and a variety of statistical techniques. Our insurance subsidiaries do not discount their liabilities for losses and loss expenses. Reserve estimates can change over time because of unexpected changes in assumptions related to our insurance subsidiaries’ external environment and, to a lesser extent, assumptions related to our insurance subsidiaries’ internal operations. For example, our insurance subsidiaries have experienced an increase in claims severity and a lengthening of the claim settlement periods on bodily injury claims during the past several years. In addition, the COVID-19 pandemic and related government mandates and restrictions resulted in various changes from historical claims reporting and settlement trends during 2020 and resulted in significant increases in loss costs in 2021 and 2022 due to a number of factors, including supply chain disruption, higher used automobile values, lengthening of repair completion times, increases in the cost of replacement automobile parts and rising labor rates. These trend changes give rise to greater uncertainty as to the pattern of future loss settlements. Related uncertainties regarding future trends include social inflation, availability and cost of building materials, availability of skilled labor, the rate of plaintiff attorney involvement in claims and the cost of medical technologies and procedures. Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at September 30, 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 $6.6 million. 21 Index The establishment of appropriate liabilities is an inherently uncertain process and we can provide no assurance that our insurance subsidiaries’ ultimate liability will not exceed our insurance subsidiaries’ loss and loss expense reserves and have an adverse effect on our results of operations and financial condition. Furthermore, we cannot predict the timing, frequency and extent of adjustments to our insurance subsidiaries’ estimated future liabilities, because the historical conditions and events that serve as a basis for our insurance subsidiaries’ estimates of ultimate claim costs may change. As is the case for substantially all property and casualty insurance companies, our insurance subsidiaries have found it necessary in the past to increase their estimated future liabilities for losses and loss expenses in certain periods and, in other periods, their estimated future liabilities for losses and loss expenses have exceeded their actual liabilities for losses and loss expenses. Changes in our insurance subsidiaries’ estimates of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received subsequent to the prior reporting period. Excluding the impact of severe weather events and the COVID-19 pandemic, our insurance subsidiaries have noted stable amounts in the number of claims incurred and the number of claims outstanding at period ends relative to their premium base in recent years across most of their lines of business. However, the amount of the average claim outstanding has increased gradually over the past several years due to various factors such as rising inflation and increased litigation trends. We have also experienced a general slowing of settlement rates in litigated claims and lengthening of repair completion times for property and automobile claims. Our insurance subsidiaries could have to make further adjustments to their estimates in the future. However, on the basis of our insurance subsidiaries’ internal procedures, which analyze, among other things, their prior assumptions, their experience with similar cases and historical trends such as reserving patterns, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes, we believe that our insurance subsidiaries have made adequate provision for their liability for losses and loss expenses. Atlantic States’ participation in the pool with Donegal Mutual exposes Atlantic States to adverse loss development on the business of Donegal Mutual that the pool includes. However, pooled business represents the predominant percentage of the net underwriting activity of both companies, and Donegal Mutual and Atlantic States share proportionately any adverse risk development relating to the pooled business. The business in the pool is homogeneous and each company has a pro-rata share of the entire pool. Since the predominant percentage of the business of Atlantic States and Donegal Mutual is pooled and the results shared by each company according to its participation level under the terms of the pooling agreement, the intent of the underwriting pool is to produce a more uniform and stable underwriting result from year to year for each company than either would experience individually and to spread the risk of loss between the companies. 