What changed in this filing

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Item 1. Financial Statements

2021-11-05 compared with 2021-08-06 · 184 added, 141 removed, 520 unchanged (38% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

September 30,

Fixed maturities

20 unchanged sentences

Losses and loss expenses

1,050,163,161

Unearned premiums

11 unchanged sentences

Preferred stock, $ .01 par value, authorized 2,000,000 shares;

Class A common stock, $ .01 par value, authorized 50,000,000 shares, issued 28,619,866 and 27,651,774 shares and outstanding 25,617,278 and 24,649,186 shares

Class A common stock, $ .01 par value, authorized 50,000,000 shares, issued 28,699,165

and 27,651,774 shares and outstanding 25,696,577

and 24,649,186 shares

Class B common stock, $ .01 par value, authorized 10,000,000 shares, issued 5,649,240 shares and outstanding 5,576,775 shares

10 unchanged sentences

and Subsidiaries

Consolidated Statements of Income

Three Months Ended June 30,

Consolidated Statements of (Loss) Income

Three Months Ended

September 30,

Net premiums earned

Investment income, net of investment expenses

Net investment gains (includes $ 479,211 and $ 14,493 accumulated other comprehensive income reclassifications)

Net investment (losses)

gains (includes $ 26,163

and $ 134,795 accumulated other comprehensive income reclassifications)

Installment payment fees

6 unchanged sentences

Total expenses

Income before income tax expense

Income tax expense (includes $ 100,634 and $ 3,044 income tax expense from reclassification items)

Earnings per common share:

Class A common stock - basic

Class A common stock - diluted

(Loss) income before income tax (benefit) expense

Income tax (benefit)

expense (includes $ 5,494

and $ 28,307 income tax expense from reclassification items)

Net (loss) income

(Loss) earnings

per common share:

Class A common stock - basic and diluted

Class B common stock - basic and diluted

1 unchanged sentence

and Subsidiaries

Consolidated Statements of Comprehensive Income

Three Months Ended June 30,

Other comprehensive income, net of tax

Unrealized gain on securities:

Unrealized holding gain during the period, net of income tax expense of $ 511,306 and $ 1,774,279

Reclassification adjustment for gains included in net income, net of income tax expense of $ 100,634 and $ 3,044

Other comprehensive income

Comprehensive income

Consolidated Statements of Comprehensive (Loss) Income

Three Months Ended

September 30,

Net (loss) income

Other comprehensive (loss) income, net of tax

Unrealized (loss) gain on securities:

Unrealized holding (loss) gain during the period, net of income tax (benefit) expense of (

Reclassification adjustment for gains included in net income, net of income tax expense of

Other comprehensive (loss) income

Comprehensive (loss) income

See accompanying notes to consolidated financial statements.

2 unchanged sentences

Consolidated Statements of Income

Six Months Ended June 30,

Nine Months Ended September 30,

Net premiums earned

Investment income, net of investment expenses

Net investment gains (losses) (includes $ 450,025 and $ 436,328 accumulated other comprehensive income reclassifications)

Net investment gains (losses) (includes $ 476,188

and $ 571,123 accumulated other comprehensive income reclassifications)

Installment payment fees

7 unchanged sentences

Income before income tax expense

Income tax expense (includes $ 94,505 and $ 91,629 income tax expense from reclassification items)

Income tax expense (includes $ 99,999

and $ 119,936 income tax expense from reclassification items)

Earnings per common share:

5 unchanged sentences

Consolidated Statements of Comprehensive Income

Six Months Ended June 30,

Nine Months Ended September 30,

Other comprehensive (loss) income, net of tax

1 unchanged sentence

Unrealized holding (loss) gain during the period, net of income tax (benefit) expense of ($ 1,046,983 ) and

Reclassification adjustment for gains included in net income, net of income tax expense of $ 94,505 and $ 91,629

Reclassification

gains included

Other comprehensive (loss) income

4 unchanged sentences

Consolidated Statement of Stockholders’ Equity

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Paid-In Capital

Comprehensive

2 unchanged sentences

Balance, December 31, 2020

Issuance of common stock (stock compensation plans)

compensation plans)

Share-based compensation

3 unchanged sentences

Balance, March 31, 2021

Issuance of common stock (stock compensation plans)

compensation plans)

Share-based compensation

3 unchanged sentences

Balance, June 30, 2021

See accompanying notes to consolidated financial statements.

compensation plans)

Share-based compensation

Cash dividends declared

Grant of stock options

Other comprehensive loss

Balance, September 30, 2021

See accompanying notes to consolidated financial

Donegal Group Inc.

1 unchanged sentence

Consolidated Statement of Stockholders’ Equity

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Paid-In Capital

Comprehensive

14 unchanged sentences

Balance, June 30, 2020

Issuance of common stock (stock compensation plans)

Share-based compensation

Cash dividends declared

Grant of stock options

Other comprehensive income

Balance, September 30, 2020

See accompanying notes to consolidated financial statements.

2 unchanged sentences

Consolidated Statements of Cash Flows

Six Months Ended June 30,

Nine Months Ended September 30,

Cash Flows from Operating Activities:

19 unchanged sentences

Purchases of fixed maturities, held to maturity

( 106,290,824

( 110,914,229

Purchases of fixed maturities, available for sale

( 118,899,756

( 143,743,351

Purchases of equity securities, available for sale

4 unchanged sentences

Sales of equity securities, available for sale

Net sales of property and equipment

Net purchases of short-term investments

Net sales (purchases) of property and equipment

Net sales (purchases) of short-term investments

Net cash used in investing activities

2 unchanged sentences

Issuance of common stock

Payments on subordinated debentures

Borrowing under lines of credit

14 unchanged sentences

We have three segments:

our investment function, our commercial lines of insurance and our personal lines of insurance.

our investment function, our commercial lines of insurance and our personal lines of i n

The commercial lines products of our insurance subsidiaries consist primarily of commercial automobile, commercial multi-peril and workers’ compensation policies.

The personal lines products of our insurance subsidiaries consist primarily of homeowners and private passenger automobile policies.

At June 30, 2021, Donegal Mutual held approximately 41 % of our outstanding Class A common stock and approximately 84 % of our outstanding Class B common stock.

This ownership provides Donegal Mutual with approximately 70 % of the total voting power of our common stock.

At September 30, 2021, Donegal Mutual held approximately 41

% of our outstanding Class A common stock and approximately 84

% of our outstanding Class B common stock.

This ownership provides Donegal Mutual with approximately 70

% of the total voting power of our common stock.

Our insurance subsidiaries and Donegal Mutual have interrelated operations due to a pooling agreement and other intercompany agreements and transactions.

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In addition, as the Donegal Insurance Group, Donegal Mutual and our insurance subsidiaries share a combined business plan to achieve market penetration and underwriting profitability objectives.

expand the Donegal Insurance Group’s ability to service an entire personal lines or commercial lines account.

The products our insurance subsidiaries and Donegal Mutual market are generally complementary, thereby allowing the Donegal Insurance Group to offer a broader range of products to a given market and to expand the Donegal Insurance Group’s ability to service an entire personal lines or commercial lines account.

Distinctions within the products of Donegal Mutual and our insurance subsidiaries generally relate to specific risk profiles targeted within similar classes of business, such as preferred tier versus standard tier products, but we do not allocate all of the standard risk gradients to one company.

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Report reflects all adjustments, consisting only of normal recurring adjustments that, in the opinion of our management, are necessary for a fair presentation of our financial position, results of operations and cash flows for those interim periods.

Our results of operations for the six months ended June 30, 2021 are not necessarily indicative of the results of operations we expect for the year ending December 31, 2021.

Our results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the results of operations we expect for the year ending December 31, 2021.

We recommend you read the interim financial statements we include in this Form 10-Q

1 unchanged sentence

for the year ended December 31, 2020.

