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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-05 · 201 added, 139 removed, 163 unchanged (68% 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.

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.

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, 2022.

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.

We combine our financial statements with those of our insurance subsidiaries and present our financial statements on a consolidated basis in accordance with United States generally accepted accounting principles

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.

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

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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.

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

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

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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 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.

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 June

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 $6.8 million.

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,

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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 March 31, 2023 and December 31, 2022 consisted of the following:

Our insurance subsidiaries’ liabilities for losses and loss expenses by major line of business at June 30, 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 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

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Reinsurance at

March 31, 2023

June 30, 2023

Percentage Change

in Stockholders’ Equity at

March 31, 2023(1)

June 30, 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 months ended March 31, 2023 and 2022:

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, 2023 and 2022:

Three Months Ended June 30,

Six Months Ended June 30,

(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 months ended March 31, 2023 and 2022:

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, 2023 and 2022:

Three Months Ended June 30,

Six Months Ended June 30,

GAAP Combined Ratios (Total Lines)

Loss ratio (non-weather)

Loss ratio (weather-related)

Loss ratio - core losses

Loss ratio - weather-related losses

Loss ratio - large fire losses

Loss ratio - net prior-year reserve development

Expense ratio

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Total commercial and personal lines

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

Results of Operations - Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Net Premiums Earned.

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.

Our insurance subsidiaries’ net premiums earned for the second quarter of 2023 were $216.3 million, an increase of $12.2 million, or 5.9%, compared to

$204.1 million for the second quarter of 2022, primarily reflecting solid premium retention and renewal premium increases.

Net Premiums Written.

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.

Our insurance subsidiaries’ net premiums written for the second quarter of 2023 were $226.5 million, an increase of $8.1 million, or 3.7%, from the

$218.4 million of net premiums written for the second quarter of 2022.

Commercial lines net premiums written decreased $4.3 million, or 3.2%, for the second quarter of 2023 compared to the second quarter of 2022.

Personal lines net premiums

written increased $12.4 million, or 14.8%, for the second quarter of 2023 compared to the second quarter of 2022.

We attribute the decrease in commercial lines net premiums written primarily to planned attrition in states we are exiting or have

targeted for profit improvement, lower new business writings and reinsurance reinstatement premiums on our property excess of loss reinsurance program, offset partially by strong premium retention and a continuation of renewal premium increases

in lines other than workers’ compensation.

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

Investment Income.

Our net investment income was $10.2 million for the second quarter of 2023, an increase of $2.0 million, or 23.8%, compared to $8.2 million for the

second quarter of 2022.

We attribute the increase primarily to an increase in the average investment yield relative to the second quarter of 2022.

Net Investment Gains (Losses).

Net investment gains for the second quarter of 2023 were $2.5 million, compared to net investment losses of $8.4 million for the second

quarter of 2022.

The net investment gains and losses for the second quarter of 2023 and 2022, respectively, resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at June 30, 2023 and 2022,

respectively.

We did not recognize any impairment losses for individual securities in our investment portfolio during the second 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 69.9% for the second

quarter of 2023, an increase from our insurance subsidiaries’ loss ratio of 69.4% for the second quarter of 2022.

We attribute this increase primarily to a 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 were $19.7 million, or 9.1 percentage points of the loss

ratio, for the second quarter of 2023, compared to $19.6 million, or 9.6 percentage points of the loss ratio, for the second quarter of 2022.

The impact of weather-related loss activity to the loss ratio for the second quarter of 2023 was higher

than our previous five-year average of 8.9 percentage points for second quarter weather-related losses.

Large fire losses for the second quarter of 2023 were $12.7 million, or 5.9 percentage points of the loss ratio, compared to $13.4 million, or

6.6 percentage points of the loss ratio, for the second quarter of 2022.

On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 67.9% for the second quarter of 2023, compared to 66.2% for the second quarter of 2022,

primarily due to an increase in the workers’ compensation loss ratio.

The personal lines statutory loss ratio of our insurance subsidiaries decreased to 73.4% for the second quarter of 2023, compared to 75.2% for the second quarter of 2022.

attribute this decrease primarily to a decrease in the homeowners loss ratio.

Our insurance subsidiaries experienced negligible favorable loss reserve development for the second quarter of 2023, compared to $7.9 million that decreased the loss

ratio for the second quarter of 2022 by 3.9 percentage points.

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 34.2% for the second quarter of 2023, compared to 35.0% for the second quarter of 2022.

The decrease in the expense ratio primarily reflected lower underwriting-based incentive costs for our agents and

employees for the second quarter of 2023 compared to the prior-year quarter.

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 104.7% and 105.0% for the second quarter of 2023 and 2022, respectively.

We attribute the decrease in the combined ratio primarily to a decrease in the expense ratio for the second

quarter of 2023 compared to the second quarter of 2022.

Income Tax Expense (Benefit).

We recorded income tax expense of $256,055 for the second quarter of 2023, representing an effective tax rate of 11.4%.

We recorded an income

tax benefit of $2.4 million for the second quarter of 2022.

The income tax expense (benefit) for the second quarter of 2023 and 2022 represented estimates based on our projected annual taxable income and effective tax rates.

