10-Q 1 brhc20052036_10q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q


(Mark One)


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR


TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                  .
Commission file number 0-15341


Donegal Group Inc.
(Exact name of registrant as specified in its charter)



Delaware
23-2424711
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1195 River Road, P.O. Box 302, Marietta, PA 17547
(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):

 Large accelerated filer ☐
Accelerated filer
Non-accelerated filer ☐
 Smaller reporting company
Emerging growth company
 
 
 

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:

Title of Each Class
Trading Symbols
Name of Each Exchange on Which Registered
     
Class A Common Stock, $.01 par value
DGICA
The NASDAQ Global Select Market
     
Class B Common Stock, $.01 par value
DGICB
The NASDAQ Global Select Market

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 27,343,615 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, 2023.



DONEGAL GROUP INC.
INDEX TO FORM 10-Q REPORT

   
Page
PART I
FINANCIAL INFORMATION
 
Item 1.
1
Item 2.
20
Item 3.
29
Item 4.
29
     
PART II
OTHER INFORMATION
 
Item 1.
30
Item 1A.
30
Item 2.
30
Item 3.
31
Item 4.
31
Item 5.
31
Item 6.
32
33

PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
Donegal Group Inc. and Subsidiaries
Consolidated Balance Sheets

   
March 31,
2023
   
December 31,
2022
 
   
(Unaudited)
       
Assets
           
Investments
           
Fixed maturities
           
Held to maturity, at amortized cost (net of allowance for expected credit losses of $1,355,484 and $0)
 
$
693,778,523
   
$
688,439,360
 
Available for sale, at fair value
   
546,469,475
     
523,791,931
 
Equity securities, at fair value
   
37,584,654
     
35,104,840
 
Short-term investments, at cost, which approximates fair value
   
28,137,598
     
57,321,111
 
Total investments
   
1,305,970,250
     
1,304,657,242
 
Cash
   
22,836,044
     
25,123,332
 
Accrued investment income
   
10,183,882
     
8,861,292
 
Premiums receivable
   
189,545,403
     
173,846,294
 
Reinsurance receivable (net of allowance for expected credit losses of $1,466,994 and $0)
   
460,681,422
     
456,522,223
 
Deferred policy acquisition costs
   
77,189,596
     
73,170,230
 
Deferred tax asset, net
   
20,686,146
     
21,603,017
 
Prepaid reinsurance premiums
   
170,551,420
     
160,591,399
 
Property and equipment, net
   
2,757,161
     
2,755,105
 
Accounts receivable - securities
   
1,288
     
1,842
 
Federal income taxes recoverable
   
7,761,084
     
8,510,897
 
Due from affiliate
    2,478,004        
Goodwill
   
5,625,354
     
5,625,354
 
Other intangible assets
   
958,010
     
958,010
 
Other
   
1,460,420
     
1,123,098
 
Total assets
 
$
2,278,685,484
   
$
2,243,349,335
 
Liabilities and Stockholders’ Equity
               
Liabilities
               
Losses and loss expenses
 
$
1,123,534,684
   
$
1,121,045,758
 
Unearned premiums
   
609,684,232
     
577,653,130
 
Accrued expenses
   
4,692,378
     
4,226,390
 
Reinsurance balances payable
   
3,275,447
     
3,495,824
 
Borrowings under lines of credit
   
35,000,000
     
35,000,000
 
Cash dividends declared to stockholders
   

     
5,296,990
 
Due to affiliate
          5,173,289  
Other
   
8,936,574
     
7,864,942
 
Total liabilities
   
1,785,123,315
     
1,759,756,323
 
Stockholders’ Equity
               
Preferred stock, $0.01 par value, authorized 2,000,000 shares; none issued
   
     
 
Class A common stock, $0.01 par value, authorized 50,000,000 shares, issued 30,298,312
and 30,120,263 shares and outstanding 27,295,724 and 27,117,675 shares
   
302,984
     
301,203
 
Class B common stock, $0.01 par value, authorized 10,000,000 shares, issued 5,649,240
shares and outstanding 5,576,775 shares
   
56,492
     
56,492
 
Additional paid-in capital
   
328,375,472
     
325,601,647
 
Accumulated other comprehensive loss
   
(37,696,109
)
   
(41,703,747
)
Retained earnings
   
243,749,687
     
240,563,774
 
Treasury stock, at cost
   
(41,226,357
)
   
(41,226,357
)
Total stockholders’ equity
   
493,562,169
     
483,593,012
 
Total liabilities and stockholders’ equity
 
$
2,278,685,484
   
$
2,243,349,335
 

See accompanying notes to consolidated financial statements.