22 Index Our insurance subsidiaries’ liabilities for losses and loss expenses by major line of business at September 30, 2022 and December 31, 2021 consisted of the following: September 30, 2022 December 31, 2021 (in thousands) Commercial lines: Automobile $ 177,188 $ 172,302 Workers’ compensation 123,784 122,398 Commercial multi-peril 189,906 168,445 Other 25,220 18,530 Total commercial lines 516,098 481,675 Personal lines: Automobile 109,444 109,915 Homeowners 28,743 26,169 Other 8,140 8,600 Total personal lines 146,327 144,684 Total commercial and personal lines 662,425 626,359 Plus reinsurance recoverable 445,701 451,261 Total liabilities for losses and loss expenses $ 1,108,126 $ 1,077,620 23 Index We have evaluated the effect on our insurance subsidiaries’ loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables we consider in establishing the loss and loss expense reserves of our insurance subsidiaries. We established the range of reasonably likely changes based on a review of changes in accident-year development by line of business and applied those changes to our insurance subsidiaries’ loss and loss expense reserves as a whole. The range we selected does not necessarily indicate what could be the potential best or worst case or the most likely scenario. The following table sets forth the estimated effect on our insurance subsidiaries’ loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables we considered in establishing the loss and loss expense reserves of our insurance subsidiaries: Percentage Change in Loss and Loss Expense Reserves Net of Reinsurance Adjusted Loss and Loss Expense Reserves Net of Reinsurance at September 30, 2022 Percentage Change in Stockholders’ Equity at September 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) (10.0)% $ 596,183 10.9% $ 563,723 9.3% (7.5) 612,743 8.2 579,382 7.0 (5.0) 629,304 5.4 595,041 4.7 (2.5) 645,864 2.7 610,700 2.3 Base 662,425 — 626,359 — 2.5 678,986 (2.7) 642,018 (2.3) 5.0 695,546 (5.4) 657,677 (4.7) 7.5 712,107 (8.2) 673,336 (7.0) 10.0 728,668 (10.9) 688,995 (9.3) (1) Net of income tax effect. Non-GAAP Information We prepare our consolidated financial statements on the basis of GAAP. Our insurance subsidiaries also prepare financial statements based on statutory accounting principles state insurance regulators prescribe or permit (“SAP”). SAP financial measures are considered non-GAAP financial measures under applicable SEC rules because the SAP financial measures include or exclude certain items that the most comparable GAAP financial measures do not ordinarily include or exclude. Our calculation of non-GAAP financial measures may differ from similar measures other companies use, so investors should exercise caution when comparing our non-GAAP financial measures to the non-GAAP financial measures other companies use. Because our insurance subsidiaries do not prepare GAAP financial statements, we evaluate the performance of our personal lines and commercial lines segments utilizing SAP financial measures that reflect the growth trends and underwriting results of our insurance subsidiaries. The SAP financial measures we utilize are net premiums written and statutory combined ratio. Net Premiums Written We define net premiums written as the amount of full-term premiums our insurance subsidiaries record for policies effective within a given period less premiums our insurance subsidiaries cede to reinsurers. Net premiums earned is the most comparable GAAP financial measure to net premiums written. Net premiums earned represent the sum of the amount of net premiums written and the change in net unearned premiums during a given period. Our insurance subsidiaries earn premiums and recognize them as revenue over the terms of their policies, which are one year or less in duration. Therefore, increases or decreases in net premiums earned generally reflect increases or decreases in net premiums written in the preceding 12-month period compared to the comparable period one year earlier. 24 Index The following table provides a reconciliation of our net premiums earned to our net premiums written for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) (in thousands) Net premiums earned $ 206,122 $ 196,235 $ 609,499 $ 575,975 Change in net unearned premiums 107 780 33,618 46,507 Net premiums written $ 206,229 $ 197,015 $ 643,117 $ 622,482 Statutory Combined Ratio The combined ratio is a standard measurement of underwriting profitability for an insurance company. The combined ratio does not reflect investment income, net investment gains or losses, federal income taxes or other non-operating income or expense. A combined ratio of less than 100% generally indicates underwriting profitability. The statutory combined ratio is a non-GAAP financial measure that is based upon amounts determined under SAP. We calculate our statutory combined ratio as the sum of: • the statutory loss ratio, which is the ratio of calendar-year