SECURITIES AND EXCHANGE COMMISSION
☒☑
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31,
20182021
☐
| 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(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, Marietta, Pennsylvania | | 17547
|
| (Address of principal executive offices) | | (Zip code) |
Registrant’s telephone number, including area code:
(800) 877-0600Securities 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
|
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act: Yes ☐. No
☒.☑.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act. Yes ☐. No
☒.☑.
Indicate by check mark whether the 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
and posted on its corporate website, if any, 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 if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements we incorporate by reference in Part III of this Form10-K or any amendment to this Form10-K. ☒
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 ☐ | | | | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☑. No ☐.
Indicate by check mark whether the registrant is a shell
company.company (as defined in Rule 12b-2 of the Act). Yes ☐. No
☒.☑.
State the aggregate market value of the voting and
non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
$173,621,480.$227,763,077.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
22,850,08725,787,922 shares of Class A common stock and 5,576,775 shares of Class B common stock outstanding on March 1,
2019.2022.
Documents Incorporated by Reference
The registrant incorporates by reference portions of the registrant’s definitive proxy statement relating to registrant’s annual meeting of stockholders to be held April
18, 201921, 2022 into Part III of this report.
Donegal Group Inc., or DGI, is an insurance holding company whose insurance subsidiaries
offer personal and
commercial lines ofaffiliates offer property and casualty insurance
to businesses and individuals in
2224 Mid-Atlantic, Midwestern, New England,
Southern and
SouthernSouthwestern states.
DGI has no significant business operations and is separate and distinct from its insurance subsidiaries. As used in this Form
10-K Report, the terms “we,” “us” and “our” refer to Donegal Group Inc. and its
insurance subsidiaries.
Our Class A common stock and our Class B common stock trade on the NASDAQ Global Select Market under the symbols “DGICA” and “DGICB,” respectively.
Donegal Mutual Insurance Company, or Donegal Mutual, organized us as an insurance holding company on August 26, 1986. At December 31,
2018,2021, Donegal Mutual held approximately
43%41% of our outstanding Class A common stock and approximately 84% of our outstanding Class B common stock. Donegal Mutual’s ownership provides Donegal Mutual with approximately
72%70% of the combined voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock. Our insurance subsidiaries and Donegal Mutual have interrelated operations due to an intercompany pooling agreement and other intercompany agreements and transactions we describe in Note 3 of the Notes to Consolidated Financial Statements. While maintaining the separate corporate existence of each company, our insurance subsidiaries
andconduct business together with Donegal Mutual
conduct business togetherand its insurance subsidiaries as the Donegal Insurance Group.
As such,The Donegal
MutualInsurance Group is not a legal entity, is not an insurance company and
ourdoes not issue or administer insurance
subsidiaries sharepolicies. Rather, it is a trade name that refers to the
same business philosophy, the same management, the same employees and the same facilities and offer the same typesgroup of insurance
products.companies that are affiliated with Donegal Mutual.
At December 31,
2018,2021, we had
fourthree segments: our investment function,
our personal lines of insurance, our commercial lines of insurance and our
investment in Donegal Financial Services Corporation, or DFSC.personal lines of insurance. We set forth financial information about these segments in Note 19 of the Notes to Consolidated Financial Statements. The
personal lines products of our insurance subsidiaries consist primarily of homeowners and private passenger automobile policies. 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.
Our insurance subsidiaries and Donegal Mutual provide their policyholders with a selection of insurance products
at competitive rates, while pursuingand pursue profitability by adhering to a strict underwriting discipline. Our insurance subsidiaries derive a substantial portion of their insurance business from smaller to
mid-sized regional communities. We believe this focus provides our insurance subsidiaries with competitive advantages in terms of local market knowledge, marketing, underwriting, claims servicing and policyholder service. At the same time, we believe our insurance subsidiaries have cost advantages over many smaller regional insurers that result from economies of scale our insurance subsidiaries realize through centralized accounting, administrative, data processing, investment and other services.
We believe we have a substantial opportunity, as a well-capitalized regional insurance holding company with a solid business strategy, to grow profitably and compete effectively with larger national property and casualty insurers. Our downstream holding company structure, with Donegal Mutual holding approximately
72%70% of the combined voting power of our common stock, has proven its effectiveness and success over the
3235 years of our existence. Over that time period, we have grown significantly in terms of revenue and financial strength, and the Donegal Insurance Group has developed an excellent reputation as a regional group of property and casualty insurers.
We have been an effective consolidator of smaller “main street” property and casualty insurance
companies,companies. While we are currently placing less emphasis on pursuing acquisitions due to several ongoing major initiatives to enhance our technology infrastructure as well as our analytical and
processing capabilities, we
pursue opportunitiesexpect to continue to acquire other insurance companies to expand our business in a given
region.region over time. Since
1995,1998, we
and Donegal Mutual have completed
sixseven transactions involving acquisitions of property and casualty insurance companies or
began to participateparticipation in
theirthe business
of property and casualty insurance companies through Donegal Mutual’s entry into quota-share reinsurance agreements with them.
Donegal Mutual completed the merger of Mountain States Mutual Casualty Company,
(“or Mountain
States”)States, with and into Donegal Mutual effective May 25, 2017. Donegal Mutual was the surviving company in the merger, and Mountain States’ insurance subsidiaries, Mountain States Indemnity Company and Mountain States Commercial Insurance Company
(collectively, the "Mountain States insurance subsidiaries"), became insurance subsidiaries of Donegal Mutual upon completion of the merger. Upon completion of the merger, Donegal Mutual assumed all of the policy obligations of Mountain States and began to market its products together with
those of itsthe Mountain States insurance subsidiaries as the Mountain States Insurance Group in four Southwestern states.
For an indefinite period of time, Donegal Mutual
will excludealso entered into a 100% quota-share reinsurance agreement with the Mountain States insurance subsidiaries on the merger date. Beginning with policies effective in 2021, Donegal Mutual began to place the business of the Mountain States Insurance Group
frominto the
pooling agreement with Atlantic States.underwriting pool we describe in “History and Organizational Structure.” As a result, our consolidated financial results
excludethrough December 31, 2020 excluded the results of
Donegal Mutual’sthe Mountain States Insurance Group operations in those Southwestern states.
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In July 2018, we consolidated the branch office operations of Peninsula into our home office operations to achieve economies of scale and enhance service levels for policyholders of Peninsula.
We
recorded a restructuring charge for employee termination costs associated with the Peninsula consolidation of approximately $1.9 million. We paid approximately $1.5 million of these costs in 2018 and had an accrual of approximately $390,000 remaining at December 31, 2018. We entered into a definitive purchase agreement for the sale of Peninsula’s branch office in 2018. The sale was completed in January 2019, and we received net proceeds of $1.2 million. We recorded an impairment charge of $1.1 million in other expenses in 2018 related to this real estate transaction and included the $1.2 million fair value of the real estate we held for sale in other assets at December 31, 2018.In June 2018, we and Donegal Mutual Insurance Company entered into an agreement to sell DFSC and its wholly owned subsidiary, Union Community Bank,sold Donegal Financial Services Corporation (“DFSC”) to Northwest Bancshares, Inc. (“Northwest”). We consummated that transaction on March 8, 2019, resulting in proceeds valued at approximately $85.8 million in a combination of cash and Northwest common stock. DFSC was a grandfathered unitary savings and loan holding company that owned Union Community Bank, a state savings bank. Immediately prior to the closing of the merger, DFSC paid a dividend of approximately $29.2 million to us and Donegal Mutual. As the owner of 48.2% of DFSC’s common stock, we received a dividend payment from DFSC of approximately $14.1 million and consideration from Northwest valuedthat included a combination of cash in the amount of $20.5 million and Northwest common stock with a fair value at approximately $41.4the closing date of $20.9 million. We recorded a gain of $12.7 million from the sale of DFSC in our results of operations during 2019. We sold the Northwest common stock that we received as part of the consideration during 2019. This transaction represented the culmination of a banking strategy that began with the formation of DFSC in 2000. We
Effective December 1, 2019, our insurance subsidiaries Le Mars Insurance Company (“Le Mars”) and
Donegal Mutual will utilize proceeds fromSheboygan Falls Insurance Company (“Sheboygan Falls”) merged with and into Atlantic States Insurance Company (the “Mergers”). As a result of the
saleMergers, the separate corporate existences of
DFSCLe Mars and Sheboygan Falls ceased and Atlantic States Insurance Company (“Atlantic States”) continued as the surviving insurance company. Atlantic States placed the business of Le Mars and Sheboygan Falls, as their policies renewed subsequent to
support expansionthe effective date of
our combined property and casualty insurance operations.the Mergers, into the underwriting pool.