1

Donegal Group Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)

   
Three Months Ended March 31,
 
   
2023
   
2022
 
Revenues:
           
Net premiums earned
 
$
215,233,160
   
$
199,248,624
 
Investment income, net of investment expenses
   
9,449,078
     
7,858,881
 
Net investment losses (includes ($ 2,199,673) and $165,354 accumulated other comprehensive income reclassifications)
   
(331,189
)
   
(76,247
)
Lease income
   
89,347
     
104,628
 
Installment payment fees
   
305,375
     
490,831
 
Total revenues
   
224,745,771
     
207,626,717
 
Expenses:
               
Net losses and loss expenses
   
138,105,889
     
117,883,002
 
Amortization of deferred policy acquisition costs
   
37,798,000
     
34,182,000
 
Other underwriting expenses
   
40,611,437
     
37,106,304
 
Policyholder dividends
   
1,343,340
     
1,648,751
 
Interest
   
152,957
     
153,033
 
Other expenses, net
   
437,715
     
427,388
 
Total expenses
   
218,449,338
     
191,400,478
 
Income before income tax expense
   
6,296,433
     
16,226,239
 
Income tax expense (includes ($ 461,931) and $34,724 income tax (benefit) expense from reclassification items)
   
1,092,837
     
3,081,210
 
Net income
 
$
5,203,596
   
$
13,145,029
 
Income per common share:
               
Class A common stock - basic and diluted
 
$
0.16
   
$
0.43
 
Class B common stock - basic and diluted
 
$
0.15
   
$
0.39
 


Donegal Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

   
Three Months Ended March 31,
 
   
2023
   
2022
 
Net income
 
$
5,203,596
   
$
13,145,029
 
Other comprehensive income (loss), net of tax
               
Unrealized gain (loss) on securities:
               
Unrealized holding gain (loss) during the period, net of income tax expense (benefit) of $603,390 and ($5,438,628)
   
2,269,896
     
(20,459,595
)
Reclassification adjustment for losses (gains) included in net income, net of income
tax (benefit) expense of ($ 461,931) and $34,724
   
1,737,742
     
(130,630
)
Other comprehensive income (loss)
   
4,007,638
     
(20,590,225
)
Comprehensive income (loss)
 
$
9,211,234
   
$
(7,445,196
)

See accompanying notes to consolidated financial statements.

2

Donegal Group Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Unaudited)
Three Months Ended March 31, 2023
 
   
Class A
Shares
   
Class B
Shares
   
Class A
Amount
   
Class B
Amount
   
Additional
Paid-In Capital
   
Accumulated
Other
Comprehensive
Loss
   
Retained
Earnings
   
Treasury Stock
   
Total
Stockholders’
Equity
 
Balance, December 31, 2022
   
30,120,263
     
5,649,240
   
$
301,203
   
$
56,492
   
$
325,601,647
   
$
(41,703,747
)
 
$
240,563,774
   
$
(41,226,357
)
 
$
483,593,012
 
Issuance of common stock
(stock compensation plans)
   
35,045
     
     
350
     
     
440,746
     
     
     
     
441,096
 
Share-based compensation
   
143,004
     
     
1,431
     
     
2,218,355
     
     
     
     
2,219,786
 
Net income
   
     
     
     
     
     
     
5,203,596
     
     
5,203,596
 
Cash dividends declared
   
     
     
     
     
     
     
(7,057
)
   
     
(7,057
)
Grant of stock options
   
     
     
     
     
114,724
     
     
(114,724
)
   
     
 
Cumulative effect of adoption of updated guidance for credit losses at January 1, 2023
   
     
     
     
     
     
      (1,895,902 )    
      (1,895,902 )
Other comprehensive income
   
     
     
     
     
     
4,007,638
     
     
     
4,007,638
 
Balance, March 31, 2023
   
30,298,312
     
5,649,240
   
$
302,984
   
$
56,492
   
$
328,375,472
   
$
(37,696,109
)
 
$
243,749,687
   
$
(41,226,357
)
 
$
493,562,169
 

Three Months Ended March 31, 2022
 
   
Class A
Shares
   
Class B
Shares
   
Class A
Amount
   
Class B
Amount
   
Additional
Paid-In Capital
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Retained
Earnings
   
Treasury Stock
   
Total
Stockholders’
Equity
 
Balance, December 31, 2021
   
28,756,203
     
5,649,240
   
$
287,562
   
$
56,492
   
$
304,889,481
   
$
3,283,551
   
$
263,745,358
   
$
(41,226,357
)
 
$
531,036,087
 
Issuance of common stock
(stock compensation plans)
   
33,407
     
     
335
     
     
423,665
     
     
     
     
424,000
 
Share-based compensation
   
900
     
     
9
     
     
256,451
     
     
     
     
256,460
 
Net income
   
     
     
     
     
     
     
13,145,029
     
     
13,145,029
 
Cash dividends declared
   
     
     
     
     
     
     
(5,490
)
   
     
(5,490
)
Grant of stock options
   
     
     
     
     
98,409
     
     
(98,409
)
   
     
 
Other comprehensive loss
   
     
     
     
     
     
(20,590,225
)
   
     
     
(20,590,225
)
Balance, March 31, 2022
   
28,790,510
     
5,649,240
   
$
287,906
   
$
56,492
   
$
305,668,006
   
$
(17,306,674
)
 
$
276,786,488
   
$
(41,226,357
)
 
$
524,265,861
 

See accompanying notes to consolidated financial statements.

3

Donegal Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

   
Three Months Ended March 31,
 
   
2023
   
2022
 
Cash Flows from Operating Activities:
           
Net income
 
$
5,203,596
   
$
13,145,029
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Depreciation, amortization and other non-cash items
   
1,122,609
     
1,343,128
 
Net investment losses
   
331,189
     
76,247
 
Changes in assets and liabilities:
               
Losses and loss expenses
   
2,488,926
     
(6,032,916
)
Unearned premiums
   
32,031,102
     
16,780,670
 
Premiums receivable
   
(15,699,109
)
   
(13,612,915
)
Deferred acquisition costs
   
(4,019,366
)
   
(3,579,838
)
Deferred income taxes
   
355,524
     
(334,190
)
Reinsurance receivable
   
(5,291,035
)
   
7,115,224
 
Prepaid reinsurance premiums
   
(9,960,021
)
   
2,412,533
 
Accrued investment income
   
(1,322,590
)
   
(1,233,871
)
Due from affiliate
   
(7,651,293
)
   
(287,192
)
Reinsurance balances payable
   
(220,377
)
   
123,455
 
Current income taxes
   
749,813
     
3,427,885
 
Accrued expenses
   
465,988
     
871,443
 
Other, net
   
734,310
     
535,049
 
Net adjustments
   
(5,884,330
)
   
7,604,712
 
Net cash (used in) provided by operating activities
   
(680,734
)
   
20,749,741
 
Cash Flows from Investing Activities:
               
Purchases of fixed maturities, held to maturity
   
(12,092,863
)
   
(28,656,113
)
Purchases of fixed maturities, available for sale
   
(34,354,601
)
   
(34,281,491
)
Purchases of equity securities, available for sale
   
(3,590,015
)
   
(5,276,815
)
Maturity of fixed maturities:
               
Held to maturity
   
6,127,883
     
9,203,976
 
Available for sale
   
12,365,403
     
23,296,757
 
Sales of fixed maturities:
               
Available for sale
    748,250        
Sales of equity securities, available for sale
   
3,066,129
     
14,408,819
 
Net (purchases) sales of property and equipment
   
(44,700
)
   
28,288
 
Net sales of short-term investments
   
29,183,513
     
3,498,167
 
Net cash provided by (used in) investing activities
   
1,408,999
     
(17,778,412
)
Cash Flows from Financing Activities:
               
Cash dividends paid
   
(5,304,047
)
   
(4,920,758
)
Issuance of common stock
   
2,288,494
     
314,940
 
Net cash used in financing activities
   
(3,015,553
)
   
(4,605,818
)
Net decrease in cash
   
(2,287,288
)
   
(1,634,489
)
Cash at beginning of period
   
25,123,332
     
57,709,375
 
Cash at end of period
 
$
22,836,044
   
$
56,074,886
 
                 
Cash paid during period - Interest
 
$
156,346
   
$
161,506
 
Net cash paid during period - Taxes
 
$
   
$
 

See accompanying notes to consolidated financial statements.

4

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, Atlantic States Insurance Company (“Atlantic States”), Southern Insurance Company of Virginia (“Southern”), the Peninsula Insurance Group (“Peninsula”), which consists of Peninsula Indemnity Company and The Peninsula Insurance Company and Michigan Insurance Company (“MICO”), and our affiliates write personal and commercial lines of property and casualty coverages exclusively through a network of independent insurance agents in certain Mid-Atlantic, Midwestern, New England, Southern and Southwestern states.



At March 31, 2023, 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, 2023, Donegal Mutual held approximately 43% of our outstanding Class A common stock and approximately 84% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately 71% 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, or 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 a 100% quota-share reinsurance agreement with Southern Mutual Insurance Company, or Southern Mutual. Donegal Mutual places its assumed business from Southern Mutual 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 relate to specific risk profiles targeted within similar classes of business, such as preferred tier versus standard tier products, but we do not allocate all of the standard risk gradients to one company. 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, 2023 are not necessarily indicative of the results of operations we expect for the year ending December 31, 2023.



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, 2022.

5

3 -
Earnings Per Share



We have two classes of common stock, which we refer to as our Class A common stock and our Class B common stock. Our certificate of incorporation provides that whenever our board of directors declares a dividend on our Class B common stock, our board of directors shall simultaneously declare a dividend on our Class A common stock that is payable to the holders of our Class A common stock at the same time and as of the same record date at a rate that is at least 10% greater than the rate at which our board of directors declared a dividend on our Class B common stock. Accordingly, we use the two-class method to compute our earnings per common share. The two-class method is an earnings allocation formula that determines earnings per share separately for each class of common stock based on dividends we have declared and an allocation of our remaining undistributed earnings using a participation percentage that reflects the dividend rights of each class. The table below presents for the periods indicated a reconciliation of the numerators and denominators we used to compute basic and diluted net income per share for our Class A common stock and our Class B common stock:
 
   
Three Months Ended March 31,
 
   
2023
   
2022
 
   
Class A
   
Class B
   
Class A
   
Class B
 
   
(in thousands, except per share data)
 
Basic earnings per share:
                       
Numerator:
                       
Allocation of net income
 
$
4,387
   
$
817
   
$
10,986
   
$
2,159
 
Denominator:
                               
Weighted-average shares outstanding
   
27,193
     
5,577
     
25,787
     
5,577
 
Basic earnings per share
 
$
0.16
   
$
0.15
   
$
0.43
   
$
0.39
 
                                 
Diluted earnings per share:
                               
Numerator:
                               
Allocation of net income
 
$
4,387
   
$
817
   
$
10,986
   
$
2,159
 
Denominator:
                               
Number of shares used in basic computation
   
27,193
     
5,577
     
25,787
     
5,577
 
Weighted-average shares effect of dilutive securities:
                               
Director and employee stock options
   
173
     
     
22
     
 
Number of shares used in diluted computation
   
27,366
     
5,577
     
25,809
     
5,577
 
Diluted earnings per share
 
$
0.16
   
$
0.15
   
$
0.43
   
$
0.39
 
 

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

   
Three Months Ended March 31,
 
   
2023
   
2022
 
                 
Number of options to purchase Class A shares excluded
   
2,307,435
     
5,434,934
 

6

4 -
Reinsurance



Atlantic States and Donegal Mutual have participated in a pooling agreement since 1986 under which they pool their direct premiums written, and Atlantic States and Donegal Mutual then share the underwriting results of the pool in accordance with the terms of the pooling agreement. 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 2023:


excess of loss reinsurance, under which Donegal Mutual and our insurance subsidiaries recover losses over a set retention of $3.0 million for all losses other than workers’compensation and a retention of $2.0 million for workers’ compensation losses; and

 
catastrophe reinsurance, under which Donegal Mutual and our insurance subsidiaries recover 100% of an accumulation of many losses resulting from a single event, including natural disasters, over a set retention of $25.0 million up to aggregate losses of $175.0 million per occurrence.



For property insurance, our insurance subsidiaries have excess of loss reinsurance that provide for coverage of $37.0 million per loss over a set retention of $3.0 million. For liability insurance, our insurance subsidiaries have excess of loss reinsurance that provide for coverage of $72.0 million per occurrence over a set retention of $3.0 million. For workers’ compensation insurance, our insurance subsidiaries have excess of loss reinsurance that provide for coverage of $18.0 million on any one life over a set retention of $2.0 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.


7


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, MICO is required to be a member of the Michigan Catastrophic Claims Association (“MCCA”).  The MCCA provides reinsurance to MICO 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, 2023 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
    $
101,899     $
62    
$
101,961
   
$
   
$
9,660
   
$
92,301
 
Obligations of states and political subdivisions
      382,388       318      
382,706
     
2,105
     
48,800
     
336,011
 
Corporate securities
      198,202       968      
199,170
     
17
     
17,854
     
181,333
 
Mortgage-backed securities
      11,290       7      
11,297
     
     
517
     
10,780
 
Totals
    $
693,779     $
1,355    
$
695,134
   
$
2,122
   
$
76,831
   
$
620,425
 
 
   
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
 
$
83,666
   
$
134
   
$
4,654
   
$
79,146
 
Obligations of states and political subdivisions
   
45,383
     
72
     
4,105
     
41,350
 
Corporate securities
   
212,358
     
2
     
14,710
     
197,650
 
Mortgage-backed securities
   
248,187
     
246
     
20,110
     
228,323
 
Totals
 
$
589,594
   
$
454
   
$
43,579
   
$
546,469
 



At March 31, 2023, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $250.1 million and an amortized cost of $284.3 million. Our holdings at March 31, 2023 also included special revenue bonds with an aggregate fair value of $127.3 million and an amortized cost of $143.8 million. With respect to both categories of those bonds at March 31, 2023, we held no securities of any issuer that comprised more than 10% of our holdings of either bond category. Education bonds and water and sewer utility bonds represented 48% and 35%, respectively, of our total investments in special revenue bonds based on the carrying values of these investments at March 31, 2023. Many of the issuers of the special revenue bonds we held at March 31, 2023 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.
8

 

The amortized cost and estimated fair values of our fixed maturities at December 31, 2022 were as follows:
 
   
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
 
$
103,362
   
$
1
   
$
10,566
   
$
92,797
 
Obligations of states and political subdivisions
   
382,097
     
1,810
     
60,494
     
323,413
 
Corporate securities
   
190,949
     
     
20,510
     
170,439
 
Mortgage-backed securities
   
12,031
     
     
635
     
11,396
 
Totals
 
$
688,439
   
$
1,811
   
$
92,205
   
$
598,045
 
 
   
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
 
$
68,538
   
$
109
   
$
5,125
   
$
63,522
 
Obligations of states and political subdivisions
   
45,448
     
34
     
5,326
     
40,156
 
Corporate securities
   
218,041
     
8
     
15,211
     
202,838
 
Mortgage-backed securities
   
239,886
     
155
     
22,765
     
217,276
 
Totals
 
$
571,913
   
$
306
   
$
48,427
   
$
523,792
 



At December 31, 2022, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $240.7 million and an amortized cost of $283.5 million. Our holdings also included special revenue bonds with an aggregate fair value of $122.9 million and an amortized cost of $144.0 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, 2022. Education bonds and water and sewer utility bonds represented 48% and 35%, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, 2022. Many of the issuers of the special revenue bonds we held at December 31, 2022 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 $ 77,032 and $149,475 in other comprehensive income (loss) during the three months ended March 31, 2023 and 2022, respectively. At March 31, 2023 and December 31, 2022, net unrealized losses of $4.6 million and $4.7 million, respectively, remained within accumulated other comprehensive loss.

9


We show below the amortized cost and estimated fair value of our fixed maturities at March 31, 2023 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
 
$
38,587
   
$
38,484
 
Due after one year through five years
   
107,029
     
102,259
 
Due after five years through ten years
   
243,499
     
220,660
 
Due after ten years
   
294,722
     
248,242
 
Mortgage-backed securities
   
11,297
     
10,780
 
Total held to maturity
 
$
695,134
   
$
620,425
 
                 
Available for sale
               
Due in one year or less
 
$
46,221
   
$
45,327
 
Due after one year through five years
   
181,269
     
169,788
 
Due after five years through ten years
   
88,229
     
80,403
 
Due after ten years
   
25,688
     
22,628
 
Mortgage-backed securities
   
248,187
     
228,323
 
Total available for sale
 
$
589,594
   
$
546,469
 


The cost and estimated fair values of our equity securities at March 31, 2023 were as follows:
 
   
Cost
   
Gross Gains
   
Gross Losses
   
Estimated Fair
Value
 
   
(in thousands)
 
Equity securities
 
$
31,672
   
$
6,631
   
$
718
   
$
37,585
 



The cost and estimated fair values of our equity securities at December 31, 2022 were as follows:
 
   
Cost
   
Gross Gains
   
Gross Losses
   
Estimated Fair
Value
 
   
(in thousands)
 
Equity securities
 
$
30,771
   
$
5,666
   
$
1,332
   
$
35,105
 
 
10


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,
 
   
2023
   
2022
 
   
(in thousands)
 
Gross realized gains:
           
Fixed maturities
 
$
22
   
$
234
 
Equity securities
   
285
     
843
 
Real estate
          477  
 
   
307
     
1,554
 
Gross realized losses:
               
Fixed maturities
   
2,222
     
69
 
Equity securities
   
46
     
824
 
     
2,268
     
893
 
Net realized (losses) gains
   
(1,961
)
   
661
 
Gross unrealized gains on equity securities     2,202       716  
Gross unrealized losses on equity securities     (485 )     (1,453 )
Fixed maturities - credit impairment charges     (87 )      
Net investment losses   $ (331 )   $ (76 )



We held fixed maturities with unrealized losses representing declines that we considered temporary at March 31, 2023 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
 
$
80,775
   
$
2,009
   
$
77,265
   
$
12,305
 
Obligations of states and political subdivisions
   
75,542
     
4,515
     
233,732
     
48,390
 
Corporate securities
   
198,944
     
8,137
     
177,785
     
24,427
 
Mortgage-backed securities
   
57,432
     
1,646
     
162,160
     
18,981
 
Totals
 
$
412,693
   
$
16,307
   
$
650,942
   
$
104,103
 



We held fixed maturities with unrealized losses representing declines that we considered temporary at December 31, 2022 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
 
$
90,245
   
$
5,327
   
$
47,238
   
$
10,364
 
Obligations of states and political subdivisions
   
261,465
     
49,327
     
47,945
     
16,493
 
Corporate securities
   
298,706
     
22,272
     
72,959
     
13,449
 
Mortgage-backed securities
   
143,886
     
10,941
     
69,879
     
12,459
 
Totals
 
$
794,302
   
$
87,867
   
$
238,021
   
$
52,765
 

11


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 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. We held 877 debt securities that were in an unrealized loss position at March 31, 2023. 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 evaluate the performance of our personal lines and commercial lines segments based upon the underwriting results of our insurance subsidiaries using statutory accounting principles (“SAP”) that various state insurance departments prescribe or permit. Our management uses SAP to measure the performance of our insurance subsidiaries instead of United States generally accepted accounting principles (“GAAP”). SAP financial measures are considered non-GAAP financial measures under applicable SEC rules because they include or exclude certain items that the most comparable GAAP financial measures do not ordinarily include or exclude.


12


Financial data by segment for the three months ended March 31, 2023 and 2022 is as follows:


   
Three Months Ended March 31,
 
   
2023
   
2022
 
   
(in thousands)
 
Revenues:
           
Premiums earned:
           
Commercial lines
 
$
130,466
   
$
124,329
 
Personal lines
   
84,767
     
74,920
 
GAAP premiums earned
   
215,233
     
199,249
 
Net investment income
   
9,449
     
7,859
 
Investment losses
   
(331
)
   
(76
)
Other
   
395
     
595
 
Total revenues
 
$
224,746
   
$
207,627
 
Income before income tax expense:
               
Underwriting (loss) income:
               
Commercial lines
 
$
(7,912
)
 
$
62
 
Personal lines
   
879
     
4,642
 
SAP underwriting (loss) income
   
(7,033
)
   
4,704
 
GAAP adjustments
   
4,407
     
3,725
 
GAAP underwriting (loss) income
   
(2,626
)
   
8,429
 
Net investment income
   
9,449
     
7,859
 
Investment losses
   
(331
)
   
(76
)
Other
   
(196
)
   
14
 
Income before income tax expense
 
$
6,296
   
$
16,226
 

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, 2023, we had no outstanding borrowings from M&T and had the ability to borrow up to $20.0 million at interest rates equal to the then-current LIBOR rate plus 2.00%.



Atlantic States is a member of the FHLB of Pittsburgh. Through its membership, Atlantic States has the ability to issue debt to the FHLB of Pittsburgh in exchange for cash advances. Atlantic States has a fixed-rate cash advance of $35.0 million that was outstanding at March 31, 2023. The cash advance carries a fixed interest rate of 1.74% and is due in August 2024.