net incurred losses and loss expenses, excluding anticipated salvage and subrogation recoveries, to net premiums earned; • the statutory expense ratio, which is the ratio of expenses incurred for net commissions, premium taxes and underwriting expenses to net premiums written; and • the statutory dividend ratio, which is the ratio of dividends to holders of workers’ compensation policies to net premiums earned. The calculation of our statutory combined ratio differs from the calculation of our GAAP combined ratio. In calculating our GAAP combined ratio, we do not deduct installment payment fees from incurred expenses, and we base the expense ratio on net premiums earned instead of net premiums written. Differences between our GAAP loss ratio and our statutory loss ratio result from anticipating salvage and subrogation recoveries for our GAAP loss ratio but not for our statutory loss ratio. 25 Index Combined Ratios The following table presents comparative details with respect to our GAAP and statutory combined ratios for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 GAAP Combined Ratios (Total Lines) Loss ratio (non-weather) 66.2 % 66.3 % 60.4 % 59.8 % Loss ratio (weather-related) 9.4 9.2 7.7 6.4 Expense ratio 33.4 31.5 34.7 33.9 Dividend ratio 0.6 0.7 0.7 0.7 Combined ratio 109.6 % 107.7 % 103.5 % 100.8 % Statutory Combined Ratios Commercial lines: Automobile 107.0 % 111.9 % 98.7 % 106.7 % Workers’ compensation 105.9 109.0 93.9 96.0 Commercial multi-peril 125.0 116.9 114.9 106.5 Other 85.9 64.0 81.9 67.2 Total commercial lines 112.1 109.4 102.4 101.1 Personal lines: Automobile 103.1 102.0 100.2 95.4 Homeowners 125.0 117.5 118.8 107.4 Other 54.6 65.4 49.9 72.2 Total personal lines 107.8 105.2 103.4 98.2 Total commercial and personal lines 110.1 107.7 102.8 100.0 26 Index Results of Operations - Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 Net Premiums Earned. Our insurance subsidiaries’ net premiums earned for the third quarter of 2022 were $206.1 million, an increase of $9.9 million, or 5.0%, compared to $196.2 million for the third 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. Our insurance subsidiaries’ net premiums written for the third quarter of 2022 were $206.2 million, an increase of $9.2 million, or 4.7%, from the $197.0 million of net premiums written for the third quarter of 2021. Commercial lines net premiums written increased $2.3 million, or 2.0%, for the third quarter of 2022 compared to the third quarter of 2021. Personal lines net premiums written increased $6.9 million, or 8.5%, for the third quarter of 2022 compared to the third quarter of 2021. We attribute the increase in commercial lines and personal lines net premiums written primarily to new business growth, solid premium retention and renewal premium increases. Investment Income. Our net investment income was $8.6 million for the third quarter of 2022, compared to $7.8 million for the third quarter of 2021. We attribute the increase primarily to an increase in average invested assets and an increase in the average investment yield relative to the third quarter of 2021. Net Investment Losses. Net investment losses for the third quarter of 2022 were $2.4 million, compared to $1.6 million for the third quarter of 2021. The net investment losses for the third quarter of 2022 and 2021, respectively, resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at September 30, 2022 and 2021, respectively. We did not recognize any impairment losses in our investment portfolio during the third quarter 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 75.6% for the third quarter of 2022, an increase from our insurance subsidiaries’ loss ratio of 75.5% for the third quarter of 2021. We attribute this increase primarily to higher weather-related and large fire losses, which we define as individual fire losses in excess of $50,000. Weather-related losses of $19.4 million, or 9.4 percentage points of the loss ratio, for the third quarter of 2022, increased from $18.0 million, or 9.2 percentage points of the loss ratio, for the third quarter of 2021. The impact of weather-related loss activity to the loss ratio for the third quarter of 2022 was in line with our previous five-year average of 9.4 percentage points for third quarter weather-related losses. Large fire losses for the third quarter of 2022 were $17.4 million, or 8.4 percentage points of the loss ratio, compared to $12.7 million, or 6.5 percentage points of the loss ratio, for the third quarter of 2021. On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 74.9% for the third quarter of 2022, compared to 76.3% for the third quarter of 2021, primarily due to decreases in the commercial automobile and workers’ compensation loss ratios. The personal lines statutory loss ratio of our insurance subsidiaries increased to 78.7% for the third quarter of 2022, compared to 75.0% for the third quarter of 2021. We attribute this increase primarily to increases in the personal automobile and homeowners’ loss ratios. Our insurance subsidiaries experienced favorable loss reserve development for the third quarter of 2022 of approximately $6.2 million, or 3.0 percentage points of the loss ratio, compared to $4.3 million that decreased the loss ratio for the third quarter of 2021 by 2.2 percentage points. Our insurance subsidiaries experienced favorable development primarily relating to reserves for accident years 2020 and 2019 in the commercial automobile, personal automobile and commercial multi-peril 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. The expense ratio of our insurance subsidiaries was 33.4% for the third quarter of 2022, compared to 31.5% for the third quarter of 2021. The increase in the expense ratio primarily reflected an increase in technology costs 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 109.6% and 107.7% for the three months ended September 30, 2022 and 2021, respectively. We attribute the increase in the combined ratio primarily to an increase in the expense ratio for the third quarter of 2022 compared to the third quarter of 2021. 27 Index Income Tax Benefit. We recorded an income tax benefit of $3.0 million and $1.9 million for the third quarter of 2022 and 2021, respectively. The income tax benefit for the third quarter of 2022 and 2021 represented estimates based on our projected annual taxable income and effective tax rates. Net Loss and Loss Per Share. Our net loss for the third quarter of 2022 was $10.4 million, or $.33 per share of Class A common stock and $.30 per share of Class B common stock, compared to $6.7 million, or $.22 per share of Class A common stock and $.20 per share of Class B common stock, for the third quarter of 2021. We had 26.8 million and 25.7 million Class A shares outstanding at September 30, 2022 and 2021, respectively. We had 5.6 million Class B shares outstanding at the end of both periods. Results of Operations - Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 Net Premiums Earned. Our insurance subsidiaries’ net premiums earned for the first nine months of 2022 were $609.5 million, an increase of $33.5 million, or 5.8%, compared to $576.0 million for the first nine 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. Net Premiums Written. Our insurance subsidiaries’ net premiums written for the nine months ended September 30, 2022 were $643.1 million, an increase of $20.6 million, or 3.3%, from the $622.5 million of net premiums written for the first nine months of 2021. Commercial lines net premiums written increased $10.2 million, or 2.6%, for the first nine months of 2022 compared to the first nine months of 2021. Personal lines net premiums written increased $10.4 million, or 4.5%, for the first nine months of 2022 compared to the first nine months of 2021. We attribute the increase in commercial lines and personal lines net premiums written primarily to new business growth, solid premium retention and renewal premium increases. Investment Income. Our net investment income was $24.6 million for the first nine months of 2022, compared to $22.9 million for the first nine months of 2021. We attribute the increase primarily to an increase in average invested asset and an increase in the average investment yield relative to the first nine months of 2021. Net Investment (Losses) Gains. Net investment losses for the first nine months of 2022 were $10.8 million, compared to net investment gains of $5.1 million for the first nine months of 2021. The net investment losses and gains for the first nine months of 2022 and 2021, respectively, resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at September 30, 2022 and 2021, respectively. We did not recognize any impairment losses in our investment portfolio during the first nine months 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 68.1% for the first nine months of 2022, an increase from our insurance subsidiaries’ loss ratio of 66.2% for the first nine months of 2021. We attribute this increase primarily to higher weather-related and large fire losses. Weather-related losses of $47.0 million, or 7.7 percentage points of the loss ratio, for the first nine months of 2022, increased from $36.6 million, or 6.4 percentage points of the loss ratio, for the first nine months of 2021. The impact of weather-related loss activity to the loss ratio for the first nine months of 2022 was lower than our previous five-year average of 8.1 percentage points. Large fire losses for the first nine months of 2022 were $40.4 million, or 6.6 percentage points of the loss ratio, compared to $34.7 million, or 6.0 percentage points of the loss ratio, for the first nine months of 