Earnings Per Share

Earnings (Loss) Per Share

We have two classes of common stock, which we refer to as our Class A common stock and our Class B common stock.

Our certificate of incorporation provides that whenever our board of directors declares a dividend on our Class B common stock, our board of directors shall simultaneously declare a dividend on our Class A common stock that is payable to the holders of our Class A common stock at the same time and as of the same record date at a rate that is at least 10 % greater than the rate at which our board of directors declared a dividend on our Class B common stock.

Accordingly, we use the two-class

method to compute our earnings per common share.

The two-class

method is an earnings allocation formula that determines earnings per share separately for each class of common stock based on dividends we have declared and an allocation of our remaining undistributed earnings using a participation percentage that reflects the dividend rights of each class.

The table below presents for the periods indicated a reconciliation of the numerators and denominators we used to compute basic and diluted net income per share for our Class A common stock and our Class B common stock:

Three Months Ended June 30,

Accordingly, we use the two-class method to compute our earnings (loss) per common share.

The two-class method is an earnings allocation formula that determines earnings (loss) per share separately for each class of common stock based on dividends we have declared and an allocation of our remaining undistributed earnings (loss) using a participation percentage that reflects the dividend rights of each class.

The table below presents for the periods indicated a reconciliation of the numerators and denominators we used to compute basic and diluted net income (loss) per share for our Class A common stock and our Class B common stock:

Three Months Ended September 30,

(in thousands, except per share data)

Basic earnings per share:

Allocation of net income

Basic (loss) earnings per share:

Allocation of net (loss) income

Weighted-average shares outstanding

Basic earnings per share

Diluted earnings per share:

Allocation of net income

Basic (loss) earnings per share

Diluted (loss) earnings per share:

Allocation of net (loss) income

Number of shares used in basic computation

2 unchanged sentences

Number of shares used in diluted computation

Diluted earnings per share

Six Months Ended June 30,

Diluted (loss) earnings per share

Nine Months Ended September 30,

(in thousands, except per share data)

6 unchanged sentences

Number of shares used in basic computation

Weighted-average shares effect of dilutive securities:

Weighted-average shares effect of dilutive sec u

Director and employee stock options

1 unchanged sentence

Diluted earnings per share

We did not include outstanding options to purchase the following number of shares of Class A common stock in our computation of diluted earnings per share because the exercise price of the options exceeded the average market price of our Class A common stock during the applicable periods.

Three Months Ended June 30,

Six Months Ended June 30,

We did not include outstanding options to purchase the following number of shares of Class A common stock in our computation of diluted earnings (loss) per share because the exercise price of the options exceeded the average market price of our Class A common stock during the applicable periods.

Three Months Ended September 30,

Nine Months Ended September 30,

Number of options to purchase Class A shares excluded

We did not include any effect of dilutive securities in the computation of diluted earnings (loss) per share for the three months ended September 30, 2021 because we sustained a net loss for this period.

Atlantic States and Donegal Mutual have participated in a pooling agreement since 1986 under which they pool their direct premiums written, and Atlantic States and Donegal Mutual then share the underwriting results of the pool in accordance with the terms of the pooling agreement.

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Our insurance subsidiaries and Donegal Mutual also purchase facultative reinsurance to cover certain exposures, including property exposures that exceeded the limits provided by their respective treaty reinsurance.

The amortized cost and estimated fair values of our fixed maturities at June 30, 2021 were as follows:

The amortized cost and estimated fair values of our fixed maturities at September 30, 2021 were as follows:

Amortized Cost

20 unchanged sentences

Mortgage-backed securities

At June 30, 2021, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $ 267.8 million and an amortized cost of $ 254.2 million.

Our holdings at June 30, 2021 also included special revenue bonds with an aggregate fair value of $ 159.7 million and an amortized cost of $ 151.7 million.

With respect to both categories of those bonds at June 30, 2021, we held no securities of any issuer that comprised more than 10 % of our holdings of either bond category.

