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Item 2. Management’s Discussion and Analysis

2025-05-06 compared with 2024-11-06 · 177 added, 244 removed, 136 unchanged (76% 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, 2023.

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, 2024.

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 United States generally accepted accounting principles

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

The most significant estimates relate to the reserves

of our insurance subsidiaries for property and casualty insurance unpaid losses and loss expenses.

While we believe our estimates and the estimates of our insurance subsidiaries are appropriate, the ultimate amounts may differ from the estimates

We regularly review our methods for making these estimates and we reflect any adjustment we consider necessary in our results of operations for the period in which we make an adjustment.

Liabilities for Losses and Loss Expenses

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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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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 subsequent years 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, 2024.

September 30, 2024, 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 $7.1 million.

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

These trend changes caused significant disruption to historical loss

patterns and 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 replacement automobile parts and building materials,

availability and cost of skilled labor, the rate of specialized plaintiff attorney involvement in claims, plaintiff attorney utilization of litigation financing and the cost of medical technologies and procedures.

While we did not see a material

impact in the first quarter of 2025, we are monitoring the impact of tariffs and other inflationary factors, which may result in increases in loss costs in the future.

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.

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, 2025.

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 $7.0 million.

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

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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

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 loss 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.

Our insurance subsidiaries’ liabilities for losses and loss expenses by major line of business at September 30, 2024 and December 31, 2023 consisted of the following:

September 30,

However, the amount of the average claim outstanding has increased gradually over the past several years due to various factors such as increased property and

automobile repair and replacement costs, rising medical loss costs and increased litigation trends and lengthening of repair completion times for property and automobile claims.

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 underwriting pool with Donegal Mutual exposes Atlantic States to adverse loss development on the business that Donegal Mutual contributes to the underwriting pool.

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 underwriting pool is homogeneous and each company has a pro-rata share of the entire underwriting 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.

Our insurance subsidiaries’ liabilities for losses and loss expenses by major line of business at March 31, 2025 and December 31, 2024 consisted of the following:

(in thousands)

Co mmercial lines:

Commercial lines:

Workers’ compensation

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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, 2024

March 31, 2025

Percentage Change

in Stockholders’ Equity at

September 30, 2024(1)

March 31, 2025(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, 2024 and 2023:

Three Months Ended September 30,

Nine Months Ended September 30,

The following table provides a reconciliation of our net premiums earned to our net premiums written for the three months ended March 31, 2025:

(in thousands)

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Net premiums written

The following table provides a reconciliation of our net premiums earned to our net premiums written for the three months ended March 31, 2024:

(in thousands)

Net premiums earned

Change in net unearned premiums

Net premiums written

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.

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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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.

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.

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, 2024 and 2023:

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, 2025 and 2024:

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, 2024 Compared to Three Months Ended September 30, 2023

Results of Operations - Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

Net Premiums Earned.

Our insurance subsidiaries’ net premiums earned for the third quarter of 2024 were $238.0 million, an increase of $13.6 million, or 6.0%, compared to

$224.4 million for the third quarter of 2023, primarily reflecting solid premium retention and renewal premium increases.

Our insurance subsidiaries’ net premiums earned for the first quarter of 2025 were $232.7 million, an increase of $5.0 million, or 2.2%, compared to

$227.7 million for the first quarter of 2024, primarily reflecting solid premium retention and renewal premium increases.

Net Premiums Written.

Our insurance subsidiaries’ net premiums written for the third quarter of 2024 were $232.2 million, an increase of $13.0 million, or 5.9%, from the

$219.2 million of net premiums written for the third quarter of 2023.

Commercial lines net premiums written increased $7.6 million, or 6.4%, for the third quarter of 2024 compared to the third quarter of 2023.

Our insurance subsidiaries’ net premiums written for the first quarter of 2025 were $247.1 million, a decrease of $4.4 million, or 1.7%, from the

$251.4 million of net premiums written for the first quarter of 2024.