2021. On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 66.1% for the first nine months of 2022, compared to 66.4% for the first nine months of 2021, primarily due to a decrease in the commercial automobile loss ratio. The personal lines statutory loss ratio of our insurance subsidiaries increased to 72.5% for the first nine months of 2022, compared to 66.5% for the first nine months of 2021. We attribute this increase primarily to increases in the personal automobile and homeowner loss ratios. Our insurance subsidiaries experienced favorable loss reserve development for the first nine months of 2022 of approximately $30.6 million, or 5.0 percentage points of the loss ratio, compared to $25.9 million that decreased the loss ratio for the first nine months of 2021 by 4.5 percentage points. Our insurance subsidiaries experienced favorable development in all major lines of business in the first nine months of 2022, with the majority of the impact relating to reserves for accident years 2021, 2020 and 2019 in the commercial automobile, personal automobile, commercial multi-peril and workers’ compensation lines of business. 28 Index Underwriting Expenses. The expense ratio for an insurance company is the ratio of policy acquisition costs and other underwriting expenses to premiums earned. The expense ratio of our insurance subsidiaries was 34.7% for the first nine months of 2022, compared to 33.9% for the first nine months of 2021. The increase in the expense ratio primarily reflected higher technology costs 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 103.5% and 100.8% for the nine months ended September 30, 2022 and 2021, respectively. We attribute the increase in the combined ratio primarily to increases in the loss and expense ratios for the first nine months of 2022 compared to the first nine months of 2021. Interest Expense. Our interest expense for the first nine months of 2022 was $464,188, compared to $739,163 for the first nine months of 2021. We attribute the decrease to lower average borrowings under our lines of credit during the first nine months of 2022 compared to the first nine months of 2021. Income Tax (Benefit) Expense. We recorded an income tax benefit of $2.3 million for the first nine months of 2022. We recorded income tax expense of $3.8 million for the first nine months of 2021, representing an effective tax rate of 16.1%. The income tax benefit and expense for the first nine months of 2022 and 2021, respectively, represented estimates based on our projected annual taxable income and effective tax rates. Net (Loss) Income and (Loss) Income Per Share. Our net loss for the first nine months of 2022 was $5.4 million, or $.17 per share of Class A common stock and $.16 per share of Class B common stock, compared to net income of $20.0 million, or $.66 per share of Class A common stock on a diluted basis and $.59 per share of Class B common stock, for the first nine months of 2021. We had 26.8 million and 25.7 million Class A shares outstanding at September 30, 2022 and 2021, respectively. We had 5.6 million Class B shares outstanding at the end of both periods. Liquidity and Capital Resources Liquidity is a measure of an entity’s ability to secure enough cash to meet its contractual obligations and operating needs as such obligations and needs arise. Our major sources of funds from operations are the net cash flows we generate from our insurance subsidiaries’ underwriting results, investment income and investment maturities. Our operations have historically generated sufficient net positive cash flow to fund our commitments and add to our investment portfolio, thereby increasing future investment returns and enhancing our liquidity. The impact of the pooling agreement between Donegal Mutual and Atlantic States has historically been cash-flow positive because of the consistent underwriting profitability of the pool. Donegal Mutual and Atlantic States settle their respective obligations to each other under the pool monthly, thereby resulting in cash flows substantially similar to the cash flows that would result from each company writing the business directly. We have not experienced any unusual variations in the timing of claim payments associated with the loss reserves of our insurance subsidiaries. We maintain significant liquidity in our investment portfolio in the form of readily marketable fixed maturities, equity securities and short-term investments. We structure our fixed-maturity investment portfolio following a “laddering” approach, so that projected cash flows from investment income and principal maturities are evenly distributed from a timing perspective, thereby providing an additional measure of liquidity to meet our obligations should an unexpected variation occur in the future. Our operating activities provided net cash flows in the first nine months of 2022 and 2021 of $49.9 million and $58.5 million, respectively. At September 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%. At September 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%. 