You may obtain our Annual Reports on Form
10-K, including this Form
10-K Report, our quarterly reports on Form
10-Q, our current reports on Form
8-K, our proxy statement and our other filings pursuant to the Securities Exchange Act of 1934, or the Exchange Act, without charge by viewing our website at
www.donegalgroup.com. You may also view our Code of Business Conduct and Ethics and the charters of the executive committee, the audit committee, the compensation committee and the nominating committee of our board of directors on our website. Upon request to our corporate secretary, we will also provide printed copies of any of these documents to you without charge. We have provided the address of our website solely for the information of investors. We do not intend the reference to our website address to be an active link or to otherwise incorporate the contents of our website into this Form
10-K Report.
In addition to our website, the Securities and Exchange Commission (the “SEC”) maintains an Internet site at www.sec.gov that contains our reports, proxy and information statements and other information that we electronically file with, or furnish to, the SEC.
History and Organizational Structure
In the
mid-1980’s, Donegal Mutual, as a mutual insurance company, recognized the desirability of developing additional sources of capital and surplus so it could remain competitive,
and have the surplus to expand its business and ensure its long-term viability. Accordingly, Donegal Mutual determined
to implementthat the implementation of a downstream holding company structure
as one of itswas a viable business
strategies.strategy to accomplish that objective. Thus, in 1986, Donegal Mutual formed us as a downstream holding
company.company, and we incorporated in the state of Delaware as Donegal Group Inc. After Donegal Mutual formed us, we in turn formed Atlantic States as our wholly owned property and casualty insurance company subsidiary.
In connection with the formation of Atlantic States and the establishment of our downstream insurance holding company system, Donegal Mutual and Atlantic States entered into a proportional reinsurance agreement, or pooling
agreement, that became effective October 1, 1986.agreement. Under the pooling agreement, Donegal Mutual and Atlantic States
poolcontribute substantially all of their respective premiums, losses and loss expenses to the
reinsuranceunderwriting pool, and the
reinsuranceunderwriting pool, acting through Donegal Mutual, then
cedes a portionallocates 80% of the pooled business
currently 80%, 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.
Since we established Atlantic States in 1986, Donegal Mutual and our insurance subsidiaries have conducted business together as the Donegal Insurance Group. As
The member companies of the Donegal Insurance Group,
Donegal Mutual andwhich include our insurance subsidiaries, share a combined business plan to enhance market penetration and underwriting profitability objectives. We believe Donegal Mutual’s majority interest in the combined voting power of our Class A common stock and of our Class B common stock fosters our ability to implement our business philosophies, enjoy management continuity, maintain superior employee relations and provide a stable environment within which we can grow our businesses.
The products
the member companies of the Donegal
Mutual and our insurance subsidiariesInsurance Group offer are generally complementary, which permits the Donegal Insurance Group to offer a broad range of products in 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
the member companies of the Donegal
Mutual and our insurance subsidiariesInsurance Group offer generally relate to specific risk profiles within similar classes of business, such as preferred tier products versus standard tier products.
The member companies of the Donegal
Mutual and weInsurance Group do not allocate all of the standard risk gradients to one company. As a result, 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.-2-
We receive 80% ofdirectly and all business that Donegal Mutual assumes from its affiliates and places into the results of the underwriting pool because Atlantic States has an 80% participation in the pool. The business Atlantic States derives from the underwriting pool represents a significant percentage of our total consolidated revenues. However, that percentage has gradually decreased over the past few years as we have acquired a number of other property and casualty insurance companies that do not participate in the underwriting pool.
As the capital of Atlantic States and our other insurance subsidiaries has increased, the underwriting capacity of our insurance subsidiaries has increased proportionately. The size of the underwriting pool has also increased substantially. Therefore, as we originally planned in the
mid-1980s, Atlantic States has successfully raised the capital necessary to support the growth of its direct business as well as to accept increases in its allocation of business from the underwriting pool. The portion of the underwriting pool allocated to Atlantic States has increased from an initial allocation of 35% in 1986 to an 80% allocation since March 1, 2008. We do not anticipate any further change in the pooling agreement between Atlantic States and Donegal Mutual, including any change in the percentage participation of Atlantic States in the underwriting pool.
In addition to Atlantic States, our insurance subsidiaries are Southern Insurance Company of Virginia, or Southern,
Le Mars Insurance Company, or Le Mars, The Peninsula Insurance Company and its wholly owned subsidiary, Peninsula Indemnity Company, or collectively, Peninsula,
Sheboygan Falls Insurance Company, or Sheboygan, and Michigan Insurance Company, or MICO.
In addition, Donegal Mutual has a 100% quota-share reinsurance agreement with Southern Mutual Insurance Company, or Southern Mutual, and Donegal Mutual places its assumed business from Southern Mutual into the underwriting pool.
Donegal Mutual wholly owns and has a 100% quota-share reinsurance agreement with the Mountain States insurance subsidiaries. Beginning with policies effective in 2021, Donegal Mutual places its assumed business from the Mountain States insurance subsidiaries into the underwriting pool.
The following chart depicts our organizational structure, including all of our property and casualty insurance subsidiaries and
Southern Mutual:
(1) | Because of the different relative voting power of our Class A common stock and our Class B common stock, our public stockholders hold approximately 28% of the combined voting power of our Class A common stock and our Class B common stock and Donegal Mutual holds approximately 72% of the combined voting power of our Class A common stock and our Class B common stock.
|
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affiliates:
(1) Because of the different relative voting power of our Class A common stock and our Class B common stock, our public stockholders hold approximately 30% of the combined voting power of our Class A common stock and our Class B common stock and Donegal Mutual holds approximately 70% of the combined voting power of our Class A common stock and our Class B common stock.
Relationship with Donegal Mutual
Donegal Mutual provides facilities,
personnelmanagement and other services to us
and our insurance subsidiaries. In addition, Donegal Mutual purchases and maintains the information technology systems that support the business of Donegal Mutual and our insurance subsidiaries. Donegal Mutual allocates certain related expenses to Atlantic States in
relation toaccordance with the relative participation of Donegal Mutual and Atlantic States in the
underwriting pool they maintain.pooling agreement. Our insurance subsidiaries other than Atlantic States reimburse Donegal Mutual for
allocated costs of services Donegal Mutual provides on their
respective personnel costs and bear their proportionate share of information services costsbehalf based on
each subsidiaries’ respective percentagetheir proportion of the total
netdirect premiums written of the Donegal Insurance
Group. ChargesGroup and other metrics. Allocated expenses from Donegal Mutual for
these services
it provided to Atlantic States and our other insurance subsidiaries totaled
$126.2$186.6 million,
$125.0$153.9 million and
$122.4$134.1 million for
2018, 20172021, 2020 and
2016,2019, respectively.
To enhance process efficiencies, Donegal Mutual paid certain expenses directly in 2021 that our insurance subsidiaries paid directly in 2020, resulting in higher allocations of expenses from Donegal Mutual to our insurance subsidiaries and lower direct expense payments by our insurance subsidiaries in 2021 compared to 2020.
Donegal Mutual is the employer of record for all personnel who provide services for our insurance subsidiaries. Donegal Mutual strives to maintain a culture that is based on integrity and respect, with an environment designed to facilitate excellent service to the agents and customers of the Donegal Insurance Group. At December 31, 2021, Donegal Mutual had 838 employees, of which 488 were based in its Marietta, Pennsylvania headquarters and 350 were based in regional offices or were permanent remote employees. There were 829 full-time employees and 9 part-time employees. Due to health and safety concerns related to the COVID-19 pandemic, many of Donegal Mutual's employees continue to work remotely from their homes or follow a hybrid schedule that includes working several days in their assigned office to allow for enhanced collaboration and interaction with other employees. Donegal Mutual targets employee compensation that is competitive and consistent with an employee's position, knowledge, experience and skill level. Donegal Mutual provides annual wage increases that are based on merit. Donegal Mutual provides an annual cash incentive plan for all of its employees that provides an opportunity for Donegal Mutual's employees to earn a bonus as a percentage of their annual wages that varies based on the level of underwriting profit Donegal Insurance Group achieves for a calendar year. In addition, Donegal Mutual provides to its full-time employees a comprehensive employee benefits program, including medical, dental and vision insurance, paid time off, and a 401(k) retirement plan that includes company matching provisions. Donegal Mutual also provides substantial training, development and wellness programs and resources to its employees.
Our insurance subsidiaries have
variousa catastrophe reinsurance
arrangementsagreement with Donegal
Mutual. These agreements include:Mutual, pursuant to which Donegal Mutual provides coverage for losses related to any catastrophic occurrence over a set retention of $2.0 million for each participating insurance subsidiary, with a combined retention of $5.0 million for a catastrophe involving a combination of participating insurance subsidiaries, up to the amount Donegal Mutual and our insurance subsidiaries retain under catastrophe reinsurance agreements with Atlantic States, Le Mars, MICO, Peninsula, Sheboygan and Southern; and
quota-share reinsurance agreements with MICO and Peninsula.
unaffiliated reinsurers. The purpose of the catastrophe reinsurance agreementsagreement 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 amountsurplus.
Donegal Mutual had a quota-share reinsurance agreement with MICO for policies effective through December 31, 2021. The purpose of
surplus.the quota-share reinsurance agreement with MICO was to transfer to Donegal Mutual 25% of the premiums and losses related to MICO’s business. Donegal Mutual placed its assumed business from MICO into the underwriting pool. Donegal Mutual and MICO terminated this reinsurance agreement on a run-off basis effective January 1, 2022. As a result, MICO will retain 100% of its net premiums and losses beginning with policies effective as of that date.
Donegal Mutual had a quota-share reinsurance agreement with Peninsula for policies effective through December 31, 2021. The purpose of the quota-share reinsurance agreement with Peninsula
iswas to transfer to Donegal Mutual 100% of the premiums and losses related to the workers’ compensation product line of Peninsula in certain
states, which provides the availability of an additional workers’ compensation tier for Donegal Mutual’s commercial accounts.states. Donegal Mutual
placesplaced its assumed business from Peninsula into the underwriting pool.
The purpose of the quota-share Donegal Mutual and Peninsula terminated this reinsurance agreement with MICO is to transfer to Donegal Mutual 25%on a run-off basis effective January 1, 2022. As a result, Peninsula will retain 100% of theits net workers’ compensation premiums and losses related to MICO’s business. Donegal Mutual places its assumed business from MICO into the underwriting pool.
beginning with policies effective as of that date.
We and Donegal Mutual have maintained a coordinating committee since our formation in 1986. The coordinating committee consists of two members of our board of directors, neither of whom is a member of Donegal Mutual’s board of directors, and two members of Donegal Mutual’s board of directors, neither of whom is a member of our board of directors. The purpose of the coordinating committee is to establish and maintain a process for an
annualongoing evaluation of the transactions between Donegal Mutual, our insurance subsidiaries and us. The coordinating committee considers the fairness of each intercompany transaction to Donegal Mutual and its policyholders and to us and our stockholders.
A new agreement or any change to a previously approved agreement must receive coordinating committee approval. The approval process for a new agreement between Donegal Mutual and us or one of our insurance subsidiaries or a change in such an agreement is as follows:
both of our members on the coordinating committee must determine that the new agreement or the change in an existing agreement is fair and equitable to us and in the best interests of our stockholders;
both of Donegal Mutual’s members on the coordinating committee must determine that the new agreement or the change in an existing agreement is fair and equitable to Donegal Mutual and in the best interests of its policyholders;
our board of directors must approve the new agreement or the change in an existing agreement; and
Donegal Mutual’s board of directors must approve the new agreement or the change in an existing agreement.
The coordinating committee also meets annually to review each existing agreement between Donegal Mutual and us or our insurance subsidiaries, including all reinsurance agreements between Donegal Mutual and our insurance subsidiaries. The purpose of this annual review is to examine the results of the agreements over the past year and, in the case of reinsurance agreements, over several years and to determine if the results of the existing agreements remain fair and equitable to us and our stockholders and fair and equitable to Donegal Mutual and its policyholders or if Donegal Mutual and we should mutually agree to certain adjustments to the terms of the agreements. In the case of
these reinsurance agreements, the annual adjustments typically relate to the reinsurance premiums
losses and
reinstatement premiums.loss retention amounts. These agreements are ongoing in nature and will continue in effect throughout
20192022 in the ordinary course of our business.
Our members on the coordinating committee, as of the date of this Form
10-K Report, are
Robert S. BolingerBarry C. Huber and Richard D. Wampler, II. Donegal Mutual’s members on the coordinating committee as of such date are Michael W. Brubaker and
John E. Hiestand.Cyril J. Greenya. We refer to our proxy statement for our annual meeting of stockholders to be held on April
18, 201921, 2022 for further information about the members of the coordinating committee.
-4-
We believe our relationships with Donegal Mutual offer us and our insurance subsidiaries a number of competitive advantages, including the following:
enabling our stable management, the consistent underwriting discipline of our insurance subsidiaries, external growth, long-term profitability and financial strength;
creating operational and expense synergies from the combination of resources and integrated operations of the Donegal Mutual and our insurance subsidiaries;Insurance Group;
enhancing our opportunities to expand by acquisition because of the ability of Donegal Mutual to affiliate with and acquire control of other mutual insurance companies and, thereafter, demutualize them and allow us to acquire all of their outstanding stock;
producing more stable and uniform underwriting results for our insurance subsidiaries over extended periods of time than we could achieve without our relationship with Donegal Mutual;
providing opportunities for growth because of the ability of Donegal Mutual to affiliate and enter into reinsurance agreements with, otheror otherwise acquire control of, mutual insurance companies and place the business it assumes into the pooling agreement;underwriting pool; and
providing Atlantic States with a significantly larger underwriting capacity because of the underwriting pool Donegal Mutual and Atlantic States have maintained since 1986.
In the first quarter of
2019,2022, our board of directors and the board of directors of Donegal Mutual each undertook a review of the relationships between Donegal Mutual and DGI and determined that continuing the current relationships and the current corporate structure of Donegal Mutual and DGI is in the best interests of DGI and its various constituencies.
We and Donegal Mutual are focused on several primary strategies, including achieving sustained excellent financial performance, strategically modernizing our operations and processes to transform our business, capitalizing on opportunities to grow profitably and delivering a superior experience to our agents and policyholders. Our
strategy isstrategies are designed to
allow our insurance subsidiaries to achieve their longstanding goal of outperforming the United States property and casualty insurance industry in terms of profitability and service, thereby providingprovide value to the policyholders of
Donegal Mutual and our
respective insurance subsidiaries and, ultimately,
providingto provide value to our stockholders. The annual net premiums earned of our insurance subsidiaries have increased from $301.5 million in 2006 to
$741.3$776.0 million in
2018,2021, a compound annual growth rate of
7.8%6.5%.
The combined ratio of our insurance subsidiaries and that of the United States property and casualty insurance industry as computed using United States generally accepted accounting principles, or GAAP, and statutory accounting principles, or SAP, for the years
20142017 through
20182021 are shown in the following table:
| | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
Our GAAP combined ratio | | | 110.1 | % | | | 103.0 | % | | | 98.1 | % | | | 99.0 | % | | | 101.7 | % |
Our SAP combined ratio | | | 109.4 | | | | 101.7 | | | | 96.8 | | | | 97.4 | | | | 100.5 | |
Industry SAP combined ratio(1) | | | 101.5 | | | | 105.1 | | | | 100.9 | | | | 98.3 | | | | 97.4 | |
| | | 2021 | | | 2020 | | | 2019 | | | 2018 | | | 2017 | |
| Our GAAP combined ratio | | | 101.0 | % | | | 96.0 | % | | | 99.5 | % | | | 110.1 | % | | | 103.0 | % |
| Our SAP combined ratio | | | 100.8 | | | | 95.4 | | | | 98.7 | | | | 109.4 | | | | 101.7 | |
Industry SAP combined ratio (1) | | | 101.8 | | | | 98.8 | | | | 98.9 | | | | 99.2 | | | | 103.9 | |
| (1) | As reported (projected for 2018)2021) by A.M. Best Company. |
We and Donegal Mutual believe we can continue to expand our insurance operations over time through organic growth and acquisitions of, or affiliations with, other insurance companies. We and Donegal Mutual have enhanced the performance of companies we have acquired, while leveraging the acquired companies’ core strengths and local market knowledge to expand their operations. Our insurance subsidiaries and Donegal Mutual also seek to increase their premium base by making quality independent agency appointments, enhancing their competitive position within each agency, introducing new and enhanced insurance products and developing and maintaining automated systems to improve service, communications and efficiency.
-5-
We translate these initiatives into our book value growth in a number of ways, including the following:
maintaining a conservative underwriting culture and pricing discipline to sustain our record of long-term underwriting profitability;
continuing our investment in technology to achieve operating efficiencies that lower expenses, enhance the service we provide to agencies and policyholders and increase the speed of our communications with agencies and policyholders; and
maintaining a conservative investment approach.
A detailed review of our business strategies follows:
| • | | Achieving underwriting profitability.
|
Achieving sustained excellent financial performance.
Our insurance subsidiaries seek to achieve
a combined ratio of less than 100%. We remain committed to achieving consistent underwriting profitability. Underwriting profitability is a fundamental component of our long-term financial strength because it allows our insurance subsidiaries to generate profits without relying exclusively on their investment income for profitability. Our insurance subsidiaries seek to enhance their underwriting results by:
carefully selecting the product lines they underwrite;
carefully selecting the individual risks they underwrite;
utilizing data analytics and predictive modeling tools to inform risk selection and pricing decisions;
managing their individual exposure toproperty exposures in catastrophe-prone areas; and
evaluating their claims history on a regular basis to ensure the adequacy of their underwriting guidelines and product pricing.
Our insurance subsidiaries maintain discipline in their pricing by effecting rate increases to sustain or improve their underwriting results without unduly affecting their customer retention. In addition to appropriate pricing, our insurance subsidiaries seek to ensure that their premium rates are adequate relative to the amount of risk they insure. Our insurance subsidiaries review loss trends on a regular basis to identify changes in the frequency and severity of their claims and to assess the adequacy of their rates and underwriting standards. Our insurance subsidiaries also carefully monitor and audit the information they use to price their policies for the purpose of enabling them to receive an adequate level of premiums for the risk they assume. For example, our insurance subsidiaries audit the payroll data of their workers’ compensation customers to verify that the assumptions used to price a particular policy were accurate. By implementing appropriate rate increases and understanding the risks our insurance subsidiaries agree to insure, our insurance subsidiaries seek to achieve consistent underwriting profitability.
Our insurance subsidiaries monitor the performance of the product lines they underwrite and the geographies in which they offer their insurance products. Our insurance subsidiaries take specific actions to remediate underperforming product lines or geographies that include pricing increases, underwriting adjustments, reunderwriting initiatives as well as discontinuing a given product or withdrawing from a geography when our insurance subsidiaries determine they cannot reasonably expect to generate targeted profitability over time.
Our insurance subsidiaries have no material exposures to asbestos or environmental liabilities. Our insurance subsidiaries seek to provide more than one policy to a given personal lines or commercial lines customer because this “account selling” strategy diversifies their risk and has historically improved their underwriting results. Our insurance subsidiaries also use reinsurance to manage their exposure and limit their maximum net loss from large single risks or risks in concentrated areas.
| • | | Pursuing profitable growth by organic expansion within the traditional operating territories of our insurance subsidiaries through developing and maintaining quality agency representation.
|
Our insurance subsidiaries maintain stringent expense controls under direct supervision of their senior management. We centralize the processing and administrative activities of our insurance subsidiaries to realize operating synergies and better expense control. Our insurance subsidiaries utilize technology to automate much of their underwriting, claims and billing processes and to facilitate agency and policyholder communications on an efficient, timely and cost-effective basis. Our insurance subsidiaries have increased their annual premium per employee, a measure of efficiency that our insurance subsidiaries use to evaluate their operations, from approximately $470,000 in 1999 to approximately $1.2million in 2021.
Return on invested assets is an important element of the financial results of our insurance subsidiaries. The investment strategy of our insurance subsidiaries is to generate an appropriate amount of after-tax income on invested assets while limiting the potential impact of equity market volatility and minimizing credit risk through investments in high-quality securities. As a result, our insurance subsidiaries seek to invest a high percentage of their assets in diversified, highly rated and marketable fixed-maturity instruments. The fixed-maturity portfolios of our insurance subsidiaries consist of both taxable and tax-exempt securities. Our insurance subsidiaries maintain a portion of their portfolios in short-term securities to provide liquidity for the payment of claims and operation of their respective businesses. Our insurance subsidiaries maintain a small percentage (5.0% at December 31, 2021) of their portfolios in equity securities that have a history of paying cash dividends or that our insurance subsidiaries expect will appreciate in value over time.
Strategically modernizing our operations and processes to transform our business.
In 2018, Donegal Mutual initiated a multi-year systems modernization project to replace its remaining legacy systems, streamline business processes and workflows and enhance data analytics and modeling capabilities. In February 2020, Donegal Mutual implemented the first release of new systems related to the project, and our insurance subsidiaries began to issue workers’ compensation policies from the new systems in the second quarter of 2020. In August 2021, Donegal Mutual implemented the second release of new systems related to the project, including a new agency portal and the rating, underwriting and policy issuance capabilities necessary to support the launch of new personal lines products, and our insurance subsidiaries began to issue new personal lines products from the new systems in the fourth quarter of 2021. Over the next several years, Donegal Mutual expects to implement new systems for the remaining lines of business the Donegal Insurance Group offers currently. The next release of new systems related to the project will include three commercial lines of business with enhanced straight-through-processing capabilities. This release is scheduled for implementation beginning in the first half of 2023.
In 2019, we established an enterprise analytics department with the goal of integrating data and analytics into strategy and decision-making at all levels of our organization. The enterprise analytics team is responsible for core functions of rate-making, predictive analytics, data management and business intelligence. These responsibilities include the development and expansion of risk-based pricing segmentation, analytical innovation, predictive modeling solutions, formal data strategies, performance monitoring and enhanced reporting mechanisms. We developed and began executing a pricing and analytics roadmap that will continue to deliver data-driven insights to our underwriters. This roadmap includes ongoing development and enhancement of quality tools that allow us to operationalize pricing and underwriting predictive models, integrate internal and external data for better-informed pricing and underwriting decisions and enhance the automation and precision of our rate indication methodology. Our enterprise analytics team is continuing to develop new tools and solutions that are enhancing our product portfolio management capabilities, competitive intelligence, pricing sophistication and utilization of data to monitor and manage our operations.
We are expanding our focus on process excellence, including the formalization of a structure to readily identify opportunities for operational efficiencies and to build a multi-year roadmap for addressing those opportunities. We are also expanding our data management personnel and capabilities to continually ensure the data upon which we rely for our business decisions and financial reporting is complete, accurate and secure. We have assigned an innovation task force the responsibility to research emerging technologies and identify potential technology solutions that might assist us in further modernizing our operations.
Capitalizing on opportunities to grow profitably.
Continued expansion of our insurance subsidiaries within their existing markets will be a key source of their continued premium growth, and that maintaining an effective and growing network of independent agencies is integral to theirthis expansion. Our insurance subsidiaries seek to be among the top three insurers within each of the independent agencies for the lines of business our insurance subsidiaries write by providing a consistent, competitive and stable market for their products. We believe that the consistency of the product offerings of our insurance subsidiaries enables our insurance subsidiaries to compete effectively for independent agents with other insurers whose product offerings may fluctuate based on industry conditions. Our insurance subsidiaries offer a competitive compensation program to their independent agents that rewards them for producing profitable growth and maintaining profitable books of business with our insurance subsidiaries.
Our insurance subsidiaries execute a combined annual business plan with Donegal Mutual and its insurance subsidiaries. Within the past several years, we have enhanced the annual planning process to ensure that we are directing efforts and resources toward geographic regions, market segments, product lines and classes of business that will give us the best opportunities to achieve sustained growth and profitability. During 2021, we further enhanced the planning process by performing a detailed analysis of internal and external data with respect to each state within our operating regions. We assessed state-specific marketing dynamics and opportunities, including an evaluation of the historical experience of our insurance subsidiaries. We then assigned a strategic posture for each state and developed action plans to execute state-specific strategies for growth or reduction of premiums, agency distribution and enhanced profit generation over the next several years.
In recent years, the consolidation of independent agencies has accelerated, resulting in the acquisition of independent agencies from which our insurance subsidiaries and Donegal Mutual currently receive business by national cluster groups and aggregators. We have a national accounts team that is responsible for the management and expansion of our relationships with these national agency groups. The national accounts team serves as a centralized point of contact for these groups and works directly with our regional sales and marketing teams to support and develop relationships with independent agents affiliated with national agency groups. We believe our relationships with existing and emerging national agency groups will continue to expand and that these groups represent a significant opportunity for profitable future growth.
Delivering a superior experience to our agents and policyholders.
Donegal Mutual and our insurance subsidiaries strive to maintain technology comparable to that of their larger competitors. “Ease of doing business” is an increasingly important component of an insurer’s value to an independent agency. Our insurance subsidiaries provide fully automated underwriting and policy issuance portals that substantially ease data entry and facilitate the quoting and issuance of policies for the independent agents of our insurance subsidiaries. As a result, applications of the independent agents for our insurance subsidiaries can result in policy issuance without further re-entry of information. These systems also interface with the agency management systems of the independent agents of our insurance subsidiaries. In addition, we are employing new agency relationship management solutions to expand the abilities of our insurance subsidiaries to manage their agency relationships and enhance their agency communications and interactions.
Our insurance subsidiaries
also provide their independent agents with ongoing support to enable them to better attract and service customers, including:
fully automated underwriting and policy issuance systems for personal, commercial and farm lines of insurance;
availability of a service center that provides comprehensive service for our personal lines policyholders; and
accessibility to and regular interactions with marketing and underwriting personnel and senior management of our insurance subsidiaries.
Our insurance subsidiaries appoint independent agencies with a strong underwriting and growth track record. We believe that our insurance subsidiaries
will drive continued long-term growth by carefully selecting, motivating and supporting their independent
agencies, will drive continued long-term growth. | • | | Acquiring property and casualty insurance companies to augment the organic growth of our insurance subsidiaries.
|
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agencies.
We have been an effective consolidator of smaller “main street” property and casualty insurance companies, and we expect to continue to acquire other insurance companies to expand our business in a given region over time.
Since 1995, we have completed six acquisitions of property and casualty insurance companies or participated in their business through Donegal Mutual’s entry into quota-share reinsurance agreements with them. We intend to continue our growth by pursuing affiliations and acquisitions that meet our criteria. Our primary criteria are:
location in regions where our insurance subsidiaries are currently conducting business or that offer an attractive opportunity to conduct profitable business;
a mix of business similar to the mix of business of our insurance subsidiaries;
annual premium volume between $50.0 million to $100.0 million; and
fair and reasonable transaction terms.
We believe that our relationship with Donegal Mutual assists us in pursuing affiliations with, and subsequent acquisitions of, mutual insurance companies because, through Donegal Mutual, we understand the concerns and issues that mutual insurance companies face. In particular, Donegal Mutual has had success affiliating with underperforming mutual insurance companies, and we have either acquired them following their conversion to a stock company or benefited from their underwriting results as a result of Donegal Mutual’s entry into a 100% quota-share reinsurance agreement with them and placement of that assumed business into the pooling agreement. We have utilized our strengths and financial position to improve the operations of those underperforming insurance companies. We evaluate a number of areas for operational synergies when considering acquisitions, including product underwriting, expenses, the cost of reinsurance and technology.
We and Donegal Mutual have the ability to employ a number of acquisition and affiliation methods. Our prior acquisitions and affiliations have taken one of the following forms:
purchase of all of the outstanding stock of a stock insurance company;
purchase of a book of business;
quota-share reinsurance transaction;
merger of a mutual company into Donegal Mutual; or
two-step acquisition of a mutual insurance company in which:
as the first step, Donegal Mutual purchases a surplus note from the mutual insurance company, Donegal Mutual enters into a services agreement with the mutual insurance company and Donegal Mutual’s designees become a majority of the members of the board of directors of the mutual insurance company; and
as the second step, the mutual insurance company enters into a quota-share reinsurance agreement with Donegal Mutual or demutualizes, or converts, into a stock insurance company. Upon the demutualization or conversion, we purchase the surplus note from Donegal Mutual and exchange it for all of the stock of the stock insurance company resulting from the demutualization or conversion.
We believe that our ability to make direct acquisitions of stock insurance companies and to make indirect acquisitions of mutual insurance companies through a sponsored conversion or a quota-share reinsurance agreement provides us with flexibility that is a competitive advantage in making acquisitions. We also believe our historic record demonstrates our ability to acquire control of an underperforming insurance company,re-underwrite its book of business, reduce its cost structure and return it to sustained profitability.
While Donegal Mutual and we generally engage in preliminary discussions with potential direct or indirect acquisition candidates from time to time, neither Donegal Mutual nor we make any public disclosure regarding a proposed acquisition until Donegal Mutual or we have entered into a definitive acquisition agreement.
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The following table highlights our history of insurance company acquisitions and affiliations since 1988:
| | | | | | |
Company Name
| | State of Domicile
| | Year Control
Acquired
| | Method of Acquisition/Affiliation
|
Southern Mutual Insurance Company and now Southern Insurance Company of Virginia
| | Virginia
| | 1984 | | Surplus note investment by Donegal Mutual in 1984; demutualization in 1988; acquisition of stock by us in 1988. |
| | | |
Pioneer Mutual Insurance Company and then Pioneer Insurance Company (1)(2)
| | Ohio
| | 1992 | | Surplus note investment by Donegal Mutual in 1992; demutualization in 1993; acquisition of stock by us in 1997. |
| | | |
Delaware Mutual Insurance Company and then Delaware Atlantic Insurance Company (1)(2)
| | Delaware
| | 1993 | | Surplus note investment by Donegal Mutual in 1993; demutualization in 1994; acquisition of stock by us in 1995. |
| | | |
Pioneer Mutual Insurance Company and then Pioneer Insurance Company(1)(2)
| | New York
| | 1995 | | Surplus note investment by Donegal Mutual in 1995; demutualization in 1998; acquisition of stock by us in 2001. |
| | | |
Southern Heritage Insurance Company (2)
| | Georgia
| | 1998 | | Purchase of stock by us in 1998. |
| | | |
Le Mars Mutual Insurance Company of Iowa and now Le Mars Insurance Company (1)
| | Iowa
| | 2002 | | Surplus note investment by Donegal Mutual in 2002; demutualization in 2004; acquisition of stock by us in 2004. |
| | | |
Peninsula Insurance Group
| | Maryland
| | 2004 | | Purchase of stock by us in 2004. |
| | | |
Sheboygan Falls Mutual Insurance Company and now Sheboygan Falls Insurance Company (1)
| | Wisconsin
| | 2007 | | Contribution note investment by Donegal Mutual in 2007; demutualization in 2008; acquisition of stock by us in 2008. |
| | | |
Southern Mutual Insurance Company (3)
| | Georgia
| | 2009 | | Surplus note investment by Donegal Mutual and quota-share reinsurance in 2009. |
| | | |
Michigan Insurance Company
| | Michigan
| | 2010 | | Purchase of stock by us and surplus note investment by Donegal Mutual in 2010. |
(1) | Each of these acquisitions initially took the form of an affiliation with Donegal Mutual. Donegal Mutual provided surplus note financing to the insurance company, and, in connection with that financing, sufficient designees of Donegal Mutual were appointed so as to constitute a majority of the members of the board of directors of the insurance company. Donegal Mutual and the insurance company simultaneously entered into a services agreement whereby Donegal Mutual provided services to improve the operations of the insurance company. Once the insurance company’s results of operations improved to the satisfaction of Donegal Mutual, Donegal Mutual sponsored the demutualization of the insurance company. Upon the consummation of the demutualization, Donegal Mutual converted the surplus note to capital stock of the newly demutualized insurance company. We then purchased all of the capital stock of the insurance company from Donegal Mutual and made an additional capital contribution in cash to provide adequate surplus to support the insurance company’s planned premium growth.
|
(2) | To reduce administrative and compliance costs and expenses, these subsidiaries subsequently merged into one of our existing insurance subsidiaries.
|
(3) | Control acquired by Donegal Mutual.
|
Donegal Mutual completed the merger of Mountain States Mutual Casualty Company, or Mountain States, with and into Donegal Mutual effective May 25, 2017. Donegal Mutual was the surviving company in the merger, and Mountain States’ insurance subsidiaries, Mountain States Indemnity Company and Mountain States Commercial Insurance Company, became insurance subsidiaries of Donegal Mutual upon completion of the merger. Upon completion of the merger, Donegal Mutual assumed all of the policy obligations of Mountain States and began to market its products together with its insurance subsidiaries as the Mountain States Insurance Group in four Southwestern states. For an indefinite period of time, Donegal Mutual will exclude the business of the Mountain States Insurance Group from the pooling agreement with Atlantic States. As a result, our consolidated financial results will exclude the results of Donegal Mutual’s operations in those Southwestern states.
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| • | | Providing responsive and friendly customer and agent service to enable our insurance subsidiaries to attract new policyholders and retain existing policyholders.
|
We believe that excellent policyholder service is important in attracting new policyholders and retaining existing policyholders. Our insurance subsidiaries work closely with their independent agents to provide a consistently responsive level of claims service, underwriting and customer support. Our insurance subsidiaries seek to respond expeditiously and effectively to address customer and independent agent inquiries in a number of ways, including:
availability of a customer call center, secure website and mobile application for claims reporting;
availability of a secure website and mobile application for access to policy information and documents, payment processing and other features;
timely replies to information requests and policy submissions; and
prompt responses to, and processing of, claims.
Our insurance subsidiaries periodically conduct policyholder surveys to evaluate the effectiveness of their service to policyholders. The management of our insurance subsidiaries meets on a regular basis with the personnel of the independent insurance agents our insurance subsidiaries appoint to seek service improvement recommendations, react to service issues and better understand local market conditions.
| • | | Maintaining premium rate adequacy to enhance the underwriting results of our insurance subsidiaries, while maintaining their existing book of business and preserving their ability to write new business.
|
Acquiring property and casualty insurance companies to augment the organic growth of our insurance subsidiaries.
We have been an effective consolidator of smaller “main street” property and casualty insurance companies. While we are currently placing less emphasis on pursuing acquisitions due to several ongoing major initiatives to enhance our technology infrastructure as well as our analytical and processing capabilities, we expect to continue to acquire other insurance companies to expand our business in a given region over time.
Since 1998, we and Donegal Mutual have completed seven transactions involving acquisitions of property and casualty insurance companies or participation in the business of property and casualty insurance companies through Donegal Mutual’s entry into quota-share reinsurance agreements with them. We and Donegal Mutual intend to continue our growth by pursuing affiliations and acquisitions that meet our criteria. Our insurance subsidiaries maintain disciplineprimary criteria are:
location in their pricing by effecting rate increases to sustain or improve their underwriting results without unduly affecting their customer retention. In addition to appropriate pricing,regions where our insurance subsidiaries seekand Donegal Mutual are currently conducting business or that offer an attractive opportunity to ensure that their premium rates are adequate relativeconduct profitable business;
a mix of business similar to the
amountmix of
risk they insure. Our insurance subsidiaries review loss trends on a periodic basis to identify changes in the frequency and severity of their claims and to assess the adequacy of their rates and underwriting standards. Our insurance subsidiaries also carefully monitor and audit the information they use to price their policies for the purpose of enabling them to receive an adequate level of premiums for the risk they assume. For example, our insurance subsidiaries inspect substantially all commercial lines risks and a substantial number of personal lines property risks before they commit to insure them to determine the adequacy of the insured amount to the value of the insured property, assess property conditions and identify any liability exposures. Our insurance subsidiaries audit the payroll data of their workers’ compensation customers to verify that the assumptions used to price a particular policy were accurate. By implementing appropriate rate increases and understanding the risks our insurance subsidiaries agree to insure, our insurance subsidiaries seek to achieve consistent underwriting profitability. | • | | Focusing on expense controls and utilization of technology to increase the operating efficiency of our insurance subsidiaries.
|
Our insurance subsidiaries maintain stringent expense controls under direct supervision of their senior management. We centralize many processing and administrative activitiesbusiness of our insurance subsidiaries and Donegal Mutual;
annual premium volume between $50.0 million to realize$100.0 million; and
fair and reasonable transaction terms.
We believe that our relationship with Donegal Mutual assists us in pursuing affiliations with, and subsequent acquisitions of, mutual insurance companies because, through Donegal Mutual, we understand the concerns and issues that mutual insurance companies face. In particular, Donegal Mutual has had success affiliating with underperforming mutual insurance companies that were operating synergiesat a competitive disadvantage due to lack of economies of scale compared to other industry participants, and better expense control. Our insurance subsidiaries utilize technologywe have either acquired them following their conversion to automate much ofa stock company or benefited from their underwriting results as a result of Donegal Mutual’s entry into a 100% quota-share reinsurance agreement with them and placement of that assumed business into the pooling agreement. We evaluate a number of areas for operational synergies when considering acquisitions, including product underwriting, expenses, the cost of reinsurance and technology.
We believe that our ability to make direct acquisitions of stock insurance companies and to
facilitate agencymake indirect acquisitions of mutual insurance companies through Donegal Mutual provides us with flexibility that is a competitive advantage in making acquisitions. We also believe our historic record demonstrates our ability to acquire control of an underperforming insurance company utilizing a number of different acquisition structures and
policyholder communications on an efficient, timelyaffiliation strategies, re-underwrite its book of business, reduce its cost structure and
cost-effective basis. We operate on a paperless basis. Our insurance subsidiaries have increased their annual premium per employee, a measure of efficiency that our insurance subsidiaries usereturn it to
evaluate their operations, from approximately $470,000 in 1999 to approximately $1.1 million in 2018.sustained profitability.
While Donegal Mutual and we generally engage in preliminary discussions with potential direct or indirect acquisition candidates from time to time, neither Donegal Mutual nor we make any public disclosure regarding a proposed acquisition until Donegal Mutual or we have entered into a definitive acquisition agreement.
The following table highlights our
and Donegal Mutual’s history of insurance
subsidiaries strive to maintain technology comparable to that of their larger competitors. “Ease of doing business” is an increasingly important component of an insurer’s value to an independent agency. Our insurance subsidiaries provide a fully automated personal lines underwritingcompany acquisitions and
policy issuance system called “WritePro®.” WritePro® is aweb-based user interface that substantially eases data entry and facilitates the quoting and issuance of policies for the independent agents of our insurance subsidiaries. Our insurance subsidiaries also provide a similar commercial business system called “WriteBiz®.” WriteBiz® is aweb-based user interface that provides the independent agents of our insurance subsidiaries with an online ability to quote and issue commercial automobile, workers’ compensation, business owners and tradesman policies automatically. WriteFarm® is aweb-based user interface that provides the independent agents of our insurance subsidiaries with an online ability to quote and issue farm policies. As a result, applications of the independent agents for our insurance subsidiaries can result in policy issuance without furtherre-entry of information. These systems also interface with the policy management systems of the independent agents of our insurance subsidiaries.-9-
affiliations since 1998:
| Company Name | | State of Domicile | | Year Control Acquired | | Method of Acquisition/Affiliation |
Southern Heritage Insurance Company (1) | | Georgia | | 1998 | | Purchase of stock by us in 1998. |
| | • | | Maintaining
| | | |
Le Mars Mutual Insurance Company of Iowa and then Le Mars Insurance Company (1) | | Iowa | | 2002 | | Surplus note investment by Donegal Mutual in 2002; conversion to stock company in 2004; acquisition of stock by us in 2004. |
| | | | | | |
| Peninsula Insurance Group | | Maryland | | 2004 | | Purchase of stock by us in 2004. |
| | | | | | |
Sheboygan Falls Mutual Insurance Company and then Sheboygan Falls Insurance Company (1) | | Wisconsin | | 2007 | | Contribution note investment by Donegal Mutual in 2007; conversion to stock company in 2008; acquisition of stock by us in 2008. |
| | | | | | |
Southern Mutual Insurance Company (2) | | Georgia | | 2009 | | Surplus note investment by Donegal Mutual and quota-share reinsurance in 2009. |
| | | | | | |
| Michigan Insurance Company | | Michigan | | 2010 | | Purchase of stock by us in 2010. |
| | | | | | |
Mountain States Mutual Casualty Company(3) | | New Mexico | | 2017 | | Merger with and into Donegal Mutual in 2017. |
| (1) | To reduce administrative and compliance costs and expenses, these subsidiaries subsequently merged into one of our existing insurance subsidiaries. |
| (2) | Control acquired by Donegal Mutual. |
| (3) | Donegal Mutual completed the merger of Mountain States with and into Donegal Mutual effective May 25, 2017. Donegal Mutual was the surviving company in the merger, and Mountain States insurance subsidiaries became insurance subsidiaries of Donegal Mutual upon completion of the merger. Donegal Mutual also entered into a conservative investment approach.100% quota-share reinsurance agreement with the Mountain States insurance subsidiaries on the merger date. Beginning with policies effective in 2021, Donegal Mutual places the business of the Mountain States Insurance Group into the underwriting pool. |
Return on invested assets is an important element of the financial results of our insurance subsidiaries. The investment strategy of our insurance subsidiaries is to generate an appropriate amount ofafter-tax income on invested assets while minimizing credit risk through investments in high-quality securities. As a result, our insurance subsidiaries seek to invest a high percentage of their assets in diversified, highly rated and marketable fixed-maturity instruments. The fixed-maturity portfolios of our insurance subsidiaries consist of both taxable andtax-exempt securities. Our insurance subsidiaries maintain a portion of their portfolios in short-term securities to provide liquidity for the payment of claims and operation of their respective businesses. Our insurance subsidiaries maintain a small percentage (4.2% at December 31, 2018) of their portfolios in equity securities.