Commercial lines net premiums written increased $5.1 million, or 3.3%, for the first quarter of 2025 compared to the first quarter of 2024.

Personal lines net premiums written

increased $5.4 million, or 5.4%, for the third quarter of 2024 compared to the third quarter of 2023.

We attribute the increase in commercial lines net premiums written primarily to new business writings, strong premium retention and a continuation

of renewal premium increases in lines other than workers’ compensation, offset partially by planned attrition in states in which we are executing ongoing profit improvement initiatives as part of our state-specific strategies.

We attribute the

increase in personal lines net premiums written primarily to renewal premium increases and strong policy retention, offset partially by planned attrition due to non-renewal actions.

decreased $9.5 million, or 9.9%, for the first quarter of 2025 compared to the first quarter of 2024.

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

in lines other than workers’ compensation, offset partially by lower new business writings.

We attribute the decrease in personal lines net premiums written primarily to planned attrition due to lower new business writings and non-renewal

actions, offset partially by a continuation of renewal premium rate increases and solid retention.

Investment Income.

Our net investment income was $10.8 million for the third quarter of 2024, an increase of $290,503, or 2.8%, compared to $10.5 million for the third

Our net investment income was $12.0 million for the first quarter of 2025, an increase of $1.0 million, or 9.2%, compared to $11.0 million for the first

quarter of 2024.

We attribute the increase primarily to an increase in the average investment yield relative to the third quarter of 2023.

Net Investment Gains (Losses).

Net investment gains for the third quarter of 2024 were $1.9 million, compared to net investment losses of $1.2 million for the third quarter

The net investment gains (losses) for the third quarter of 2024 and 2023 resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at September 30, 2024 and 2023, respectively.

recognize any impairment losses for individual securities in our investment portfolio during the third quarter of 2024 or 2023.

Losses and Loss Expenses.

Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 61.5% for the third quarter

of 2024, a decrease from our insurance subsidiaries’ loss ratio of 69.8% for the third quarter of 2023.

We attribute this decrease primarily to decreased core losses, offset partially by decreased favorable loss reserve development.

The core loss

ratio, which excludes weather-related losses, large fire losses and net favorable development of reserves for losses incurred in prior accident years, was 50.1% for the third quarter of 2024, compared to 56.7% for the third quarter of 2023.

commercial lines segment, the core loss ratio of 48.5% for the third quarter of 2024 decreased from 53.7% for the third quarter of 2023.

For the personal lines segment, the core loss ratio of 52.5% for the third quarter of 2024 decreased from 61.8%

for the third quarter of 2023.

Weather-related losses were $24.4 million, or 10.3 percentage points of the loss ratio, for the third quarter of 2024, compared to $25.7 million, or 11.5 percentage points of the loss ratio, for the third quarter of

The impact of weather-related loss activity to the loss ratio for the third quarter of 2024 was higher than our previous five-year average of 9.4 percentage points for third quarter weather-related losses.

Large fire losses, which we define

as individual fire losses in excess of $50,000, for the third quarter of 2024 were $8.8 million, or 3.7 percentage points of the loss ratio, compared to $11.0 million, or 4.9 percentage points of the loss ratio, for the third quarter of 2023.

statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 52.5% for the third quarter of 2024, compared to 60.9% for the third quarter of 2023, primarily due to a decrease in the commercial multi-peril loss ratio.

lines statutory loss ratio of our insurance subsidiaries decreased to 74.5% for the third quarter of 2024, compared to 86.8% for the third quarter of 2023.

We attribute this decrease primarily to a decrease in the personal automobile and homeowners

Our insurance subsidiaries experienced favorable loss reserve development for the third quarter of 2024 of $6.2 million that decreased the loss ratio by 2.6 percentage points, compared to favorable loss reserve development for the

third quarter of 2023 of approximately $7.3 million that decreased the loss ratio by 3.3 percentage points.

Our insurance subsidiaries experienced favorable development primarily in the commercial multi-peril and other commercial lines of business

for the third quarter of 2024.

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 34.5% for the third quarter of 2024, compared to 34.1% for the third quarter of 2023.

We attribute the modest increase to higher technology costs related to our ongoing systems modernization initiatives and

an increase in underwriting-based incentive costs for the third quarter of 2024 compared to the prior-year quarter.

These increases were offset partially by impacts of various expense reduction initiatives, including agency incentive program

revisions, commission schedule adjustments, targeted staffing reductions, and deferred replacement of open employment positions, among others.

We expect the impact from allocated costs from Donegal Mutual to our insurance subsidiaries related to

the ongoing systems modernization project will peak at approximately 1.3 percentage points of the expense ratio for the full year of 2024 before beginning to subside gradually in subsequent years.

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 96.4% and 104.5% for the third quarter of 2024 and 2023, respectively.

We attribute the decrease in the combined ratio primarily to a decrease in the loss ratio for the third quarter

of 2024 compared to the third quarter of 2023.

Income Tax Expense (Benefit).

We recorded income tax expense of $3.7 million for the third quarter of 2024, representing an effective tax rate of 17.9%.

We recorded an income

tax benefit of $199,613 for the third quarter of 2023.

The income tax expense (benefit) for the third quarter of 2024 and 2023 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 third quarter of 2024 was $16.8 million, or $.51 per share of Class A common stock on a diluted

basis and $.46 per share of Class B common stock, compared to a net loss of $805,301, or $.02 per share of Class A common stock and $.02 per share of Class B common stock, for the third quarter of 2023.

We had 28.2 million and 27.6 million Class A

shares outstanding at September 30, 2024 and 2023, respectively.

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

Results of Operations - Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

Net Premiums Earned.

Our insurance subsidiaries’ net premiums earned for the first nine months of 2024 were $700.0 million, an increase of $44.1 million, or 6.7%, compared to

$655.9 million for the first nine months of 2023, primarily reflecting solid premium retention and renewal premium increases.

Net Premiums Written.

Our insurance subsidiaries’ net premiums written for the first nine months of 2024 were $730.8 million, an increase of $47.8 million, or 7.0%, from the

$683.0 million of net premiums written for the first nine months of 2023.

Commercial lines net premiums written increased $16.1 million, or 4.0%, for the first nine months of 2024 compared to the first nine months of 2023.

Personal lines net

premiums written increased $31.7 million, or 11.5%, for the first nine months of 2024 compared to the first nine months of 2023.

We attribute the increase in commercial lines net premiums written primarily to new business writings, strong premium

retention and a continuation of renewal premium increases in lines other than workers’ compensation, offset partially by planned attrition in states we exited or have targeted for profit improvement.

We attribute the increase in personal lines net

premiums written primarily to renewal premium increases and strong policy retention.

Investment Income.

Our net investment income was $32.9 million for the first nine months of 2024, an increase of $2.7 million, or 9.0%, compared to $30.1 million for the

first nine months of 2023.

We attribute the increase primarily to an increase in the average investment yield relative to the first nine months of 2023.

Net Investment Gains.

Net investment gains for the first nine months of 2024 were $4.7 million, compared to $930,302 for the first nine months of 2023.

The net investment

gains for the first nine months of 2024 and 2023 resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at September 30, 2024 and 2023, respectively.

We did not recognize any impairment losses

for individual securities in our investment portfolio during the first nine months of 2024 or 2023.

We attribute the increase primarily to an increase in the average investment yield and higher average invested assets relative to the first quarter of 2024.

Net Investment (Losses) Gains.

Net investment losses for the first quarter of 2025 were $470,861, compared to net investment gains of $2.1 million for the first quarter of

The net investment losses for the first quarter of 2025 resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at March 31, 2025.

We did not recognize any impairment losses for

individual securities in our investment portfolio during the first quarter of 2025 or 2024.

Losses and Loss Expenses.

Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 66.1% for the first nine

months of 2024, a decrease from our insurance subsidiaries’ loss ratio of 68.0% for the first nine months of 2023.

We attribute this decrease primarily to lower core and weather-related losses.

The core loss ratio, which excludes weather-related

losses, large fire losses and net favorable development of reserves for losses incurred in prior accident years, was 54.5% for the first nine months of 2024, compared to 56.0% for the first nine months of 2023.

For the commercial lines segment, the

core loss ratio of 54.1% for the first nine months of 2024 decreased from 55.2% for the first nine months of 2023.

For the personal lines segment, the core loss ratio of 55.2% for the first nine months of 2024 decreased from 57.3% for the first

nine months of 2023.

Weather-related losses were $60.0 million, or 8.6 percentage points of the loss ratio, for the first nine months of 2024, compared to $59.5 million, or 9.1 percentage points of the loss ratio, for the first nine months of 2023.

The impact of weather-related loss activity to the loss ratio for the first nine months of 2024 was modestly higher than our previous five-year average of 7.6 percentage points for first nine months weather-related losses.

Large fire losses, which

we define as individual fire losses in excess of $50,000, for the first nine months of 2024 were $36.2 million, or 5.2 percentage points of the loss ratio, compared to $34.7 million, or 5.3 percentage points of the loss ratio, for the first nine

months of 2023.

On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 63.0% for the first nine months of 2024, compared to 63.9% for the first nine months of 2023, primarily due to a decrease in the commercial

multi-peril loss ratio.

The personal lines statutory loss ratio of our insurance subsidiaries decreased to 71.5% for the first nine months of 2024, compared to 75.2% for the first nine months of 2023.

We attribute this decrease primarily to a

decrease in the personal automobile loss ratio.

Our insurance subsidiaries experienced favorable loss reserve development for the first nine months of 2024 of approximately $15.4 million that decreased the loss ratio by 2.2 percentage points,

compared to $15.8 million that decreased the loss ratio for the first nine months of 2023 by 2.4 percentage points.

Our insurance subsidiaries experienced favorable development primarily in the commercial multi-peril, commercial automobile,

personal automobile and other lines of business for the first nine months of 2024, offset partially by unfavorable development in the workers’ compensation line of business that we attribute to higher-than-expected severity for a relatively small

number of previously reported claims.

Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 56.7% for the first

quarter of 2025, a decrease from our insurance subsidiaries’ loss ratio of 66.3% for the first quarter of 2024.

We attribute this decrease primarily to decreased core losses and large fire losses, which we define as individual fire losses in

excess of $50,000.

The core loss ratio, which excludes weather-related losses, large fire losses and net favorable development of reserves for losses incurred in prior accident years, was 54.2% for the first quarter of 2025, compared to 58.7% for

the first quarter of 2024.

For the commercial lines segment, the core loss ratio of 58.3% for the first quarter of 2025 decreased modestly from 59.0% for the first quarter of 2024.

For the personal lines segment, the core loss ratio of 48.7% for

the first quarter of 2025 decreased significantly from 58.1% for the first quarter of 2024, due largely to the favorable impact of ongoing premium rate increases on net premiums earned for that segment.

Weather-related losses were $8.6 million,

or 3.7 percentage points of the loss ratio, for the first quarter of 2025, compared to $10.8 million, or 4.7 percentage points of the loss ratio, for the first quarter of 2024.

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

first quarter of 2025 was modestly lower than our previous five-year first-quarter average of 4.6 percentage points of the loss ratio.

Large fire losses for the first quarter of 2025 were $7.7 million, or 3.3 percentage points of the loss ratio,

compared to $15.0 million, or 6.6 percentage points of the loss ratio, for the first quarter of 2024.

Our insurance subsidiaries’ commercial lines loss ratio was 59.7% for the first quarter of 2025, compared to 65.4% for the first quarter of

2024, primarily due to decreases in commercial multi-peril and commercial automobile loss ratios, offset by an increase in the workers’ compensation loss ratio.

