UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2025
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to .
Commission file number 0-15341
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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(Address of principal executive offices) (Zip code)
(717 ) 426-1931
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ☐
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Non-accelerated filer ☐
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Smaller reporting company |
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Trading Symbols
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Name of Each Exchange on Which Registered
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The
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The
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 30,519,896 shares of Class A Common Stock, par value $0.01 per share, and 5,576,775 shares of Class B Common Stock, par value $0.01 per share, outstanding on May 1, 2025.
DONEGAL GROUP INC.
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Page
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PART I
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Item 1.
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1
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Item 2.
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21 |
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Item 3.
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30 | |
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Item 4.
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30 | |
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PART II
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Item 1.
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31
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Item 1A.
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31
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Item 2.
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31
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Item 3.
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31
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Item 4.
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31
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Item 5.
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31
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Item 6.
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32
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33
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| Item 1. |
Financial Statements
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Donegal Group Inc. and Subsidiaries
Consolidated
Balance Sheets
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March 31,
2025
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December 31,
2024
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(Unaudited)
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Assets
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Investments
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Fixed maturities
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Held to maturity, at amortized cost (net of allowance for expected credit losses of $
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$
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$
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Available for sale, at fair value
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Equity securities, at fair value
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Short-term investments, at cost, which approximates fair value
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Total investments
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Cash
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Accrued investment income
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Premiums receivable
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Reinsurance receivable (net of allowance for expected credit losses of $
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Deferred policy acquisition costs
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Deferred tax asset, net
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Prepaid reinsurance premiums
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Property and equipment, net
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Accounts receivable - securities
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Goodwill
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Other intangible assets
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Other
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Total assets
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$
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$
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Liabilities and Stockholders’ Equity
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||||||||
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Liabilities
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||||||||
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Losses and loss expenses
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$
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$
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Unearned premiums
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Accrued expenses
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Reinsurance balances payable
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Borrowings under lines of credit
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Cash dividends declared to stockholders
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Federal income taxes payable
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Other
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Total liabilities
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Stockholders’ Equity
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Preferred stock, $
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Class A common stock, $
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Class B common stock, $
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Additional paid-in capital
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Accumulated other comprehensive loss
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(
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)
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(
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)
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Retained earnings
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Treasury stock, at cost
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(
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)
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(
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)
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Total stockholders’ equity
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||||||
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Total liabilities and stockholders’ equity
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$
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$
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||||
See accompanying notes to consolidated financial statements.
Donegal Group Inc. and Subsidiaries
(Unaudited)
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Three Months Ended March 31,
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2025
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2024
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Revenues:
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||||||||
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Net premiums earned
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$
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$
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Investment income, net of investment expenses
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Net investment (losses) gains (includes $
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(
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)
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Lease income
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Installment payment fees
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Total revenues
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Expenses:
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Net losses and loss expenses
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Amortization of deferred policy acquisition costs
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Other underwriting expenses
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Policyholder dividends
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Interest
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Other expenses, net
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Total expenses
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Income before income tax expense
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Income tax expense (includes $
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Net income
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$
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$
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Net income per share:
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Class A common stock - basic
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$
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$
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Class A common stock - diluted
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$ | $ | ||||||
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Class B common stock - basic and diluted
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$
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$
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Donegal Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
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Three Months Ended March 31,
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||||||||
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2025
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2024
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Net income
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$
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$
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Other comprehensive income (loss), net of tax
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Unrealized income (loss) on securities:
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Unrealized holding income (loss) during the period, net of income tax expense
(benefit) of $
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(
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)
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|||||
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Reclassification adjustment for (gains) losses included in net income, net of income
tax expense (benefit) of $
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(
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)
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Other comprehensive income (loss)
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(
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)
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Comprehensive income
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$
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$
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See accompanying notes to consolidated financial statements.
Donegal Group Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Unaudited)
Three Months Ended
March 31, 2025
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Class A
Shares
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Class B
Shares
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Class A
Amount
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Class B
Amount
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Additional
Paid-In Capital
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Accumulated
Other
Comprehensive
Loss
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Retained
Earnings
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Treasury Stock
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Total
Stockholders’
Equity
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||||||||||||||||||||||||||||
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Balance, December 31, 2024
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$
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$
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$
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$
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(
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)
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$
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$
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(
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)
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$
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Issuance of common stock
(stock compensation plans)
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Share-based compensation
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Net income
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—
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—
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Cash dividends declared
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—
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—
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(
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)
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(
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)
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|||||||||||||||||||||||||
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Grant of stock options
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—
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—
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(
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)
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Other comprehensive income
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—
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—
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Balance, March 31, 2025
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$
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$
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$
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$
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(
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)
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$
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$
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(
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)
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$
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||||||||||||||||||
Three Months Ended
March 31, 2024
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Class A
Shares
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Class B
Shares
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Class A
Amount
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Class B
Amount
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Additional
Paid-In Capital
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Accumulated
Other
Comprehensive
Loss
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Retained
Earnings
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Treasury Stock
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Total
Stockholders’
Equity
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||||||||||||||||||||||||||||
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Balance, December 31, 2023
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|
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$
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$
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$
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$
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(
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)
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$
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$
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(
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)
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$
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|
||||||||||||||||||
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Issuance of common stock
(stock compensation plans)
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Share-based compensation
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Net income
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—
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—
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|||||||||||||||||||||||||||
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Cash dividends declared
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—
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—
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(
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)
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(
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)
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|||||||||||||||||||||||||
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Grant of stock options
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—
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—
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(
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)
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||||||||||||||||||||||||||
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Other comprehensive loss
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—
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—
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|
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(
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)
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(
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)
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|||||||||||||||||||||||||
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Balance, March 31, 2024
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|
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$
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$
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$
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$
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(
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)
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$
|
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$
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(
|
)
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$
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|
||||||||||||||||||
See accompanying notes to consolidated financial statements.
Donegal Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
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Three Months Ended March 31,
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||||||||
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2025
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2024
|
|||||||
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Cash Flows from Operating Activities:
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||||||||
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Net income
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$
|
|
$
|
|
||||
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Adjustments to reconcile net income to net cash provided by operating activities:
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||||||||
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Depreciation, amortization and other non-cash items
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||||||
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Net investment losses (gains)
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(
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)
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|||||
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Changes in assets and liabilities:
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||||||||
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Losses and loss expenses
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(
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)
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(
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)
|
||||
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Unearned premiums
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|
||||||
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Premiums receivable
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(
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)
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(
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)
|
||||
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Deferred acquisition costs
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(
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)
|
(
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)
|
||||
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Deferred income taxes
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(
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)
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|
|||||
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Reinsurance receivable
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|
||||||
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Prepaid reinsurance premiums
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(
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)
|
(
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)
|
||||
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Accrued investment income
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(
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)
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(
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)
|
||||
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Due from affiliate
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|
(
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)
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|||||
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Reinsurance balances payable
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(
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)
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(
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)
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||||
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Current income taxes
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||||||
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Accrued expenses
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(
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)
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|||||
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Other, net
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||||||
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Net adjustments
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|
(
|
)
|
|||||
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Net cash provided by operating activities
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|
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||||||
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Cash Flows from Investing Activities:
|
||||||||
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Purchases of fixed maturities, held to maturity
|
(
|
)
|
(
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)
|
||||
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Purchases of fixed maturities, available for sale
|
(
|
)
|
(
|
)
|
||||
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Purchases of equity securities, available for sale
|
(
|
)
|
(
|
)
|
||||
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Maturity of fixed maturities:
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||||||||
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Held to maturity
|
|
|
||||||
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Available for sale
|
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||||||
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Sales of fixed maturities:
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||||||||
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Available for sale
|
||||||||
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Net purchases of property and equipment
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(
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)
|
|
|||||
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Net sales of short-term investments
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|
|
||||||
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Net cash used in investing activities
|
(
|
)
|
(
|
)
|
||||
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Cash Flows from Financing Activities:
|
||||||||
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Cash dividends paid
|
(
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)
|
(
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)
|
||||
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Issuance of common stock
|
|
|
||||||
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Net cash provided by (used in) financing activities
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|
(
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)
|
|||||
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Net increase (decrease) in cash
|
|
(
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)
|
|||||
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Cash at beginning of period
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|
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||||||
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Cash at end of period
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$
|
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$
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|
||||
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Cash paid during period - Interest
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$
|
|
$
|
|
||||
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Net cash received during period - Taxes
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$
|
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$
|
|
||||
See accompanying notes to consolidated financial statements.
DONEGAL GROUP INC. AND SUBSIDIARIES
(Unaudited)
Notes to Consolidated Financial Statements
| 1 - |
Organization
|
Donegal Mutual Insurance Company (“Donegal Mutual”) organized us as an insurance holding company on August 26, 1986. Our insurance
subsidiaries are Atlantic States Insurance Company (“Atlantic States”), Michigan Insurance Company (“MICO”), the Peninsula Insurance Group (“Peninsula”), which consists of The Peninsula Insurance Company and its wholly owned subsidiary
Peninsula Indemnity Company, and Southern Insurance Company of Virginia (“Southern”). Our insurance subsidiaries and their affiliates write property and casualty insurance exclusively through a network of independent insurance agents in
certain Mid-Atlantic, Midwestern, Southern and Southwestern states.
At March 31, 2025, we had three
segments: our investment function, our commercial lines of insurance and our personal lines of insurance. 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 March 31, 2025, Donegal Mutual held approximately 44 % 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. While each company maintains its separate corporate existence, our insurance
subsidiaries and Donegal Mutual conduct business together as the Donegal Insurance Group. As such, Donegal Mutual and our insurance subsidiaries share the same business philosophy, the same management, the same employees and the same facilities
and offer the same types of insurance products.
Atlantic States, our largest subsidiary, participates in a proportional reinsurance agreement (the “pooling agreement”) with Donegal Mutual. Under the pooling
agreement, Donegal Mutual and Atlantic States contribute substantially all of their respective premiums, losses and loss expenses to the underwriting pool, and the underwriting pool, acting through Donegal Mutual, then allocates 80 % of the pooled business to Atlantic States. Thus, Donegal Mutual and Atlantic States share the underwriting results of the pooled business in
proportion to their respective participation in the underwriting pool.
In addition, Donegal Mutual has 100 %
quota-share reinsurance agreements with Mountain States Commercial Insurance Company, Mountain States Indemnity Company and Southern Mutual Insurance Company. Donegal Mutual places its assumed business from these companies into the underwriting
pool.
The same executive management and underwriting personnel administer products, classes of business underwritten, pricing practices and
underwriting standards of Donegal Mutual and our insurance subsidiaries. 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. 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 allow the individual companies to manage certain
risk segments through variations in coverage, terms and pricing. Therefore, the underwriting profitability of the business the individual companies write directly will vary. However, the underwriting pool homogenizes the risk characteristics
of all business that Donegal Mutual and Atlantic States write directly. The business Atlantic States derives from the underwriting pool represents a significant percentage of our total consolidated revenues.
| 2 - |
Basis of Presentation
|
Our financial information for the interim periods included in this Form 10-Q Report is unaudited; however, our financial information we
include in this Form 10-Q 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 three months ended March 31, 2025 are not necessarily indicative of the results of operations we expect for the year ending December 31, 2025.
We recommend you read the interim financial statements we include in this Form 10-Q Report in conjunction with the financial statements and
the notes to our financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2024 that we filed with the Securities and Exchange Commission (“SEC”) on March 10, 2025.
| 3 - |
Net Income 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 net income per share. The two-class
method is an earnings allocation formula that determines net income per share separately for each class of common stock based on dividends we have declared and an allocation of our remaining undistributed net income 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 March 31,
|
||||||||||||||||
|
2025
|
2024
|
|||||||||||||||
|
Class A
|
Class B
|
Class A
|
Class B
|
|||||||||||||
|
(in thousands, except per share data)
|
||||||||||||||||
|
Basic net income per share:
|
||||||||||||||||
|
Numerator:
|
||||||||||||||||
|
Allocation of net income
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Denominator:
|
||||||||||||||||
|
Weighted-average shares outstanding
|
|
|
|
|
||||||||||||
|
Basic net income per share
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Diluted net income per share:
|
||||||||||||||||
|
Numerator:
|
||||||||||||||||
|
Allocation of net income
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Denominator:
|
||||||||||||||||
|
Number of shares used in basic computation
|
|
|
|
|
||||||||||||
|
Weighted-average shares effect of dilutive securities:
|
||||||||||||||||
|
Director and employee stock options
|
|
|
|
|
||||||||||||
|
Number of shares used in diluted computation
|
|
|
|
|
||||||||||||
|
Diluted net income 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 net income 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 March 31,
|
||||||||
|
2025
|
2024
|
|||||||
|
Number of options to purchase Class A shares excluded
|
|
|
||||||
| 4 - |
Reinsurance
|
Atlantic States and Donegal Mutual have participated in a pooling agreement since 1986 under which they pool substantially all of their
respective premiums, losses and loss expenses, and Atlantic States and Donegal Mutual then share the underwriting results of the pool in accordance with the terms of the pooling agreement. Atlantic States has an 80 % share of the results of the pool, and Donegal Mutual has a 20 % share of the results of the pool.
Our insurance subsidiaries and Donegal Mutual participate in a consolidated third-party reinsurance program. The coverage and parameters of
the program are common to all of our insurance subsidiaries and Donegal Mutual. The program utilizes several different reinsurers. They require their reinsurers to maintain an A.M. Best rating of A- (Excellent) or better or, with respect to
foreign reinsurers, have a financial condition that, in the opinion of our management, is equivalent to a company with at least an A- rating from A.M. Best. The following information describes the external reinsurance Donegal Mutual and our
insurance subsidiaries have in place for 2025:
| • |
excess of loss reinsurance, under which Donegal Mutual and our insurance subsidiaries recover losses over a set retention of $
|
|
•
|
catastrophe reinsurance, under which Donegal Mutual and our insurance subsidiaries recover
|
For property
insurance, our insurance subsidiaries have excess of loss reinsurance that provides coverage of $36.0 million per loss over a set
retention of $4.0 million. For liability insurance, our insurance subsidiaries have excess of loss reinsurance that provides coverage
of $69.0 million per occurrence over a set retention of $6.0 million. For workers’ compensation insurance, our insurance subsidiaries have excess of loss reinsurance that provides coverage of $17.0 million on any one life over a set retention of $3.0
million.
In addition to the
pooling agreement and third-party reinsurance, our insurance subsidiaries have a catastrophe reinsurance agreement with Donegal Mutual, under which each of our insurance subsidiaries recovers 100 % of an accumulation of multiple losses resulting from a single event, including natural disasters, over a set retention of $3.0 million up to aggregate losses of $22.0 million per
occurrence. The agreement also provides additional coverage for an accumulation of losses from a single event including a combination of our insurance subsidiaries over a combined retention of $6.0 million. The purpose of the agreement is to lessen the effects of an accumulation of losses arising from one event to levels that are appropriate given each
subsidiary’s size, underwriting profile and surplus.
Southern, MICO and The Peninsula Insurance Company also have a liability reinsurance agreement with Donegal Mutual, under which each
insurance subsidiary recovers up to $3.0 million per occurrence over a set retention of $3.0 million.
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.
In
order to write automobile insurance in the state of Michigan, Atlantic States, MICO and Peninsula are required to be members of the Michigan Catastrophic Claims Association (“MCCA”). The MCCA provides reinsurance to Atlantic States, MICO and
Peninsula for personal automobile and commercial automobile personal injury claims in the state of Michigan over a set retention.
We report reinsurance receivable net of an allowance for expected credit losses. We base the allowance upon our ongoing review of amounts outstanding, historical loss data, changes in reinsurer credit standing and other relevant
factors. We use a probability-of-default methodology, which reflects current and forecasted economic conditions, to estimate the allowance for expected credit losses.
| 5 - |
Investments
|
The amortized cost and estimated fair values of our fixed maturities at March 31, 2025 were as follows:
|
Carrying
Value
|
Allowance for
Credit Losses
|
Amortized Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated Fair
Value
|
|||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||
|
Held to Maturity
|
||||||||||||||||||||||||
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
$ | $ |
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||
|
Obligations of states and political subdivisions
|
|
|
|
|
||||||||||||||||||||
|
Corporate securities
|
|
|
|
|
||||||||||||||||||||
|
Mortgage-backed securities
|
|
|
|
|
||||||||||||||||||||
|
Totals
|
$ | $ |
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||
|
Amortized Cost
|
Gross Unrealized
Gains
|
Gross Unrealized
Losses
|
Estimated Fair
Value
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
Available for Sale
|
||||||||||||||||
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Obligations of states and political subdivisions
|
$ |
|
|
|
|
|||||||||||
|
Corporate securities
|
|
|
|
|
||||||||||||
|
Mortgage-backed securities
|
|
|
|
|
||||||||||||
|
Totals
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
At March 31, 2025, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair
value of $229.6 million and an amortized cost of $268.0 million. Our holdings at March 31, 2025 also included special revenue bonds with an aggregate fair value of $127.4
million and an amortized cost of $144.4 million. With respect to both categories of bonds, we held no securities of any issuer that
comprised more than 10 % of that category at March 31, 2025. Education bonds and water and sewer utility bonds represented 46 % and 37 %, respectively, of our
total investments in special revenue bonds based on the carrying values of these investments at March 31, 2025. Many of the issuers of the special revenue bonds we held at March 31, 2025 have the authority to impose ad valorem taxes. In that
respect, many of the special revenue bonds we held are similar to general obligation bonds.
The amortized cost and estimated fair values of our fixed maturities at December 31, 2024 were as follows:
|
Carrying
Value
|
Allowance
for Credit
Losses
|
Amortized Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated Fair
Value
|
|||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||
|
Held to Maturity
|
||||||||||||||||||||||||
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
$ | $ |
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||
|
Obligations of states and political subdivisions
|
|
|
|
|
||||||||||||||||||||
|
Corporate securities
|
|
|
|
|
||||||||||||||||||||
|
Mortgage-backed securities
|
|
|
|
|
||||||||||||||||||||
|
Totals
|
$ | $ |
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||
|
Amortized Cost
|
Gross Unrealized
Gains
|
Gross Unrealized
Losses
|
Estimated Fair
Value
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
Available for Sale
|
||||||||||||||||
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Obligations of states and political subdivisions
|
|
|
|
|
||||||||||||
|
Corporate securities
|
|
|
|
|
||||||||||||
|
Mortgage-backed securities
|
|
|
|
|
||||||||||||
|
Totals
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
At December 31, 2024, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate
fair value of $233.1 million and an amortized cost of $272.5 million. Our holdings also included special revenue bonds with an aggregate fair value of $123.0 million and an amortized cost of $141.3 million. With
respect to both categories of bonds, we held no securities of any issuer that comprised more than 10 % of that category at December
31, 2024. Education bonds and water and sewer utility bonds represented 44 % and 37 %, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, 2024. Many of the issuers of the special revenue bonds
we held at December 31, 2024 have the authority to impose ad valorem taxes. In that respect, many of the special revenue bonds we held are similar to general obligation bonds.
We have segregated within accumulated other comprehensive loss the net unrealized losses of $15.1 million arising prior to the November 30, 2013 reclassification date for fixed maturities reclassified from available for sale to held to maturity. We are amortizing
this balance over the remaining life of the related securities as an adjustment of yield in a manner consistent with the accretion of discount on the same fixed maturities. We recorded amortization of $45,199 and $48,577 in other comprehensive income (loss)
during the three months ended March 31, 2025 and 2024, respectively. At March 31, 2025 and December 31, 2024, net unrealized losses of $1.0
We show below the amortized cost and estimated fair value of our fixed maturities at March 31, 2025 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.
|
Amortized Cost
|
Estimated Fair
Value
|
|||||||
|
(in thousands)
|
||||||||
|
Held to maturity
|
||||||||
|
Due in one year or less
|
$
|
|
$
|
|
||||
|
Due after one year through five years
|
|
|
||||||
|
Due after five years through ten years
|
|
|
||||||
|
Due after ten years
|
|
|
||||||
|
Mortgage-backed securities
|
|
|
||||||
|
Total held to maturity
|
$
|
|
$
|
|
||||
|
Available for sale
|
||||||||
|
Due in one year or less
|
$
|
|
$
|
|
||||
|
Due after one year through five years
|
|
|
||||||
|
Due after five years through ten years
|
|
|
||||||
|
Due after ten years
|
|
|
||||||
|
Mortgage-backed securities
|
|
|
||||||
|
Total available for sale
|
$
|
|
$
|
|
||||
The cost and estimated fair values of our equity securities at March 31, 2025 were as follows:
|
Cost
|
Gross Gains
|
Gross Losses
|
Estimated Fair
Value
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
Equity securities
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
The cost and estimated fair values of our equity securities at December 31, 2024 were as follows:
|
Cost
|
Gross Gains
|
Gross Losses
|
Estimated Fair
Value
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
Equity securities
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
We present below gross gains and losses from investments and the change in the difference between fair value and cost of investments:
|
Three Months Ended March 31,
|
||||||||
|
2025
|
2024
|
|||||||
|
(in thousands)
|
||||||||
|
Gross realized gains:
|
||||||||
|
Fixed maturities
|
$
|
|
$
|
|
||||
|
Equity securities
|
|
|
||||||
|
|
|
|
||||||
|
Gross realized losses:
|
||||||||
|
Fixed maturities
|
|
|
||||||
|
Equity securities
|
|
|
||||||
|
|
|
|||||||
|
Net realized gains (losses)
|
|
(
|
)
|
|||||
| Gross unrealized gains on equity securities | ||||||||
| Gross unrealized losses on equity securities | ( |
) | ( |
) | ||||
| Fixed maturities - credit impairment charges | ( |
) | ||||||
| Net investment (losses) gains |
$ | ( |
) | $ | ||||
We held fixed maturities with unrealized losses representing declines that we considered temporary at March 31, 2025 as follows:
|
Less Than 12 Months
|
More Than 12 Months
|
|||||||||||||||
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Obligations of states and political subdivisions
|
|
|
|
|
||||||||||||
|
Corporate securities
|
|
|
|
|
||||||||||||
|
Mortgage-backed securities
|
|
|
|
|
||||||||||||
|
Totals
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
We held fixed maturities with unrealized losses representing declines that we considered temporary at December 31, 2024 as follows:
|
Less Than 12 Months
|
More Than 12 Months
|
|||||||||||||||
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Obligations of states and political subdivisions
|
|
|
|
|
||||||||||||
|
Corporate securities
|
|
|
|
|
||||||||||||
|
Mortgage-backed securities
|
|
|
|
|
||||||||||||
|
Totals
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
We make
estimates concerning the valuation of our investments and, as applicable, the recognition of 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. With respect to an available-for-sale debt security that is in an unrealized loss position, we first assess if we intend to sell the debt security. If we determine we intend to sell the debt security, we recognize the
impairment loss in our results of operations. If we do not intend to sell the debt security, we determine whether it is more likely than not that we will be required to sell the debt security prior to recovery. If we determine it is more
likely than not that we will be required to sell the debt security prior to recovery, we recognize the impairment loss in our results of operations. 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. 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 establish an allowance for credit loss. We then recognize the amount of the
allowance 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 regularly review the allowance for credit losses and recognize changes in the
allowance in our results of operations. 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. For held-to-maturity debt
securities, we make estimates concerning expected credit losses at an aggregated level rather than monitoring individual debt securities for credit losses. We establish an allowance for expected credit losses based on an ongoing review of
securities held, historical loss data, changes in issuer credit standing and other relevant factors. We utilize a probability-of-default methodology, which reflects current and forecasted economic conditions, to estimate the allowance for
expected credit losses and recognize changes to the allowance in our results of operations. We held 841 debt securities that were
in an unrealized loss position at March 31, 2025. Based upon our analysis of general market conditions 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. We compute realized investment gains and losses using the specific identification method.