Education bonds and water and sewer utility bonds represented 46 % and 35 %, respectively, of our total investments in special revenue bonds based on the carrying values of these investments at June 30, 2021.

Many of the issuers of the special revenue bonds we held at June 30, 2021 have the authority to impose ad valorem taxes.

In that respect, many of the special revenue bonds we held at June 30, 2021 are similar to general obligation bonds.

At September 30, 2021, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $ 275.4 million and an amortized cost of $ 264.2 million.

Our holdings at September 30, 2021 also included special revenue bonds with an aggregate fair value of $ 154.9 million and an amortized cost of $ 148.5 million.

With respect to both categories of those bonds at September 30, 2021, we held no securities of any issuer that comprised more than 10 % of our holdings of either bond category.

Education bonds and water and sewer utility bonds represented 47 % and 35 %, respectively, of our total investments in special revenue bonds based on the carrying values of these investments at September 30, 2021.

Many of the issuers of the special revenue bonds we held at September 30, 2021 have the authority to impose ad valorem taxes.

In that respect, many of the special revenue bonds we held at September 30, 2021 are similar to general obligation bonds.

The amortized cost and estimated fair values of our fixed maturities at December 31, 2020 were as follows:

5 unchanged sentences

Held to Maturity

Treasury securities and obligations of U.S.

government corporations and agencies

Obligations of states and political subdivisions

7 unchanged sentences

Available for Sale

Treasury securities and obligations of U.S.

government corporations and agencies

Obligations of states and political subdivisions

10 unchanged sentences

We are amortizing this balance over the remaining life of the related securities as an adjustment to yield in a manner consistent with the accretion of discount on the same fixed maturities.

We recorded amortization of $ 556,553 and $ 833,690 in other comprehensive (loss) income during the six months ended June 30, 2021 and 2020, respectively.

At June 30, 2021 and December 31, 2020, net unrealized losses of $ 5.5 million and $ 6.1 million, respectively, remained within accumulated other comprehensive income.

We show below the amortized cost and estimated fair value of our fixed maturities at June 30, 2021 by contractual maturity.

Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

We recorded amortization of $ 738,815

and $ 1.1 million in other comprehensive income (loss)

during the nine months ended September 30, 2021 and 2020, respectively.

At September 30, 2021 and December 31, 2020, net unrealized losses of $ 5.3

million and $ 6.1 million, respectively, remained within accumulated other comprehensive income.

We show below the amortized cost and estimated fair value of our fixed maturities at September 30, 2021 by contractual maturity.

Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or pre p

ay obligations with or without call or prepayment penalties .

Amortized Cost

15 unchanged sentences

Total available for sale

The cost and estimated fair values of our equity securities at June 30, 2021 were as follows:

The cost and estimated fair values of our equity securities at September 30, 2021 were as follows:

Estimated Fair

5 unchanged sentences

Equity securities

Gross investment gains and losses before applicable income taxes for the three months and six months ended June 30, 2021 and 2020 were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Gross investment gains and losses before applicable income taxes for the three months and nine months ended September 30, 2021 and 2020 were as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

6 unchanged sentences

Equity securities

Net investment gains (losses)

We recognized $ 6.1 million of gains and $ 114,339 of losses on equity securities we held at June 30, 2021 in net investment gains for the six months ended June 30, 2021.

We recognized $ 3.4 million of gains and $ 4.9 million of losses on equity securities we held at June 30, 2020 in net investment losses for the six months ended June 30, 2020.

We held fixed maturities with unrealized losses representing declines that we considered temporary at June 30, 2021 as follows:

Net investment (losses) gains

We recognized $ 4.7

million of gains and $ 248,146

of losses on equity securities we held at September 30, 2021 in net investment gains for the nine months ended September 30, 2021.

We recognized $ 5.6 million of gains and $ 3.6 million of losses on equity securities we held at September 30, 2020 in net investment losses for the nine months ended September 30, 2020.

We held fixed maturities with unrealized losses representing declines that we considered temporary at September 30, 2021 as follows:

Less Than 12 Months

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We make estimates concerning the valuation of our investments and the recognition of other-than-temporary declines in the value of our investments.

For equity securities, we measure investments at fair value, and we recognize changes in fair value in

our results of operations.

For equity securities, we measure investments at fair value, and we recognize changes in fair value in our results of operations.

With respect to a debt security that is in an unrealized loss position, we first assess if we intend to sell the debt security.

3 unchanged sentences

If we determine it is more likely than not that we will not be required to sell the debt security prior to recovery, we then evaluate whether a credit loss has occurred with respect to that security.

We determine whether a credit loss has occurred by comparing the amortized cost of the debt security to the present value of the cash flows we expect to collect.

We determine whether a credit loss has occurred by comparing the amortized cost of the debt

security to the present value of the cash flows we expect to collect.

If we expect a cash flow shortfall, we consider that a credit loss has occurred.

If we determine that a credit loss has occurred, we consider the impairment to be other than temporary.

We then recognize the amount of the impairment loss related to the credit loss in our results of operations, and we recognize the remaining portion of the impairment loss in our other comprehensive income, net of applicable taxes.

We then recognize the amount of the impairment loss related to the credit loss in our results of operations, and we recognize the remaining portion of the impairme n

t loss in our other comprehensive income, net of applicable taxes.

In addition, we may write down securities in an unrealized loss position based on a number of other factors, including when the fair value of an investment is significantly below its cost, when the financial condition of the issuer of a security has deteriorated, the occurrence of industry, issuer or geographic events that have negatively impacted the value of a security and rating agency downgrades.

debt securities that were in an unrealized loss position at June 30, 2021.

Based upon our analysis of general market conditions and underlying factors impacting these debt securities, we considered these declines in value to be temporary.

debt securities that were in an unrealized loss position at September 30, 2021.

Based upon our analysis of general market cond i

tions and underlying factors impacting these debt securities, we considered these declines in value to be temporary.

We amortize premiums and discounts on debt securities over the life of the security as an adjustment to yield using the effective interest method.

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Segment Information

We evaluate the performance of our personal lines and commercial lines segments based upon the underwriting results of our insurance subsidiaries using statutory accounting principles (“SAP”) that various state insurance departments prescribe or permit.

the performance of our personal lines and commercial lines segments based upon the underwriting results of our insurance subsidiaries using statutory accounting principles (“SAP”) that various state insurance departments prescribe or permit.

Our management uses SAP to measure the performance of our insurance subsidiaries instead of United States generally accepted accounting principles (“GAAP”).

SAP financial measures are considered non-GAAP

financial measures under applicable SEC rules because they include or exclude certain items that the most comparable GAAP financial measures do not ordinarily include or exclude.

Financial data by segment for the three and six months ended June 30, 2021 and 2020 is as follows:

Three Months Ended June 30,

SAP financial measures are considered

financial measures under applicable SEC rules because they include or exclude certain items that the most

comparable GAAP financial measures do not ordinarily include or exclude.

Financial data by segment for the three and nine months ended September 30, 2021 and 2020 is as follows:

Three Months Ended September 30,

(in thousands)

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Net investment income

Investment gains

Investment (losses)

Total revenues

Income before income tax expense:

Underwriting income:

(Loss) income

before income tax (benefit)

Underwriting (loss)

Commercial lines

Personal lines

SAP underwriting income

SAP underwriting (loss)

GAAP adjustments

GAAP underwriting income

GAAP underwriting (loss)

Net investment income

Investment gains

Income before income tax expense

Six Months Ended June 30,

Investment (losses)

(Loss) income

before income tax (benefit)

Nine Months Ended September 30,

(in thousands)

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GAAP adjustments

GAAP underwriting income

GAAP underwriting (loss)

Net investment income

4 unchanged sentences

The line of credit has no expiration date, no annual fees and no covenants.

At June 30, 2021, we had no outstanding borrowings from M&T and had the ability to borrow up to $ 20.0 million at interest rates equal to the then-current LIBOR rate plus 2.00 % .

At September 30, 2021, we had no outstanding borrowings from 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 % .

Atlantic States is a member of the FHLB of Pittsburgh.

Through its membership, Atlantic States has the ability to issue debt to the FHLB of Pittsburgh in exchange for cash advances.

Atlantic States has a fixed-rate cash advance of $ 35.0 million that was outstanding at June 30, 2021.

Through its membership, Atlantic States h a

s the ability to issue debt to the FHLB of Pittsburgh in exchange for cash advances.

Atlantic States has a fixed-rate cash advance of $ 35.0 million that was outstanding at September 30, 2021.

The cash advance carries a fixed interest rate of 1.74 % and is due in August 2024.

2 unchanged sentences

Atlantic States repaid this advance when it became due in March 2021.

The table below presents the amount of FHLB of Pittsburgh stock Atlantic States purchased, collateral pledged and assets related to Atlantic States’ membership in the FHLB of Pittsburgh at June 30, 2021.

FHLB of Pittsburgh stock purchased and owned

1 unchanged sentence

Borrowing capacity currently available

Subordinated Debentures

Donegal Mutual holds a $ 5.0 million surplus note that MICO issued to increase MICO’s statutory surplus.

The surplus note carries an interest rate of 5.00 %, and any repayment of principal or payment of interest on the surplus note requires prior approval of the Michigan Department of Insurance and Financial Services.

ubordinated Debentures

In September 2021, upon receipt of approval from the Michigan Department of Insurance and Financial Services, MIC

O repaid in full the $ 5.0 million surplus note held previously by Donegal Mutual, along with accrued interest of $ 178,082 .

Share–Based Compensation

2 unchanged sentences

The significant assumptions we utilize in applying the Black-Scholes option pricing model are the risk-free interest rate, the expected term, the dividend yield and the expected volatility.

We charged compensation expense related to our stock compensation plans against income before income taxes of $

304,373 and $

314,237 for the three months ended June 30, 2021 and 2020, respectively, with a corresponding income tax benefit of $

65,990 , respectively.

We charged compensation expense related to our stock compensation plans against income before income taxes of $

597,168 and $

644,541 for the six months ended June 30, 2021 and 2020, respectively, with a corresponding income tax benefit of $

125,405 and $

135,354 , respectively.

At June 30, 2021, we had $

1.0 million of unrecognized compensation expense related to nonvested share-based compensation granted under our stock compensation plans that we expect to recognize over a weighted average period of approximately

We received cash from option exercises under all stock compensation plans during the three months ended June 30, 2021 and 2020 of $ 7.0 million and $ 2.2 million, respectively.

We received cash from option exercises under all stock compensation plans during the six months ended June 30, 2021 and 2020 of $ 11.4 million and $ 3.1 million, respectively.

We recorded compensation expense related to our stock compensation plans of $

181,595 and $ 219,051 for the three months ended September 30, 2021 and 2020, respectively, with a corresponding income tax benefit of $ 38,135 and $ 46,001 , respectively.

We recorded compensation expense related to our stock compensation plans of $ 778,763 and $ 863,592 for the nine months ended September 30, 2021 and 2020, respectively, with a corresponding income tax benefit of $ 163,540 and $ 181,354 , respectively.

At September 30, 2021, we had $ 852,888 of unrecognized compensation expense related to nonvested share-based compensation granted under our stock compensation plans that we expect to recognize over a weighted average period of approximately 1.4 years.

We received cash from option exercises under all stock compensation plans during the three months ended September 30, 2021 and 2020 of $ 764,956

and $ 8.1 million, respectively.

We received cash from option exercises under all stock compensation plans during the nine months ended September 30, 2021 and 2020 of $ 12.2

million and $ 11.2 million, respectively.

We realized actual tax benefits for the tax deductions related to those option exercises of $ 16,655

and $ 54,221 for the three months ended June 30, 2021 and 2020, respectively.

and $ 163,245 for the three months ended September 30, 2021 and 2020, respectively.

We realized actual tax benefits for the tax deductions related to those option exercises of $ 437,790

and $ 68,878 for the six months ended June 30, 2021 and 2020, respectively.

and $ 232,123 for the nine months ended September 30, 2021 and 2020, respectively.

Fair Value Measurements

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In addition, the valuation of fixed maturity investments is more subjective when markets are less liquid, increasing the potential that the estimated fair value does not reflect the price at which an actual transaction would occur.

We utilize nationally recognized independent pricing services to estimate fair values or obtain market quotations for substantially all of our fixed maturity and equity investments.

We utilize nationally

recognized independent pricing services to estimate fair values or obtain market quotations for substantially all of our fixed maturity and equity investments.

These pricing services utilize market quotations for fixed maturity and equity securities that have quoted prices in active markets.

5 unchanged sentences

Our investment personnel periodically review documentation with respect to the pricing services’ pricing methodology that they obtain to determine if the primary pricing sources, market inputs and pricing frequency for various security types are reasonable.

At June 30, 2021, we received two estimates per security from the pricing services, and we priced substantially all of our Level 1 and Level 2 investments using those prices.

In our review of the estimates the pricing services provided at June 30, 2021, we did not identify any material discrepancies, and we did not make any adjustments to the estimates the pricing services provided.

At September 30, 2021, we received two estimates per security from the pricing services, and we priced substantially all of our Level 1 and Level 2 investments using those prices.

In our review of the estimates the pricing services provided at September 30, 2021, we did not identify any material discrepancies, and we did not make any adjustments to the estimates the pricing services provided.

We present our cash and short-term investments at estimated fair value.

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We evaluate our assets and liabilities to determine the appropriate level at which to classify them for each reporting period.

The following table presents our fair value measurements for our investments in available-for-sale

fixed maturity and equity securities at June 30, 2021:

The following table presents our fair value measurements for our investments in

available-for-sale

ed maturity and equity securities at September

Fair Value Measurements Using

13 unchanged sentences

Total investments in the fair value hierarchy

The following table presents our fair value measurements for our investments in available-for-sale

The following table presents our fair value measurements for our investments in a v

ailable-for-sale

fixed maturity and equity securities at December 31, 2020:

13 unchanged sentences

Equity securities

At June 30, 2021 and December 31, 2020, respectively, we had no material unrecognized tax benefits or accrued interest and penalties.

Tax years 2016 through 2020 remained open for examination at June 30, 2021.

At September 30, 2021 and December 31, 2020, respectively, we had no material unrecognized tax benefits or accrued interest and penalties.

Tax years 2016 through 2020 remained open for examination at September 30, 2021.

We provide a valuation allowance when we believe it is more likely than not that we will not realize some portion of our tax assets.

We established a valuation allowance of $ 7.9 million for our net state operating loss carryforward.

We have determined that we are not required to establish a valuation allowance for our other deferred tax assets of $ 27.6 million and $ 26.7 million at June 30, 2021 and December 31, 2020, respectively, because it is more likely than not that we will realize these deferred tax assets through reversals of existing temporary differences, future taxable income and the implementation of tax planning strategies.

We established a valuation allowance of $ 7.9

million for our net state operating loss carryforward.

We have determined that we are not required to establish a valuation allowance for our other deferred tax assets of $ 28.1

million and $ 26.7 million at September 30, 2021 and December 31, 2020, respectively, because it is more likely than not that we will realize these deferred tax assets through reversals of existing temporary differences, future taxable income and the implementation of tax planning strategies.

On March 27, 2020, the Coronavirus Aid, Relief and Security Act (the “CARES Act”) was signed into law.

1 unchanged sentence

The CARES Act allows for the carryback of losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021 to each of the five taxable years preceding the taxable year of such loss.

