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Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2022-11-04 · 146 added, 214 removed, 156 unchanged (70% of the section changed)

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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.

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.

recommend you read Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022.

Critical Accounting Policies and Estimates

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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.

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.

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

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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.

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 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.

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.

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

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

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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.

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.

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.

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, 2023.

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 $6.7 million.

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,

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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.

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

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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 September 30, 2022 and December 31, 2021 consisted of the following:

September 30,

Our insurance subsidiaries’ liabilities for losses and loss expenses by major line of business at March 31, 2023 and December 31, 2022 consisted of the following:

(in thousands)

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Total liabilities for losses and loss expenses

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.

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:

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

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Reinsurance at

September 30, 2022

March 31, 2023

Percentage Change

in Stockholders’ Equity at

September 30, 2022(1)

March 31, 2023(1)

Adjusted Loss and Loss

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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 and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

The following table provides a reconciliation of our net premiums earned to our net premiums written for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

(in thousands)

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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.

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.

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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,

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

Three Months Ended March 31,

GAAP Combined Ratios (Total Lines)

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Total commercial and personal lines

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

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

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.

Our insurance subsidiaries’ net premiums earned for the first quarter of 2023 were $215.2 million, an increase of

$16.0 million, or 8.0%, compared to $199.2 million for the first quarter of 2022, primarily reflecting 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.

Our insurance subsidiaries’ net premiums written for the first quarter of 2023 were $237.3 million, an increase of $18.9 million, or 8.6%, from the $218.4

million of net premiums written for the first quarter of 2022.

Commercial lines net premiums written increased $6.2 million, or 4.2%, for the first quarter of 2023 compared to the first quarter of 2022.

Personal lines net premiums written increased

$12.7 million, or 17.7%, for the first quarter of 2023 compared to the first quarter of 2022.

We attribute the increase in commercial lines net premiums written primarily to solid premium retention and renewal premium increases.

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.

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.

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.

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.

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.

increase in personal lines net premiums written primarily to new business growth from the launch of new products in nine of 10 states in which we offer personal lines, 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.

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.

Our net investment income was $9.4 million for the first quarter of 2023, compared to $7.9 million for the first quarter of 2022.

We attribute the increase

primarily to an increase in the average investment yield relative to the first quarter of 2022.

Net Investment Losses.

Net investment losses for the first quarter of 2023 were $331,189, compared to $76,247 for the first quarter of 2022.

The net investment losses for the

first quarter of 2023 resulted primarily from realized losses on the sale of fixed-maturity securities, offset partially by the net change in unrealized gains and losses within our equity securities portfolio.The net investment losses for the first

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

We did not recognize any impairment losses for individual securities in our investment portfolio during

the first quarter of 2023 or 2022.

Losses and Loss Expenses.

Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 68.1% 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.

Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 64.2% for the first quarter of

2023, an increase from our insurance subsidiaries’ loss ratio of 59.2% for the first quarter of 2022.

We attribute this increase primarily to increased weather-related losses and decreased benefit of net favorable development of reserves for losses

incurred in prior accident years.

Loss ratios for both periods for the automobile and property lines of business reflected the impact of higher costs of labor, parts and materials.

Weather-related losses of $14.1 million, or 6.5 percentage points

of the loss ratio, for the first quarter of 2023, increased from $8.0 million, or 4.0 percentage points of the loss ratio, for the first quarter of 2022.

The impact of weather-related loss activity to the loss ratio for the first quarter of 2023

was higher than our previous five-year average of 4.8 percentage points for first quarter weather-related losses.

Large fire losses for the first quarter of 2023 were $10.9 million, or 5.1 percentage points of the loss ratio, compared to $9.6

million, or 4.8 percentage points of the loss ratio, for the first quarter of 2022.

On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 63.2% for the first quarter of 2023, compared to 57.2% for the first quarter of

2022, primarily due to increases in the commercial automobile and commercial multi-peril loss ratios.

The personal lines statutory loss ratio of our insurance subsidiaries increased to 66.4% for the first quarter of 2023, compared to 63.0% for the

first quarter of 2022.

We attribute this increase primarily to an increase in the personal automobile loss ratio.

Our insurance subsidiaries experienced favorable loss reserve development for the first quarter of 2023 of approximately $8.3 million,

or 3.9 percentage points of the loss ratio, compared to $16.5 million that decreased the loss ratio for the first quarter of 2022 by 8.3 percentage points.

Our insurance subsidiaries experienced favorable development primarily in the commercial

automobile, workers’ compensation and commercial multi-peril lines of business for the first quarter of 2023, with the majority of the impact relating to reserves for accident years 2021 and 2020.

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 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.

The expense ratio

of our insurance subsidiaries was 36.4% for the first quarter of 2023, compared to 35.8% for the first quarter of 2022.

The increase in the expense ratio primarily reflected higher technology systems-related expenses for the first quarter of 2023

compared to the prior-year quarter.

The increase in technology systems-related expenses was primarily due to increased costs as we continue implementations with respect to our ongoing systems modernization project, a portion of which are allocated

from Donegal Mutual to our insurance subsidiaries.

Combined Ratio.

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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.

Our insurance subsidiaries’ combined ratios were 101.2% and 95.8% for the first quarter of 2023 and 2022, respectively.

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

quarter of 2023 compared to the first quarter of 2022.

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

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.

Our interest expense was $152,957 for the first quarter of 2023, compared to $153,033 for the first quarter of 2022.

Income Tax Expense.

We recorded income tax expense of $1.1 million and $3.1 million for the first quarter of 2023 and 2022, respectively,

representing effective tax rates of 17.4% and 19.0%, respectively.

The income tax expense for the first quarter of 2023 and 2022 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 quarter of 2023 was $5.2 million, or $.16 per share of Class A common stock on a diluted basis and $.15 per share

of Class B common stock, compared to $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, for the first quarter of 2022.

We had 27.3 million and 25.8 million Class A shares

outstanding at March 31, 2023 and 2022, respectively.

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

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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 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.

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

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We maintain significant liquidity in our investment portfolio in the form of readily marketable fixed maturities, equity securities and short-term

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%.

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%.

additional measure of liquidity to meet our obligations should an unexpected variation occur in the future.

Our operating activities (used) provided net cash flows in the first quarter of 2023 and 2022 of ($680,734) and $20.7 million, respectively.

At March 31, 2023, 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%.

31, 2023, Atlantic States had a $35.0 million outstanding advance with the FHLB of Pittsburgh that carries a fixed interest rate of 1.74%.

We estimate the timing of claim payments associated with the liabilities for losses and loss expenses of our insurance subsidiaries based on historical experience and expectations of future payment patterns.

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.

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.

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.

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.

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, 2023 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, 2023.

On April 20, 2023, our board of directors declared quarterly cash dividends of $.17 per share of our Class A common stock and $.1525 per share of our Class B common stock,

payable on May 15, 2023 to our stockholders of record as of the close of business on May 1, 2023.

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.

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, 2022 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant

Our insurance subsidiaries did not pay any dividends to us during the first quarter of 2023.

Amounts remaining available for distribution to us as dividends from our insurance subsidiaries without prior approval of their domiciliary

insurance regulatory authorities in 2023 are $26.4 million from Atlantic States, $6.5 million from Southern, $6.0 million from Peninsula and $7.5 million from MICO, or a total of approximately $46.4 million.

At March 31, 2023, 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.

We manage this risk

by having our investment personnel perform an analysis of prospective investments and regular reviews of our portfolio of equity securities.

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

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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.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis