DONEGAL GROUP INC [DGICA] Filings

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

☐	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.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults upon Senior Securities	31
Item 4.	Removed and Reserved	31
Item 5.	Other Information	31
Item 6.	Exhibits	32
Signatures		33

Index

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.

Index

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.

Index

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.

Index

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.

Index

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.

Index

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

Index

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.

Index

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.

Index

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.

Index

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

Index

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

Index

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.

Index

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.

DONEGAL GROUP INC [DGICA] Filings

DONEGAL GROUP INC [DGICB] Filings