The property and casualty insurance industry is highly competitive on the basis of both price and service. Numerous companies compete for business in the geographic areas where our insurance subsidiaries operate. Many of these other insurance companies are substantially larger and have greater financial resources than those of our insurance subsidiaries. In addition, because our insurance subsidiaries and Donegal Mutual market their respective insurance products exclusively through independent insurance agencies, most of which represent more than one insurance company, our insurance subsidiaries face competition within agencies, as well as competition to retain qualified independent agents.
Insurance companies that are substantially larger than our insurance subsidiaries are likely to benefit from certain cost synergies, and insurance companies that market their products directly to end consumers are likely to incur lower relative acquisition costs compared to those of our insurance subsidiaries.
Products and Underwriting
We report the results of our insurance operations in two segments:
personalcommercial lines of insurance and
commercialpersonal lines of
insurance. The personal lines our insurance subsidiaries write consist primarily of private passenger automobile and homeowners insurance. The commercial lines our insurance subsidiaries write consist primarily of commercial automobile, commercial multi-peril and workers’ compensation insurance.
The personal lines our insurance subsidiaries write consist primarily of private passenger automobile and homeowners insurance. We describe these lines of insurance in greater detail below:
Commercial
Commercial automobile — policies that provide protection against liability for bodily injury and property damage arising from automobile accidents and protection against loss from damage to automobiles owned by the insured.
Commercial multi-peril — policies that provide protection to businesses against many perils, usually combining liability and physical damage coverages.
Workers’ compensation — policies employers purchase to provide benefits to employees for injuries sustained during employment. The workers’ compensation laws of each state determine the extent of the coverage we provide.
Private passenger automobile — policies that provide protection against liability for bodily injury and property damage arising from automobile accidents and protection against loss from damage to automobiles owned by the insured.
Homeowners — policies that provide coverage for damage to residences and their contents from a broad range of perils, including fire, lightning, windstorm and theft. These policies also cover liability of the insured arising from injury to other persons or their property while on the insured’s property and under other specified conditions.
Commercial
Commercial automobile — policies
In recent years, we have taken actions to shift our business mix to a higher proportion of commercial business, where we believe we will continue to have opportunities to achieve profitable, sustainable long-term growth. While we expect our commercial growth rate will exceed that provide protection against liabilityof personal lines for bodily injury and property damage arising from automobile accidents and protection against loss from damagethe foreseeable future, we desire to automobiles owned by the insured.
Commercial multi-peril — policies that provide protection to businesses against many perils, usually combining liability and physical damage coverages.
Workers’ compensation — policies employers purchasemaintain a profitable book of personal business to provide benefitsenhanced stability across our product portfolio and increase our brand value to employees for injuries sustained during employment.our independent agents. We commenced a phased rollout of new personal lines products in the fourth quarter of 2021. These products feature various coverage enhancements, modernized rating methodology, enhanced pricing segmentation, application of predictive analytical models and utilization of third-party data to augment pricing and risk selection. We implemented a new personal lines agency portal and the rating, underwriting and policy issuance capabilities necessary to support the launch in the ten states where Donegal Mutual and our insurance subsidiaries offer personal lines. The workers’ compensation lawsportal and systems are now live in the states of each state determineIndiana, Ohio and Pennsylvania, and we plan to continue the extentrollout of the coverage we provide.
new personal lines products in the remaining seven states throughout 2022. We expect to write sufficient levels of new personal lines business to offset normal policy attrition within our legacy personal lines book of business with the goal of achieving modest levels of personal lines premium growth following the completion of the rollout.-10-
The following table sets forth the net premiums written of our insurance subsidiaries by line of insurance for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2018 | | | 2017 | | | 2016 | |
| (dollars in thousands) | | Amount | | | % | | | Amount | | | % | | | Amount | | | % | |
Personal lines: | | | | | | | | | | | | | | | | | | | | | | | | |
Automobile | | $ | 249,275 | | | | 33.5 | % | | $ | 255,297 | | | | 35.0 | % | | $ | 229,789 | | | | 33.7 | % |
Homeowners | | | 123,782 | | | | 16.6 | | | | 125,054 | | | | 17.2 | | | | 122,811 | | | | 18.0 | |
Other | | | 21,064 | | | | 2.9 | | | | 19,672 | | | | 2.7 | | | | 19,057 | | | | 2.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total personal lines | | | 394,121 | | | | 53.0 | | | | 400,023 | | | | 54.9 | | | | 371,657 | | | | 54.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commercial lines: | | | | | | | | | | | | | | | | | | | | | | | | |
Automobile | | | 108,123 | | | | 14.5 | | | | 99,333 | | | | 13.6 | | | | 87,849 | | | | 12.9 | |
Commercial multi-peril | | | 117,509 | | | | 15.8 | | | | 110,313 | | | | 15.1 | | | | 104,728 | | | | 15.4 | |
Workers’ compensation | | | 109,022 | | | | 14.7 | | | | 109,884 | | | | 15.1 | | | | 108,349 | | | | 15.9 | |
Other | | | 15,241 | | | | 2.0 | | | | 9,586 | | | | 1.3 | | | | 9,451 | | | | 1.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total commercial lines | | | 349,895 | | | | 47.0 | | | | 329,116 | | | | 45.1 | | | | 310,377 | | | | 45.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total business | | $ | 744,016 | | | | 100.0 | % | | $ | 729,139 | | | | 100.0 | % | | $ | 682,034 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2021 | | | 2020 | | | 2019 | |
| (dollars in thousands) | | Amount | | | % | | | Amount | | | % | | | Amount | | | % | |
| Commercial lines: | | | | | | | | | | | | | | | | | | |
| Automobile | | $ | 161,947 | | | | 20.1 | % | | $ | 135,294 | | | | 18.2 | % | | $ | 122,142 | | | | 16.2 | % |
| Workers’ compensation | | | 113,256 | | | | 14.1 | | | | 109,960 | | | | 14.8 | | | | 113,684 | | | | 15.1 | |
| Commercial multi-peril | | | 188,242 | | | | 23.4 | | | | 147,993 | | | | 19.9 | | | | 138,750 | | | | 18.5 | |
| Other | | | 38,340 | | | | 4.8 | | | | 32,739 | | | | 4.5 | | | | 30,303 | | | | 4.0 | |
| Total commercial lines | | | 501,785 | | | | 62.4 | | | | 425,986 | | | | 57.4 | | | | 404,879 | | | | 53.8 | |
| Personal lines: | | | | | | | | | | | | | | | | | | | | | | | | |
| Automobile | | | 170,578 | | | | 21.2 | | | | 184,602 | | | | 24.9 | | | | 210,507 | | | | 28.0 | |
| Homeowners | | | 109,974 | | | | 13.7 | | | | 111,886 | | | | 15.1 | | | | 117,118 | | | | 15.5 | |
| Other | | | 21,930 | | | | 2.7 | | | | 19,666 | | | | 2.6 | | | | 20,097 | | | | 2.7 | |
| Total personal lines | | | 302,482 | | | | 37.6 | | | | 316,154 | | | | 42.6 | | | | 347,722 | | | | 46.2 | |
| Total business | | $ | 804,267 | | | | 100.0 | % | | $ | 742,140 | | | | 100.0 | % | | $ | 752,601 | | | | 100.0 | % |
The
personalcommercial lines and
commercialpersonal lines underwriting departments of our insurance subsidiaries evaluate and select those risks that they believe will enable our insurance subsidiaries to achieve an underwriting profit.
TheWithin each of the underwriting departments,
have significant interaction with the independent agents regarding the underwriting philosophy and the underwriting guidelines of our insurance
subsidiaries. Our underwriting personnel also assist the researchsubsidiaries have dedicated product development and
development department inmanagement teams responsible for the development of quality products at competitive prices to promote growth and
profitability.profitability as well as the enhancement of our current products to meet targeted customer needs.