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

Our net income for the second quarter of 2023 was $2.0 million, or $.06 per share of Class A common stock on a diluted

basis and $.05 per share of Class B common stock, compared to a net loss of $8.2 million, or $.26 per share of Class A common stock and $.24 per share of Class B common stock, for the second quarter of 2022.

We had 27.5 million and 26.6 million

Class A shares outstanding at June 30, 2023 and 2022, respectively.

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

Results of Operations - Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Net Premiums Earned.

Our insurance subsidiaries’ net premiums earned for the first half of 2023 were $431.5 million, an increase of

$28.1 million, or 7.0%, compared to $403.4 million for the first half of 2022, primarily reflecting solid premium retention and renewal premium increases.

Net Premiums Written.

Our insurance subsidiaries’ net premiums written for the first half of 2023 were $463.8 million, an increase of $26.9 million, or 6.2%, from the

$436.9 million of net premiums written for the first half of 2022.

Commercial lines net premiums written increased $1.8 million, or 0.6%, for the first half of 2023 compared to the first half 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 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.

$25.1 million, or 16.1%, for the first half of 2023 compared to the first half of 2022.

We attribute the increase in commercial lines net premiums written primarily to strong premium retention and a continuation of renewal premium increases in

lines other than workers’ compensation, offset partially by planned attrition in states we are exiting or have targeted for profit improvement, lower new business writings and reinsurance reinstatement premiums on our property excess of loss

reinsurance program.

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

Investment Income.

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.

Our net investment income was $19.6 million for the first half of 2023, an increase of $3.5 million, or 22.1%, compared to $16.1 million for the first

half of 2022.

We attribute the increase primarily to an increase in the average investment yield relative to the first half of 2022.

Net Investment Gains (Losses).

Net investment gains for the first half of 2023 were $2.2 million, compared to net investment losses of $8.5 million for the first half of

The net investment gains and losses for the first half of 2023 and 2022, respectively, resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at June 30, 2023 and 2022, respectively.

did not recognize any impairment losses for individual securities in our investment portfolio during the first half 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 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.

Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 67.1% for the first half

of 2023, an increase from our insurance subsidiaries’ loss ratio of 64.3% for the first half of 2022.

We attribute this increase primarily to increased weather-related losses and a 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.

Weather-related losses of $33.8 million, or 7.8 percentage

points of the loss ratio, for the first half of 2023, increased from $27.5 million, or 6.8 percentage points of the loss ratio, for the first half of 2022.

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

was higher than our previous five-year average of 6.8 percentage points for first half weather-related losses.

Large fire losses for the first half of 2023 were $23.6 million, or 5.5 percentage points of the loss ratio, compared to $23.0 million,

or 5.7 percentage points of the loss ratio, for the first half of 2022.

On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 65.5% for the first half of 2023, compared to 61.6% for the first half of 2022, primarily

due to increases in the commercial automobile, workers’ compensation and commercial multi-peril loss ratios.

The personal lines statutory loss ratio of our insurance subsidiaries increased to 70.0% for the first half of 2023, compared to 69.2%

for the first half 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.

Our insurance subsidiaries experienced favorable loss reserve development for the first half of 2023 of approximately $8.5

million that decreased the loss ratio by 2.0 percentage points, compared to $24.4 million that decreased the loss ratio for the first half of 2022 by 6.1 percentage points.

Our insurance subsidiaries experienced favorable development primarily in

the commercial automobile, workers’ compensation and homeowners lines of business for the first half 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.

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.

ratio of our insurance subsidiaries was 35.3% for the first half of 2023, compared to 35.4% for the first half of 2022.

The modest decrease in the expense ratio primarily reflected lower underwriting-based incentive costs for our agents and

employees for the first half of 2023 compared to the first half of 2022.

Combined Ratio.

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premiums earned.

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

Our insurance subsidiaries’ combined ratios were 103.0% and 100.4% for the first half of 2023 and 2022, respectively.

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

of 2023 compared to the first half 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,

We recorded income tax expense of $1.3 million and $709,888 for the first half of 2023 and 2022, respectively,

representing effective tax rates of 15.8% and 12.5%, 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.

The income tax expense for the first half of 2023 and 2022 represented estimates based on our projected annual taxable income and effective tax rates.

Net Income and Net Income Per Share.

Our net income for the first half of 2023 was $7.2 million, or $.22 per share of Class A common stock on a diluted basis and $.20 per

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

We had 27.5 million and 26.6 million Class A shares

outstanding at March 31, 2023 and 2022, respectively.

outstanding at June 30, 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.

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.

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

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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 (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%.

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 half of 2023 and 2022 of $13.1 million and $35.0 million, respectively.

At June 30, 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 an interest rate equal to the then-current Term SOFR rate plus 2.11%.

At June 30, 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.

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.

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.

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 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.

time in the open market subject to the provisions of applicable rules of the SEC and in privately negotiated transactions.

We did not purchase any shares of our Class A common stock under this program during the six months ended June 30, 2023 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, 2023.

On July 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 August 15, 2023 to our stockholders of record as of the close of business on August 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, 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.

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.

significant margin.

Our insurance subsidiaries did not pay any dividends to us during the first six months 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 June 30, 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

Donegal Mutual.

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

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