We amortize premiums and discounts on mortgage-backed debt securities using anticipated prepayments.
|
6 -
|
Segment Information
|
We have three reportable
segments, which consist of our investment function, our commercial lines of insurance and our personal lines of insurance. Using independent agents, our insurance subsidiaries market commercial lines of insurance to small and medium-sized
businesses and personal lines of insurance to individuals.
Our chief operating decision maker, which is our Chief Executive Officer, evaluates the performance of the commercial lines and personal
lines primarily based upon our insurance subsidiaries’ underwriting results as determined under statutory accounting principles (“SAP”). This segmentation is consistent with the segmentation we utilize to manage our business. We make
resource allocation decisions based upon historical underwriting results as well as perceived opportunities for future profitable growth within each segment.
We operate only in the United States, and no single customer or agent provides 10 percent or more of our revenues.
Financial data by segment is as follows:
|
Three Months Ended
March 31, 2025
|
||||||||||||||||
|
Investments
|
Commercial Lines
|
Personal
Lines
|
Total
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Net premiums earned
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Net investment income
|
|
|
|
|
||||||||||||
|
Investment losses
|
(
|
)
|
|
|
(
|
)
|
||||||||||
|
Total segment revenues
|
|
|
|
|
||||||||||||
|
Other
|
|
|||||||||||||||
|
Total revenues
|
$
|
|
||||||||||||||
|
Segment expenses:
|
||||||||||||||||
|
Net losses and loss expenses
|
|
|
|
|
||||||||||||
|
Other underwriting expenses
|
|
|
|
|
||||||||||||
|
Policyholder dividends
|
|
|
|
|
||||||||||||
|
Total segment expenses
|
|
|
|
|
||||||||||||
|
SAP underwriting (loss) income
|
|
(
|
)
|
|
|
|||||||||||
|
GAAP adjustments
|
|
|||||||||||||||
|
GAAP underwriting income
|
|
|||||||||||||||
|
Net investment income
|
|
|||||||||||||||
|
Investment losses
|
(
|
)
|
||||||||||||||
|
Other
|
|
|||||||||||||||
|
Income before income tax expense
|
$
|
|
||||||||||||||
|
Three Months Ended
March 31, 2024
|
||||||||||||||||
|
Investments
|
Commercial Lines
|
Personal
Lines
|
Total
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Net premiums earned
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Net investment income
|
|
|
|
|
||||||||||||
|
Investment gains
|
|
|
|
|
||||||||||||
|
Total segment revenues
|
|
|
|
|
||||||||||||
|
Other
|
|
|||||||||||||||
|
Total revenues
|
$
|
|
||||||||||||||
|
Segment expenses:
|
||||||||||||||||
|
Net losses and loss expenses
|
|
|
|
|
||||||||||||
|
Other underwriting expenses
|
|
|
|
|
||||||||||||
|
Policyholder dividends
|
|
|
|
|
||||||||||||
|
Total segment expenses
|
|
|
|
|
||||||||||||
|
SAP underwriting loss
|
|
(
|
)
|
(
|
)
|
(
|
)
|
|||||||||
|
GAAP adjustments
|
|
|||||||||||||||
|
GAAP underwriting loss
|
(
|
)
|
||||||||||||||
|
Net investment income
|
|
|||||||||||||||
|
Investment gains
|
|
|||||||||||||||
|
Other
|
(
|
)
|
||||||||||||||
|
Income before income tax expense
|
$
|
|
||||||||||||||
|
7 -
|
Borrowings
|
Lines of Credit
In August 2020, we entered into a credit agreement with Manufacturers and Traders Trust Company (“M&T”) that related to a $20.0 million unsecured demand line of credit. The line of credit has no expiration date, no annual fees and no covenants. At March 31, 2025, we
had no outstanding borrowings from M&T and had the ability to borrow up to $20.0 million at an interest rate equal to the then-current Term
rate plus 2.11 %.
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 March 31, 2025. The cash advance carries a fixed interest rate of 3.806 % and is due in . 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 March 31, 2025.
|
FHLB of Pittsburgh stock purchased and owned
|
$
|
|
||
|
Collateral pledged, at par (carrying value $
|
|
|||
|
Borrowing capacity currently available
|
|
|
8 -
|
Share–Based Compensation
|
We measure all share-based payments to employees, including grants of stock options, and use a fair-value-based method for the recording of
related compensation expense in our results of operations. In determining the expense we record for stock options granted to directors and employees of our subsidiaries and affiliates, we estimate the fair value of each option award on the
date of grant using the Black-Scholes option pricing model. 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 recorded compensation expense related to our stock compensation plans of $296,936 and $286,001 for the three months ended March 31, 2025 and 2024,
respectively, with a corresponding income tax benefit of $62,357 and $60,060 , respectively. At March 31, 2025, we had $1.5 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 1.8 years.
We received cash from option exercises under all stock compensation plans during the three months ended March 31, 2025 and 2024 of $6.3 million and $236,624 ,
respectively. We realized actual tax benefits for the tax deductions related to those option exercises of $300,981 and $1,719 for the three months ended March 31, 2025 and 2024, respectively.
| 9 - |
Fair Value Measurements
|
We account for financial assets using a framework that establishes a
hierarchy that ranks the quality and reliability of the inputs, or assumptions, we use in the determination of fair value, and we classify financial assets and liabilities carried at fair value in one of the following three categories:
Level 1 – quoted prices in active markets for identical assets and liabilities;
Level 2 – directly or indirectly observable inputs other than Level 1 quoted prices; and
Level 3 – unobservable inputs not corroborated by market data.
For investments that have quoted market prices in active markets, we use the quoted market price as fair value and include these
investments in Level 1 of the fair value hierarchy. We classify publicly-traded equity securities as Level 1. When quoted market prices in active markets are not available, we base fair values on quoted market prices of comparable
instruments or price estimates we obtain from independent pricing services and include these investments in Level 2 of the fair value hierarchy. We classify our fixed maturity investments and non-publicly traded equity securities as Level
2. Our fixed maturity investments consist of U.S. Treasury securities and obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, corporate securities and mortgage-backed securities.
We present our investments in available-for-sale fixed maturity and equity securities at estimated fair value. The estimated fair value of a
security may differ from the amount that could be realized if we sold the security in a forced transaction. 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 generally obtain two prices per security. These pricing services utilize market quotations for fixed maturity and equity securities that have quoted prices in active markets. For fixed maturity
securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements based predominantly on observable market inputs. The pricing services do not use broker quotes in determining the
fair values of our investments. Our investment personnel review the estimates of fair value the pricing services provide to verify that the estimates we obtain from the pricing services are representative of fair values based upon our
investment personnel’s general knowledge of the market, their research findings related to unusual fluctuations in value and their comparison of such values to execution prices for similar securities. Our investment personnel monitor the
market and are familiar with current trading ranges for similar securities and the pricing of specific investments. Our investment personnel review all pricing estimates that we receive from the pricing services against their expectations
with respect to pricing based on fair market curves, security ratings, coupon rates, security types and recent trading activity. 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 March 31, 2025, 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 March 31, 2025, 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. We classify these items as Level 1.
The carrying values in our balance sheet for premium receivables, reinsurance receivables related to paid losses and loss expenses and
reinsurance balances payable approximate their fair values. The carrying amounts reported in the balance sheet for our borrowings under lines of credit approximate their fair values. We classify these items as Level 3.
We evaluate our assets and liabilities on a regular basis to determine the appropriate level at which to classify them for each reporting period. Based on our review of the
methodology and summary of inputs the pricing services use, we have concluded that our Level 1 and Level 2 investments were classified properly at March 31, 2025 and December 31, 2024.
The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at
March 31, 2025:
|
Fair Value Measurements Using
|
||||||||||||||||
|
Fair Value
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
Significant
Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
U.S. Treasury securities and obligations of U.S.government corporations and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Obligations of states and political subdivisions
|
|
|
|
|
||||||||||||
|
Corporate securities
|
|
|
|
|
||||||||||||
|
Mortgage-backed securities
|
|
|
|
|
||||||||||||
|
Equity securities
|
|
|
|
|
||||||||||||
|
Total investments in the fair value hierarchy
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at
December 31, 2024:
|
Fair Value Measurements Using
|
||||||||||||||||
|
Fair Value
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
Significant
Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
U.S. Treasury securities and obligations of U.S.government corporations and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Obligations of states and political subdivisions
|
|
|
|
|
||||||||||||
|
Corporate securities
|
|
|
|
|
||||||||||||
|
Mortgage-backed securities
|
|
|
|
|
||||||||||||
|
Equity securities
|
|
|
|
|
||||||||||||
|
Totals
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
| 10 - |
Income Taxes
|
At March 31, 2025 and December 31, 2024, respectively, we had no material unrecognized tax benefits or accrued interest and penalties. In
2019, the Internal Revenue Service (“IRS”) began a federal income tax audit of our consolidated tax returns for tax years 2016 to 2018. No material issues have been raised and no adjustments have been proposed as a result of this ongoing
audit. 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 $7.6 million for our net state operating loss carryforward, which will expire between 2025 and 2044. We have determined that we are not required to establish a valuation allowance for
our other deferred tax assets of $36.0 million and $37.5 million at March 31, 2025 and December 31, 2024, 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.
| 11 - |
Liabilities for Losses and Loss Expenses
|
The
establishment of appropriate liabilities for losses and loss expenses is an inherently uncertain process, and we can provide no assurance that our insurance subsidiaries’ ultimate liabilities for losses and loss expenses will not exceed
their loss and loss expense reserves and have an adverse effect on our results of operations and financial condition. For example, legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate
coverage or otherwise require our insurance subsidiaries to pay losses for damages that their policies explicitly excluded or did not intend to cover. Furthermore, we cannot predict the timing, frequency and extent of adjustments to our
insurance subsidiaries’ estimated future liabilities, because the historical conditions and events that serve as a basis for our insurance subsidiaries’ estimates of ultimate claim costs may change. As is the case for substantially all
property and casualty insurance companies, our insurance subsidiaries have found it necessary in the past to increase their estimated future liabilities for losses and loss expenses in certain periods, and, in other periods, their
estimated future liabilities for losses and loss expenses have exceeded their actual liabilities for losses and loss expenses. Changes in our insurance subsidiaries’ estimate of their liabilities for losses and loss expenses generally
reflect actual payments and their evaluation of information received subsequent to the prior reporting period.
We summarize activity in our insurance subsidiaries’ liabilities for losses and loss expenses as follows:
|
Three Months Ended March 31,
|
||||||||
|
2025
|
2024
|
|||||||
|
(in thousands)
|
||||||||
|
Balance at January 1
|
$
|
|
$
|
|
||||
|
Less reinsurance recoverable
|
(
|
)
|
(
|
)
|
||||
|
Net balance at January 1
|
|
|
||||||
|
Incurred related to:
|
||||||||
|
Current year
|
|
|
||||||
|
Prior years
|
(
|
)
|
(
|
)
|
||||
|
Total incurred
|
|
|
||||||
|
Paid related to:
|
||||||||
|
Current year
|
|
|
||||||
|
Prior years
|
|
|
||||||
|
Total paid
|
|
|
||||||
|
Net balance at end of period
|
|
|
||||||
|
Plus reinsurance recoverable
|
|
|
||||||
|
Balance at end of period
|
$
|
|
$
|
|
||||
Our insurance subsidiaries recognized a decrease in their liabilities for losses and loss expenses of prior years of $10.5 million and $8.4 million
for the three months ended March 31, 2025 and 2024, 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 2025 development represented 1.5 %
of the December 31, 2024 net carried reserves and resulted from lower-than-expected loss emergence or severity primarily in the commercial automobile, commercial multi-peril and personal automobile lines of business. The majority of the
2025 development related to decreases in the liabilities for losses and loss expenses of prior years for Atlantic States and MICO. The 2024 development represented 1.2 % of the December 31, 2023 net carried reserves and resulted from lower-than-expected loss emergence or severity primarily in the commercial multi-peril, commercial automobile
and homeowners lines of business. The majority of the 2024 development related to decreases in the liabilities for losses and loss expenses of prior years for Atlantic States and MICO.
Short-duration contracts are contracts for which our insurance subsidiaries receive premiums that they recognize as revenue over the
period of the contract in proportion to the amount of insurance protection our insurance subsidiaries provide. Our insurance subsidiaries consider the policies they issue to be short-duration contracts. We consider the material lines of
business of our insurance subsidiaries to be personal automobile, homeowners, commercial automobile, commercial multi-peril and workers’ compensation.
Our insurance subsidiaries determine incurred but not reported (“IBNR”)
reserves by subtracting the cumulative loss and loss expense amounts our insurance subsidiaries have paid and the case reserves our insurance subsidiaries have established at the balance sheet date from their actuaries’ estimate of the
ultimate cost of losses and loss expenses. 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 three
months ended March 31, 2025.
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 “a priori,” or expected, loss ratio for each line of business our insurance subsidiaries write. Expected loss ratios represent the actuaries’ expectation
of losses at the time our insurance subsidiaries price and write their policies and before the emergence of any actual claims experience. 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. These methods include paid
loss development, incurred loss development and the Bornhuetter-Ferguson method from which the actuaries select loss development factor assumptions. The actuaries base their selection of a point estimate on a judgmental weighting of the
estimates each of these methods produce.
The actuaries consider loss frequency and severity trends when they develop expected loss ratios and point estimates. Loss frequency is
a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors that affect loss frequency include changes in weather patterns and economic activity. Factors that
affect loss severity include changes in policy limits, reinsurance retentions, inflation rates and judicial interpretations.
Our insurance subsidiaries create a claim file when they receive notice of an actual demand for payment, an event that may lead to a
demand for payment or when they otherwise determine that a demand for payment could potentially lead to a future demand for payment on another coverage under the same policy or another policy they have issued. In recent years, our
insurance subsidiaries have noted an increase in the period of time between the occurrence of a casualty loss event and the date on which they receive notice of a liability claim. Changes in the length of time between the loss occurrence
date and the claim reporting date affect the actuaries’ ability to predict loss frequency accurately and the amount of IBNR reserves our insurance subsidiaries require.
Our insurance subsidiaries generally create a claim file for a policy at the claimant level by type of coverage and generally recognize
one count for each claim event. In certain lines of business where it is common for multiple parties to claim damages arising from a single claim event, our insurance subsidiaries recognize one count for each claimant involved in the
event. Atlantic States recognizes one count for each claim event, or claimant involved in a multiple-party claim event, related to losses Atlantic States assumes through its participation in its pooling agreement with Donegal Mutual. Our
insurance subsidiaries accumulate the claim counts and report them by line of business.
| 12 - |
Allowance for Expected Credit Losses
|
We make estimates with respect to the potential impairment of financial instruments and recognize expected credit losses as an allowance rather than impairments as credit losses are
incurred. We have established allowances for expected credit losses with respect to held-to-maturity debt securities and reinsurance receivable.
Held-to-Maturity Fixed-Maturity Securities
For held-to-maturity debt securities, we make estimates concerning expected credit losses at an aggregated level rather that monitoring individual debt securities for credit losses.
We establish an allowance for expected credit losses based on an ongoing review of securities held, historical loss data, changes in issuer credit standing and other relevant factors. We utilize a probability-of-default methodology, which
reflects current and forecasted economic conditions, to estimate the allowance for expected credit losses and recognize changes to the allowance in our results of operations.
The following table presents the balances for fixed maturities classified as
held-to-maturity, net of the allowance for expected credit losses, at March 31, 2025 and 2024 and changes in the allowance for expected credit losses for the three months ended March 31, 2025 and 2024.
|
At and For the Three Months
Ended March 31, 2025
|
At and For the Three Months
Ended March 31, 2024
|
|||||||||||||||
|
Held-to-Maturity,
Net of Allowance
for Expected
Credit Losses
|
Allowance
for Expected
Credit Losses
|
Held-to-Maturity,
Net of Allowance
for Expected
Credit Losses
|
Allowance
for Expected
Credit Losses
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
Balance at beginning of period
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Current period change for expected credit losses
|
(
|
)
|
|
|||||||||||||
|
Balance at end of period
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
Reinsurance Receivable
For
reinsurance receivable, we establish an allowance for expected credit losses based upon our ongoing review of amounts outstanding, historical loss data, changes in reinsurer credit standing and other relevant factors. We utilize a
probability-of-default methodology, which reflects current and forecasted economic conditions, to estimate the allowance for expected credit losses and recognize changes to the allowance in our results of operations.
The following table presents the balances
for reinsurance receivable, net of the allowance for expected credit losses, at March 31, 2025 and 2024, and the changes in the allowance for expected credit losses for the three months ended March 31, 2025 and 2024.
|
At and For the Three Months
Ended March 31, 2025
|
At and For the Three Months
Ended March 31, 2024
|
|||||||||||||||
|
Reinsurance
Receivable, Net
of Allowance
for Expected
Credit Losses
|
Allowance
for Expected
Credit Losses
|
Reinsurance
Receivable, Net
of Allowance
for Expected
Credit Losses
|
Allowance
for Expected
Credit Losses
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
Balance at beginning of period
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Current period change for expected credit losses
|
|
(
|
)
|
|||||||||||||
|
Balance at end of period
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
| 13 - |
Impact of New Accounting Standards
|
In December 2023, the Financial Accounting Standards Board (“FASB”) issued
guidance to enhance the transparency and usefulness of income tax disclosures. The guidance requires disclosure of specific categories in the rate reconciliation table and additional information for reconciling items that meet a
quantitative threshold of equal to or greater than 5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate. The guidance also requires disaggregated disclosure of the amount of
income taxes paid for federal, state and foreign taxes. The guidance is effective for annual reporting periods beginning after December 15, 2024. The adoption of this guidance will not have an impact on our financial position, results of
operations or cash flows.
In November 2024, the FASB issued guidance requiring disaggregated disclosure
of income statement expenses in the notes to financial statements. The guidance requires disclosure of certain expenses, including employee compensation, depreciation and selling expenses. The guidance will not impact current income
statement expense captions that industry-specific guidance requires. The guidance is effective for annual and interim reporting periods beginning after December 15, 2026. The adoption of this guidance will not have an impact on our
financial position, results of operations or cash flows.
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
We recommend that you read the following information in conjunction with the historical financial information and the footnotes to that financial information we include in this Quarterly Report on Form 10-Q. We
also recommend you read Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2024.
Critical Accounting Policies and Estimates
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 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 provided. 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
Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with respect to incurred policyholder claims based on facts and circumstances the insurer
knows at that point in time. For example, legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries to pay losses for damages that their policies
explicitly excluded or did not intend to cover. At the time of establishing its estimates, an insurer recognizes that its ultimate liability for losses and loss expenses will exceed or be less than such estimates. Our insurance subsidiaries base
their estimates of liabilities for losses and loss expenses on assumptions as to future loss trends, expected claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, our insurance
subsidiaries may learn additional facts regarding individual claims, and, consequently, it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates for these liabilities. We reflect any adjustments to the
liabilities for losses and loss expenses of our insurance subsidiaries in our consolidated results of operations in the period in which our insurance subsidiaries make adjustments to their estimates.
Our insurance subsidiaries maintain liabilities for the payment of losses and loss expenses with respect to both reported and unreported claims. Our insurance subsidiaries establish these liabilities for the
purpose of covering the ultimate costs of settling all losses, including investigation and litigation costs. Our insurance subsidiaries base the amount of their liability for reported losses primarily upon a case-by-case evaluation of the type of
risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss the policyholder incurred. Our insurance subsidiaries determine the amount of their liability for unreported
claims and loss expenses on the basis of historical information by line of insurance. Our insurance subsidiaries account for inflation in the reserving function through analysis of costs and trends and reviews of historical reserving results. Our
insurance subsidiaries monitor their liabilities closely and recompute them periodically using new information on reported claims and a variety of statistical techniques. Our insurance subsidiaries do not discount their liabilities for losses and
loss expenses.
Reserve estimates can change over time because of unexpected changes in assumptions related to our insurance subsidiaries’ external environment and, to a lesser extent, assumptions related to our insurance
subsidiaries’ internal operations. For example, our insurance subsidiaries have experienced an increase in claims severity and a lengthening of the claim settlement periods on bodily injury claims during the past several years. In addition, the
COVID-19 pandemic and related government mandates and restrictions resulted in various changes from historical claims reporting and settlement trends during 2020 and resulted in significant increases in loss costs in subsequent years due to a
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. Internal
assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions,
consistency in the quality and characteristics of business written within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent our insurance subsidiaries
determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our insurance subsidiaries’ ultimate liability
for unpaid losses and loss expenses will likely differ from the amount recorded at March 31, 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
and loss expense reserves and have an adverse effect on our results of operations and financial condition. Furthermore, we cannot predict the timing, frequency and extent of adjustments to our insurance subsidiaries’ estimated future liabilities,
because the historical conditions and events that serve as a basis for our insurance subsidiaries’ estimates of ultimate claim costs may change. As is the case for substantially all property and casualty insurance companies, our insurance
subsidiaries have found it necessary in the past to increase their estimated future liabilities for losses and loss expenses in certain periods and, in other periods, their estimated future liabilities for losses and loss expenses have exceeded
their actual liabilities for losses and loss expenses. Changes in our insurance subsidiaries’ estimates of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received subsequent to
the prior reporting period.
Excluding the impact of severe weather events and the COVID-19 pandemic, our insurance subsidiaries have noted stable amounts in the number of claims incurred and the number of claims outstanding at period ends
relative to their premium base in recent years across most of their lines of business. However, the amount of the average claim outstanding has increased gradually over the past several years due to various factors such as 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. However,
pooled business represents the predominant percentage of the net underwriting activity of both companies, and Donegal Mutual and Atlantic States share proportionately any adverse risk development relating to the pooled business. The business in
the 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:
|
March 31,
2025
|
December 31,
2024
|
|||||||
|
(in thousands)
|
||||||||
|
Commercial lines:
|
||||||||
|
Automobile
|
$
|
172,468
|
$
|
180,757
|
||||
|
Workers’ compensation
|
132,456
|
129,406
|
||||||
|
Commercial multi-peril
|
212,283
|
208,676
|
||||||
|
Other
|
39,389
|
39,336
|
||||||
|
Total commercial lines
|
556,596
|
558,175
|
||||||
|
Personal lines:
|
||||||||
|
Automobile
|
110,817
|
116,693
|
||||||
|
Homeowners
|
25,760
|
26,591
|
||||||
|
Other
|
3,024
|
2,905
|
||||||
|
Total personal lines
|
139,601
|
146,189
|
||||||
|
Total commercial and personal lines
|
696,197
|
704,364
|
||||||
|
Plus reinsurance recoverable
|
396,427
|
416,621
|
||||||
|
Total liabilities for losses and loss expenses
|
$
|
1,092,624
|
$
|
1,120,985
|
||||
We have evaluated the effect on our insurance subsidiaries’ loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables we consider
in establishing the loss and loss expense reserves of our insurance subsidiaries. We established the range of reasonably likely changes based on a review of changes in accident-year development by line of business and applied those changes to our
insurance subsidiaries’ loss and loss expense reserves as a whole. The range we selected does not necessarily indicate what could be the potential best or worst case or the most likely scenario. The following table sets forth the estimated effect
on our insurance subsidiaries’ loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables we considered in establishing the loss and loss expense reserves of our insurance subsidiaries:
|
Percentage Change in Loss
and Loss Expense Reserves
Net of Reinsurance
|
Adjusted Loss and Loss
Expense Reserves Net of
Reinsurance at
March 31, 2025
|
Percentage Change
in Stockholders’ Equity at
March 31, 2025(1)
|
Adjusted Loss and Loss
Expense Reserves Net of
Reinsurance at
December 31, 2024
|
Percentage Change
in Stockholders’ Equity at
December 31, 2024(1)
|
||||
|
(dollars in thousands)
|
||||||||
|
(10.0)%
|
$626,577
|
9.4%
|
$633,928
|
10.2%
|
||||
|
(7.5)
|
643,982
|
7.1
|
651,537
|
7.6
|
||||
|
(5.0)
|
661,387
|
4.7
|
669,146
|
5.1
|
||||
|
(2.5)
|
678,792
|
2.4
|
686,755
|
2.5
|
||||
|
Base
|
696,197
|
—
|
704,364
|
—
|
||||
|
2.5
|
713,602
|
(2.4)
|
721,973
|
(2.5)
|
||||
|
5.0
|
731,007
|
(4.7)
|
739,582
|
(5.1)
|
||||
|
7.5
|
748,412
|
(7.1)
|
757,191
|
(7.6)
|
||||
|
10.0
|
765,817
|
(9.4)
|
774,800
|
(10.2)
|
||||
| (1) |
Net of income tax effect.
|
Non-GAAP Information
We prepare our consolidated financial statements on the basis of GAAP. Our insurance subsidiaries also prepare financial statements based on statutory accounting principles state insurance regulators prescribe or
permit (“SAP”). SAP financial measures are considered non-GAAP financial measures under applicable SEC rules because the SAP financial measures include or exclude certain items that the most comparable GAAP financial measures do not ordinarily
include or exclude. Our calculation of non-GAAP financial measures may differ from similar measures other companies use, so investors should exercise caution when comparing our non-GAAP financial measures to the non-GAAP financial measures other
companies use.
Because our insurance subsidiaries do not prepare GAAP financial statements, we evaluate the performance of our personal lines and commercial lines segments utilizing SAP financial measures that reflect the growth
trends and underwriting results of our insurance subsidiaries. The SAP financial measures we utilize are net premiums written and statutory combined ratio.
Net Premiums Written
We define net premiums written as the amount of full-term premiums our insurance subsidiaries record for policies effective within a given period less premiums our insurance subsidiaries cede to reinsurers. Net
premiums earned is the most comparable GAAP financial measure to net premiums written. Net premiums earned represent the sum of the amount of net premiums written and the change in net unearned premiums during a given period. Our insurance
subsidiaries earn premiums and recognize them as revenue over the terms of their policies, which are one year or less in duration. Therefore, increases or decreases in net premiums earned generally reflect increases or decreases in net premiums
written in the preceding 12-month period compared to the comparable period one year earlier.
The following table provides a reconciliation of our net premiums earned to our net premiums written for the three months ended March 31, 2025:
|
Commercial
Lines
|
Personal
Lines
|
Total
|
||||||||||
|
(in thousands)
|
||||||||||||
|
Net premiums earned
|
$
|
136,216
|
$
|
96,486
|
$
|
232,702
|
||||||
|
Change in net unearned premiums
|
24,402
|
(10,012
|
)
|
14,390
|
||||||||
|
Net premiums written
|
$
|
160,618
|
$
|
86,474
|
$
|
247,092
|
||||||
The following table provides a reconciliation of our net premiums earned to our net premiums written for the three months ended March 31, 2024:
|
Commercial
Lines
|
Personal
Lines
|
Total
|
||||||||||
|
(in thousands)
|
||||||||||||
|
Net premiums earned
|
$
|
132,092
|
$
|
95,657
|
$
|
227,749
|
||||||
|
Change in net unearned premiums
|
23,402
|
291
|
23,693
|
|||||||||
|
Net premiums written
|
$
|
155,494
|
$
|
95,948
|
$
|
251,442
|
||||||
Statutory Combined Ratio
The combined ratio is a standard measurement of underwriting profitability for an insurance company. The combined ratio does not reflect investment income, net investment gains or losses,
federal income taxes or other non-operating income or expense. A combined ratio of less than 100% generally indicates underwriting profitability.
The statutory combined ratio is a non-GAAP financial measure that is based upon amounts determined under SAP. We calculate our statutory combined ratio as the sum of:
| • |
the statutory loss ratio, which is the ratio of calendar-year net incurred losses and loss expenses to net premiums earned;
|
| • |
the statutory expense ratio, which is the ratio of expenses incurred for net commissions, premium taxes and underwriting expenses to net premiums written; and
|
| • |
the statutory dividend ratio, which is the ratio of dividends to holders of workers’ compensation policies to net premiums earned.
|
The calculation of our statutory combined ratio differs from the calculation of our GAAP combined ratio. In calculating our GAAP combined ratio, we do not deduct installment payment fees from
incurred expenses, and we base the expense ratio on net premiums earned instead of net premiums written. Differences between our GAAP loss ratio and our statutory loss ratio result from anticipating salvage and subrogation recoveries for our GAAP
loss ratio but not for our statutory loss ratio.
Combined Ratios
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,
|
||||||||
|
2025
|
2024
|
|||||||
|
GAAP Combined Ratios (Total Lines)
|
||||||||
|
Loss ratio - core losses
|
54.2
|
%
|
58.7
|
%
|
||||
|
Loss ratio - weather-related losses
|
3.7
|
4.7
|
||||||
|
Loss ratio - large fire losses
|
3.3
|
6.6
|
||||||
|
Loss ratio - net prior-year reserve development
|
(4.5
|
)
|
(3.7
|
)
|
||||
|
Loss ratio
|
56.7
|
66.3
|
||||||
|
Expense ratio
|
34.6
|
35.7
|
||||||
|
Dividend ratio
|
0.3
|
0.4
|
||||||
|
Combined ratio
|
91.6
|
%
|
102.4
|
%
|
||||
|
Statutory Combined Ratios
|
||||||||
|
Commercial lines:
|
||||||||
|
Automobile
|
91.4
|
%
|
99.6
|
%
|
||||
|
Workers’ compensation
|
117.6
|
111.2
|
||||||
|
Commercial multi-peril
|
90.3
|
102.7
|
||||||
|
Other
|
80.8
|
82.2
|
||||||
|
Total commercial lines
|
94.7
|
101.6
|
||||||
|
Personal lines:
|
||||||||
|
Automobile
|
85.0
|
99.8
|
||||||
|
Homeowners
|
83.8
|
102.9
|
||||||
|
Other
|
56.6
|
85.2
|
||||||
|
Total personal lines
|
83.6
|
100.3
|
||||||
|
Total commercial and personal lines
|
90.3
|
101.2
|
||||||
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 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 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
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 $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 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
2024. 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 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. Our
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. The expense
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. 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 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 $6.0 million for the first quarter of 2025, representing an effective tax rate of 19.1%. We recorded income tax
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
tax rates.
Net Income and Net Income Per Share. 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 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 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
business. 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%. At
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.
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 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
Our portfolio of marketable equity securities, which we carry on our consolidated balance sheets at estimated fair value, has exposure to the risk of loss resulting from an adverse change in prices. We manage this
risk by having our investment personnel perform an analysis of prospective investments and regular reviews of our portfolio of equity securities.
Credit Risk
Our portfolio of fixed-maturity securities and, to a lesser extent, our portfolio of short-term investments is subject to credit risk, which we define as the potential loss in market value resulting from adverse
changes in the borrower’s ability to repay its debt. We manage this risk by having our investment personnel perform an analysis of prospective investments and regular reviews of our portfolio of fixed-maturity securities. We also limit the
percentage and amount of our total investment portfolio that we invest in the securities of any one issuer.
Our insurance subsidiaries provide property and casualty insurance coverages through independent insurance agencies. We bill the majority of this business directly to the insured, although we bill a portion of our
commercial business through licensed insurance agents to whom our insurance subsidiaries extend credit in the normal course of business.
Because the pooling agreement does not relieve Atlantic States of primary liability as the originating insurer, Atlantic States is subject to a concentration of credit risk arising from the business it cedes to
Donegal Mutual. Our insurance subsidiaries maintain reinsurance agreements with Donegal Mutual and with a number of other major unaffiliated authorized reinsurers.
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk.
|
Our market risk generally represents the risk of gain or loss that may result from the potential change in the fair value of the securities we hold in our investment portfolio as a result of fluctuations in prices
and interest rates and, to a lesser extent, our debt obligations. We manage our interest rate risk by maintaining an appropriate relationship between the average duration of our investment portfolio and the approximate duration of our
liabilities, i.e., policy claims of our insurance subsidiaries and our debt obligations.
There have been no material changes to our quantitative or qualitative market risk exposure from December 31, 2024 through March 31, 2025.
| Item 4. |
Controls and Procedures.
|
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act). Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, at March 31, 2025, our disclosure controls and procedures were effective in recording,
processing, summarizing and reporting, on a timely basis, information we are required to disclose in the reports that we file or submit under the Exchange Act, and our disclosure controls and procedures were also effective to ensure that
information we disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required
disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to affect materially,
our internal control over financial reporting.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
We base all statements contained in this Quarterly Report on Form 10-Q that are not historic facts on our current expectations. Such statements are forward-looking in nature (as defined in the Private Securities
Litigation Reform Act of 1995) and necessarily involve risks and uncertainties. Forward-looking statements we make may be identified by our use of words such as “will,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “seek,” “estimate” and
similar expressions. Our actual results could vary materially from our forward-looking statements. The factors that could cause our actual results to vary materially from the forward-looking statements we have previously made include, but are not
limited to, adverse litigation and other trends that could increase our loss costs (including labor shortages and escalating medical, automobile and property repair costs, including due to tariffs), adverse and catastrophic weather events
(including from changing climate conditions), our ability to maintain profitable operations (including our ability to underwrite risks effectively and charge adequate premium rates), the adequacy of the loss and loss expense reserves of our
insurance subsidiaries, the availability and successful operation of the information technology systems our insurance subsidiaries utilize, the successful development of new information technology systems to allow our insurance subsidiaries to
compete effectively, business and economic conditions in the areas in which we and our insurance subsidiaries operate, interest rates, competition from various insurance and other financial businesses, terrorism, the availability and cost of
reinsurance, legal and judicial developments (including those related to COVID-19 business interruption coverage exclusions), changes in regulatory requirements, our ability to attract and retain independent insurance agents, changes in our A.M.
Best rating and the other risks that we describe from time to time in our filings with the Securities and Exchange Commission. We disclaim any obligation to update such statements or to announce publicly the results of any revisions that we may
make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
| Item 1. |
Legal Proceedings.
|
None.
| Item 1A. |
Risk Factors.
|
Our business, results of operations and financial condition, and, therefore, the value of our Class A common stock and our Class B common stock, are subject to a number of risks. For a description of certain
risks, we refer to “Risk Factors” in our 2024 Annual Report on Form 10-K that we filed with the SEC on March 10, 2025. There have been no material changes in the risk factors we disclosed in that Form 10-K Report during the three months ended
March 31, 2025.
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds.
|
|
Period
|
(a) Total Number of Shares
(or Units) Purchased
|
(b) Average Price Paid per
Share (or Unit)
|
(c) Total Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs
|
(d) Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs
|
||||
|
Month #1
January 1-31, 2025
|
Class A – None
Class B – None
|
Class A – None
Class B – None
|
Class A – None
Class B – None
|
(1)
|
||||
|
Month #2
February 1-28, 2025
|
Class A – 51,901
Class B – None
|
Class A – $16.96
Class B – None
|
Class A – 51,901
Class B – None
|
(1)
|
||||
|
Month #3
March 1-31, 2025
|
Class A – 130,109
Class B – None
|
Class A – $17.93
Class B – None
|
Class A – 130,109
Class B – None
|
(1)
|
||||
|
Total
|
Class A – 182,010
Class B – None
|
Class A – $17.65
Class B – None
|
Class A – 182,010
Class B – None
|
| (1) |
Donegal Mutual purchased these shares pursuant to its announcement on April 29, 2022 that it will, at its discretion, purchase shares of our Class A common stock and Class B common stock at market prices prevailing from time to time
in the open market subject to the provisions of SEC Rule 10b-18 and in privately negotiated transactions. Such announcement did not stipulate a maximum number of shares that may be purchased under this program.
|
| Item 3. |
Defaults upon Senior Securities.
|
None.
| Item 4. |
Mine Safety Disclosure.
|
Not Applicable.
| Item 5. |
Other Information.
|
| Item 6. |
Exhibits.
|
|
Exhibit No.
|
Description
|
Reference
|
||
|
Management Contracts and Compensatory Plans or Arrangements
|
||||
|
Form of Employment Agreement dated as of October 1, 2020 among Donegal Mutual Insurance Company, Donegal Group Inc. and Our Executive Officers Other Than Kevin G. Burke and Jeffrey D. Miller
|
Filed herewith
|
|||
|
Other Exhibits
|
||||
|
Certification of Chief Executive Officer.
|
Filed herewith
|
|||
|
Certification of Chief Financial Officer.
|
Filed herewith
|
|||
|
Statement of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of Title 18 of the United States Code.
|
Filed herewith
|
|||
|
Statement of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of Title 18 of the United States Code.
|
Filed herewith
|
|||
|
Exhibit 101.INS
|
XBRL Instance Document
|
Filed herewith
|
||
|
Exhibit 101.SCH
|
XBRL Taxonomy Extension Schema Document
|
Filed herewith
|
||
|
Exhibit 101.PRE
|
XBRL Taxonomy Presentation Linkbase Document
|
Filed herewith
|
||
|
Exhibit 101.CAL
|
XBRL Taxonomy Calculation Linkbase Document
|
Filed herewith
|
||
|
Exhibit 101.LAB
|
XBRL Taxonomy Label Linkbase Document
|
Filed herewith
|
||
|
Exhibit 101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
Filed herewith
|
||
|
Exhibit 104
|
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
|
Filed herewith
|
||
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
DONEGAL GROUP INC.
|
||
|
May 6, 2025
|
By:
|
/s/ Kevin G. Burke
|
|
Kevin G. Burke, President and Chief Executive Officer
|
||
|
May 6, 2025
|
By:
|
/s/ Jeffrey D. Miller
|
|
Jeffrey D. Miller, Executive Vice President and Chief Financial Officer
|