29 Index We estimate the timing of claim payments associated with the liabilities for losses and loss expenses of our insurance subsidiaries based on historical experience and expectations of future payment patterns. We show these liabilities net of reinsurance recoverable on unpaid losses and loss expenses to reflect expected future cash flows related to such liabilities. Amounts Atlantic States assumes pursuant to the pooling agreement with Donegal Mutual represent a substantial portion of our insurance subsidiaries’ gross liabilities for losses and loss expenses, and amounts Atlantic States cedes pursuant to the pooling agreement represent a substantial portion of our insurance subsidiaries’ reinsurance recoverable on unpaid losses and loss expenses. We include cash settlement of Atlantic States’ assumed liabilities from the pool in monthly settlements of pooled activity, as we net amounts ceded to and assumed from the pool. Although Donegal Mutual and we do not anticipate any changes in the pool participation levels in the foreseeable future, any such change would be prospective in nature and therefore would not impact the timing of expected payments by Atlantic States for its percentage share of pooled losses occurring in periods prior to the effective date of such change. We discuss in Note 7 – Borrowings our estimate of the timing of the amounts payable for the borrowings under our lines of credit based on their contractual maturities. On July 18, 2013, our board of directors authorized a share repurchase program pursuant to which we have the authority to purchase up to 500,000 shares of our Class A common stock at prices prevailing from time to time in the open market subject to the provisions of applicable rules of the SEC and in privately negotiated transactions. We did not purchase any shares of our Class A common stock under this program during the nine months ended September 30, 2022 or 2021. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through September 30, 2022. On October 20, 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 November 15, 2022 to our stockholders of record as of the close of business on November 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 also subject to risk based capital (“RBC”) requirements that limit their ability to pay dividends to us. Our insurance subsidiaries’ statutory capital and surplus at December 31, 2021 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin. Our insurance subsidiaries did not pay any dividends to us during the first nine months of 2022. Amounts remaining available for distribution to us as dividends from our insurance subsidiaries without prior approval of their domiciliary insurance regulatory authorities in 2022 are $27.9 million from Atlantic States, $6.9 million from Southern, $4.8 million from Peninsula and $7.7 million from MICO, or a total of approximately $47.3 million. At September 30, 2022, we had no material commitments for capital expenditures. Equity Price Risk Our portfolio of marketable equity securities, which we carry on our consolidated balance sheets at estimated fair value, has exposure to the risk of loss resulting from an adverse change in prices. We manage this risk by having our investment personnel perform an analysis of prospective investments and regular reviews of our portfolio of equity securities. Credit Risk Our portfolio of fixed-maturity securities and, to a lesser extent, our portfolio of short-term investments is subject to credit risk, which we define as the potential loss in market value resulting from adverse changes in the borrower’s ability to repay its debt. We manage this risk by having our investment personnel perform an analysis of prospective investments and regular reviews of our portfolio of fixed-maturity securities. We also limit the percentage and amount of our total investment portfolio that we invest in the securities of any one issuer. 30 Index Our insurance subsidiaries provide property and casualty insurance coverages through independent insurance agencies. We bill the majority of this business directly to the insured, although we bill a portion of our commercial business through licensed insurance agents to whom our insurance subsidiaries extend credit in the normal course of business. Because the pooling agreement does not relieve Atlantic States of primary liability as the originating insurer, Atlantic States is subject to a concentration of credit risk arising from the business it cedes to Donegal Mutual. Our insurance subsidiaries maintain reinsurance agreements with Donegal Mutual and with a number of other major unaffiliated authorized reinsurers.