As a result, we filed amended tax returns to carry back net operating losses from taxable year 2018 to past tax years.

As a result, we filed amended tax returns in 2020 to carry back net operating losses from taxable year 2018 to past tax years.

We recorded a tax benefit of $ 1.6 million in the first quarter of 2020 in anticipation of a refund of taxes we paid in prior years as a result of the carryback.

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We summarize activity in our insurance subsidiaries’ liabilities for losses and loss expenses as follows:

Six Months Ended June 30,

(in thousands)

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Balance at end of period

Our insurance subsidiaries recognized a decrease in their liabilities for losses and loss expenses of prior years of $ 21.6 million

and $ 10.9 million for the six months ended June 30, 2021 and 2020, respectively.

Our insurance subsidiaries made no significant changes in their reserving philosophy or claims management personnel, and they have made no significant offsetting changes in estimates that increased or decreased their loss and loss expense reserves in those years.

The 2021 development represented 3.9 % of the December 31, 2020 net carried reserves and resulted primarily from lower-than-expected loss emergence or severity in nearly all lines of business.

Our insurance subsidiaries

recognized a decrease in their liabilities for losses and loss expenses of prior years of $ 25.9

and $ 10.3 million for the nine months ended September 30, 2021 and 2020, respectively.

Our insurance sub s

idiaries made no significant changes in their reserving philosophy or claims management personnel, and they have made no significant offsetting changes in estimates that increased or decreased their loss and loss expense reserves in those years.

The 2021 development represented 4.6

% of the December 31, 2020 net carried reserves and resulted primarily from lower-than-expected loss emergence or severity in nearly all lines of business.

The majority of the 2021 development related to decreases in the liabilities for losses and loss expenses of prior years for Atlantic States and MICO.

The 2020 development represented 2.1 % of the December 31, 2019 net carried reserves and resulted primarily from lower-than-expected severity in nearly all lines of business,

with the exception of modest higher-than-expected severity in commercial automobile.

The 2020 development represented 2.0 % of the December 31, 2019 net carried reserves and resulted primarily from lower-than-expected severity in nearly all lines of business, with the exception of modest higher-than-expected severity in commercial automobile.

The majority of the 2020 development related to decreases in the liabilities for losses and loss expenses of prior years for Atlantic States and MICO.

4 unchanged sentences

Accordingly, the IBNR reserves of our insurance subsidiaries include their actuaries’ projections of the cost of unreported claims as well as their actuaries’ projected development of case reserves on known claims and reopened claims.

Our insurance subsidiaries’ methodology for estimating IBNR reserves has been in place for many years, and their actuaries made no significant changes to that methodology during the six months ended June 30, 2021.

The actuaries for our insurance subsidiaries generally prepare an initial estimate for ultimate losses and loss expenses for the current accident year by multiplying earned premium by an expected loss ratio for each line of business our insurance subsidiaries write.

1 unchanged sentence

The actuaries determine an expected loss ratio by analyzing historical experience and adjusting for loss cost trends, loss frequency and severity trends, premium rate level changes, reported and paid loss emergence patterns and other known or observed factors.

The actuaries use a variety of actuarial methods to estimate the ultimate cost of losses and loss expenses.

The actuaries use a variety of actuarial methods to estimate the ultimate cost of losses and loss e x

These methods include paid loss development, incurred loss development and the Bornhuetter-Ferguson method.

13 unchanged sentences

In September 2016, the FASB issued guidance that amends previous guidance on the impairment of financial instruments by adding an impairment model that requires an entity to recognize expected credit losses as an allowance rather than impairments as credit losses are incurred.

The intent of this guidance is to reduce complexity and result in a more timely

recognition of expected credit losses.

The intent of this guidance is to reduce complexity and result in a more timely recognition of expected credit losses.

In November 2019, the FASB issued guidance that delays the effective date for “smaller reporting companies,” as defined in Item 10(f)(1) of Regulation S-K, to

6 unchanged sentences

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 1. Financial Statements