The personal lines loss ratio of our insurance subsidiaries decreased to 52.5% for

the first quarter of 2025, compared to 67.6% for the first quarter of 2024.

We attribute this decrease primarily to decreases in the homeowners and personal automobile loss ratios.

Our insurance subsidiaries experienced favorable loss reserve

development for the first quarter of 2025 of approximately $10.5 million that decreased the loss ratio by 4.5 percentage points, compared to $8.4 million that decreased the loss ratio for the first quarter of 2024 by 3.7 percentage points.

insurance subsidiaries experienced favorable development primarily in the commercial automobile, commercial multi-peril and personal automobile lines of business, offset partially by modest unfavorable development in workers’ compensation for the

first quarter of 2025.

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 34.0% for the first nine months of 2024, compared to 34.9% for the first nine months of 2023.

The decrease in the expense ratio primarily reflected impacts of expense reduction initiatives, including agency

incentive program revisions, commission schedule adjustments, targeted staffing reductions, and deferred replacement of open employment positions, among others, offset partially by higher technology costs related to our ongoing systems

modernization initiatives for the first nine months of 2024 compared to the first nine months of 2023.

We expect the impact from allocated costs from Donegal Mutual to our insurance subsidiaries related to the ongoing systems modernization project

will peak at approximately 1.3 percentage points of the expense ratio for the full year of 2024 before beginning to subside gradually in subsequent years.

ratio of our insurance subsidiaries was 34.6% for the first quarter of 2025, compared to 35.7% for the first quarter of 2024.

The decrease in the expense ratio primarily reflected the favorable impact of ongoing expense management initiatives,

offset partially by higher underwriting-based incentive costs for agents and employees.

The impact from costs that Donegal Mutual Insurance Company allocated to our insurance subsidiaries related to its ongoing systems modernization project

peaked at approximately 1.3 percentage points of the full year 2024 expense ratio, and we expect that impact to subside gradually over the next several years.

Allocated costs related to that project represented approximately 1.2 percentage points

of the expense ratio for the first quarter of 2025, and we expect the full year 2025 expense ratio impact will be approximately 1.0 percentage point.

Combined Ratio.

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premiums earned.

Our insurance subsidiaries’ combined ratios were 100.6% and 103.5% for the first nine months of 2024 and 2023, respectively.

We attribute the decrease in the combined ratio primarily to a decrease in the loss and expense ratios for

the first nine months of 2024 compared to the first nine months of 2023.

Our insurance subsidiaries’ combined ratios were 91.6% and 102.4% for the first quarter of 2025 and 2024, respectively.

We attribute the decrease in the combined ratio primarily to the decrease in the loss ratio for the first

quarter of 2025 compared to the first quarter of 2024.

Income Tax Expense.

We recorded income tax expense of $5.8 million for the first nine months of 2024, representing an effective tax rate of 17.8%.

We recorded income tax expense of $6.0 million for the first quarter of 2025, representing an effective tax rate of 19.1%.

We recorded income tax

expense of $1.1 million for the first nine months of 2023, representing an effective tax rate of 15.2%.

The income tax expense for the first nine months of 2024 and 2023 represented estimates based on our projected annual taxable income and

effective tax rates.

expense of $1.3 million for the first quarter of 2024, representing an effective tax rate of 17.8%.

The income tax tax expense for the first quarter of 2025 and 2024 represented estimates based on our projected annual taxable income and effective

Net Income and Net Income Per Share.

Our net income for the first nine months of 2024 was $26.9 million, or $.81 per share of Class A common stock on a diluted basis and $.74

per share of Class B common stock, compared to $6.4 million, or $.20 per share of Class A common stock on a diluted basis and $.17 per share of Class B common stock, for the first nine months of 2023.

Our net income for the first quarter of 2025 was $25.2 million, or $.71 per share of Class A common stock on a diluted basis and $.65

per share of Class B common stock, compared to $6.0 million, or $.18 per share of Class A common stock on a diluted basis and $.16 per share of Class B common stock, for the first quarter of 2024.

We had 30.4 million and 27.8 million Class A

shares outstanding at September 30, 2024 and 2023, respectively.

shares outstanding at March 31, 2025 and 2024, 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.

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

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 2024 and 2023 of $39.2 million and $26.0 million, respectively.

At September 30, 2024, 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

At September 30, 2024, Atlantic States had a $35.0 million outstanding advance with the FHLB of Pittsburgh that carries a fixed interest rate of 3.81%.

Liquidity is a measure of an entity’s ability to secure enough cash to meet its contractual obligations and operating needs as they arise.

Our major sources of funds from operations are the net cash flows we

generate from our insurance subsidiaries’ underwriting results, investment income and maturing investments.

We have historically generated sufficient net positive cash flow to fund our commitments and add to our investment portfolio, thereby increasing future investment returns.

The pooling agreement with Donegal Mutual

historically has been cash-flow positive because of the profitability of the underwriting pool.

Because we settle the pool monthly, our cash flows are substantially similar to the cash flows that would result from the underwriting of direct

We maintain a high degree of liquidity in our investment portfolio in the form of 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.

This laddering approach provides an additional measure of liquidity to meet our obligations and the

obligations of our insurance subsidiaries should an unexpected variation occur in the future.

Net cash flows provided by operating activities in the first three months of 2025 and 2024 were $25.7 million and $4.8 million, respectively.

At March 31, 2025, 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 Term SOFR rate plus 2.11%.

March 31, 2025, Atlantic States had a $35.0 million outstanding advance with the FHLB of Pittsburgh that carries a fixed interest rate of 3.806% and is due in September 2026.

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.

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.

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.

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.

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, 2024

We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through September 30, 2024.

On October 17, 2024, our board of directors declared quarterly cash dividends of $.1725 per share of our Class A common stock and $.155 per share of our Class B common stock,

payable on November 15, 2024 to our stockholders of record as of the close of business on November 1, 2024.

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, 2023 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant

Our insurance subsidiaries paid $10.0 million in dividends to us during the first nine months of 2024.

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

domiciliary insurance regulatory authorities in 2024 are $22.4 million from Atlantic States and $7.2 million from MICO, or a total of approximately $29.6 million.

At September 30, 2024, we had no material commitments for capital expenditures.

time in the open market subject to the provisions of the SEC Rule 10b-18 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, 2025 or 2024.

We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through March 31, 2025.

On April 17, 2025, our board of directors declared quarterly cash dividends of $.1825 per share of our Class A common stock and $.165 per share of our Class B common stock,

payable on May 15, 2025 to our stockholders of record as of the close of business on May 1, 2025.

There are no regulatory restrictions on our payment of dividends to our stockholders, although there are restrictions under applicable state laws on

the payment of dividends from our insurance subsidiaries to us, which is a significant source of cash for payment of stockholder dividends by us.

Our insurance subsidiaries are required by law to maintain minimum surplus on a statutory basis and

are subject to regulations under which their payment of dividends from statutory surplus is restricted and may require prior approval of their domiciliary insurance regulatory authorities.

Our insurance subsidiaries are also subject to risk based

capital (“RBC”) requirements.

The amount of statutory capital and surplus necessary for our insurance subsidiaries to satisfy regulatory requirements, including the RBC requirements, was not significant in relation to our insurance subsidiaries’

statutory capital and surplus at December 31, 2024.

Our insurance subsidiaries did not pay any dividends to us during the first three months of 2025.

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

without prior approval of their domiciliary insurance regulatory authorities in 2025 are $40.7 million from Atlantic States, $7.8 million from MICO and $4.7 million from Peninsula, or a total of approximately $53.3 million.

At March 31, 2025, we had no material commitments for capital expenditures.

Equity Price Risk

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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.

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.

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