In order to achieve underwriting profitability on a consistent basis, our insurance subsidiaries:
assess and select primarily standard and preferred risks;
adhere to disciplined underwriting guidelines;
inspect substantially all commercial lines
seek to price risks appropriately based on exposure, risk characteristics, utilization of predictive models and a substantial numberapplication of personal lines property risks;underwriting judgment and
utilize various types of risk management and loss control services.
Our insurance subsidiaries also review their existing policies and accounts to determine whether those risks continue to meet their underwriting guidelines. If a given policy or account no longer meets those underwriting guidelines, our insurance subsidiaries will take appropriate action regarding that policy or account, including raising premium rates or
non-renewing the policy to the extent applicable law permits.
As part of the effort of our insurance subsidiaries to maintain acceptable underwriting results, they conduct annual reviews of agencies that have failed to meet their underwriting profitability criteria. The review process includes an analysis of the underwriting and
re-underwriting practices of the agency, the completeness and accuracy of the applications the agency submits, the adequacy of the training of the agency’s staff and the agency’s record of adherence to the underwriting guidelines and service standards of our insurance subsidiaries. Based on the results of this review process, the marketing and underwriting personnel of our insurance subsidiaries develop, together with the agency, a plan to improve its underwriting profitability. Our insurance subsidiaries monitor the agency’s compliance with the plan and take other measures as required in the judgment of our insurance subsidiaries, including the termination to the extent applicable law permits of agencies that are unable to achieve acceptable underwriting profitability.
-11-
Our insurance subsidiaries market their products primarily in the
Mid-Atlantic, Midwestern, New England,
Southern and
SouthernSouthwestern regions through approximately
2,4002,300 independent insurance agencies. At December 31,
2018,2021, the Donegal Insurance Group actively wrote business in
2224 states (Alabama,
Colorado, Delaware, Georgia, Illinois, Indiana, Iowa, Maine, Maryland, Michigan, Nebraska, New Hampshire, New
York,Mexico, North Carolina, Ohio, Pennsylvania, South Carolina, South Dakota, Tennessee,
Texas, Utah, Vermont,
Virginia, West Virginia, and Wisconsin).
Beginning with policies effective in 2021, Donegal Mutual
includes the business it writes directly and
itsassumes from the Mountain States insurance subsidiaries
also write business in four Southwestern states (Colorado, New Mexico, Texas and Utah)
. Donegal Mutual currently excludes the business written in
these four states from the pooling agreement between Donegal Mutual and Atlantic States.
As a result, thisThis business
hashad no impact on our results of
operations.operations prior to 2021. We believe the relationships of our insurance subsidiaries with their independent agents are valuable in identifying, obtaining and retaining profitable business. Our insurance subsidiaries maintain a stringent agency selection procedure that emphasizes appointing agencies with proven marketing strategies for the development of profitable business, and our insurance subsidiaries only appoint agencies with a strong underwriting history and potential growth capabilities. Our insurance subsidiaries also regularly evaluate the independent agencies that represent them based on their profitability and performance in relation to the objectives of our insurance subsidiaries. Our insurance subsidiaries seek to be among the top three insurers within each of their agencies for the lines of business our insurance subsidiaries write.
The following table sets forth the percentage of direct premiums our insurance subsidiaries write, including 80% of the direct premiums Donegal Mutual and Atlantic States
write,include in the underwriting pool, in each of the states where they conducted a significant portion of their business in
2018:2021: | | | | |
Pennsylvania | | | 34.333.7 | % |
Michigan | | | 15.4 | |
Maryland | | | 8.78.9 | |
Virginia
Delaware | | | 8.06.6 | |
Georgia
Virginia | | | 7.96.1 | |
Delaware
Georgia | | | 5.75.6 | |
Wisconsin | | | 3.83.9 | |
Ohio | | | 3.13.3 | |
Iowa
| | | 2.6 | |
Nebraska
Indiana | | | 2.3 | |
Tennessee
Iowa | | | 2.3 | |
South Dakota
North Carolina | | | 1.21.9 | |
Other
Tennessee | | | 4.71.8 | |
| Other | | | 8.2 | |
Total | | | 100.0 | % |
| | | | |
Our insurance subsidiaries employ a number of policies and procedures that we believe enable them to attract, retain and motivate their independent agents. We believe that the consistency of the product offerings of our insurance subsidiaries enables our insurance subsidiaries to compete effectively for independent agents with other insurers whose product offerings may fluctuate based upon industry conditions. Our insurance subsidiaries have a competitive
profit-sharing plancompensation program for their independent agents
that includes base commissions, growth incentive plans and a profit-sharing plan, consistent with applicable state laws and regulations, under which the independent agents may earn additional commissions based upon the volume of premiums produced and the profitability of the business our insurance subsidiaries receive from that agency.
We have an agency stock purchase plan that allows our independent agents to purchase our Class A common stock at a discount to market prices to further align the interests of our independent agents with the interests of our stockholders.
Our insurance subsidiaries encourage their independent agents to focus on “account selling,” or serving all of a particular insured’s property and casualty insurance needs, which our insurance subsidiaries believe generally results in more favorable loss experience than covering a single risk for an individual insured.
Donegal Mutual owns
the majority ofand manages the technology
systemsthat our insurance subsidiaries
use.utilize on a daily basis. The technology
systems consist primarilyis comprised of
anhighly integrated
centralagency-facing and back-end processing
computer system, a series of server-based computer networks and various communication systems that
allow the home office of our insurance subsidiariesoperate within an advanced, modernized infrastructure that provides high service levels for performance, reliability, security and
their branch offices to utilize the same systems for the processing of business.availability. Donegal Mutual maintains
disaster recovery and backup
facilities and systems
at the office of one of our insurance subsidiaries and tests these
backup facilities and systems on a regular basis. Our insurance subsidiaries bear their proportionate share of information services expenses based on their respective percentage of the total net premiums written of the Donegal Insurance
Group during the preceding calendar year.-12-
Group.
The business strategy
and ultimate success of our insurance subsidiaries depends on the
use, developmenteffectiveness of efficient and
implementation of integrated
business systems and technology
systems.infrastructure. These systems enable our insurance subsidiaries to provide quality service to agents and policyholders by processing business in a timely and
efficientdependable manner,
communicatingcommunicate and
sharingshare data with agents
providingand provide a variety of methods for the payment of
premiums and allowingpremiums. These systems also allow for the accumulation and analysis of
data and information for the management of our insurance subsidiaries.
We believe Donegal Mutual is currently in the availabilitymidst of a multi-year effort to modernize certain of its key infrastructure and useapplications systems we describe in more detail under “Business - Business Strategy - Strategically modernizing our operations and processes to transform our business.”
The modernized proficiency of these integrated technology systems has resulted in improvedfacilitates high service tolevels for the agents and policyholders of our insurance subsidiaries, increased efficiencies in processing the business of our insurance subsidiaries and lower operating costs. Key components of these integrated technology systems are theinclude agency interface system, the WritePro®, WriteBiz® and WriteFarm®systems, automated policy management systems, a claims processing system and an imaginga billing administration system. The agency interface system providessystems provide our insurance subsidiaries with a high level ofcomprehensive single source to facilitate data sharing both to and from agents’ systems and also provides agents with an integrated means of processing new business. The WritePro®, WriteBiz® and WriteFarm®automated policy management systems are fully automated underwriting and policy issuance systems that provide agents with the ability to generate underwritten quotes and automatically issue policies that meet the underwriting guidelines of our insurance subsidiaries with limited or no intervention by their personnel. The claims processing system allows our insurance subsidiaries to process claims efficiently and in an automated environment. The imagingbilling administration system eliminates the needallows our insurance subsidiaries to handle paper files, while providing greater access to the same information by a variety of personnel. process premium billing and collection efficiently and in an automated environment.
We believe
ourDonegal Mutual's agency-facing technology systems compare
favorably towell against those of many national property and casualty insurance carriers in terms of
qualityfeature capabilities and service levels.
In 2018, Donegal Mutual
initiatedmaintains a
multi-year systems modernization project that will facilitate the replacement ofregular interactive forum with its
remaining legacy systems, streamline our business processesindependent agents to be proactive in identifying opportunities for continued automation and
workflows and enhance our data analytics and modeling capabilities.technology enhancements.
The management of claims is a critical component of the philosophy of our insurance subsidiaries to achieve underwriting profitability on a consistent basis and is fundamental to the successful operations of our insurance subsidiaries and their dedication to excellent service. Our senior claims management oversees the claims processing units of each of our insurance subsidiaries to assure consistency in the claims settlement process. The field office staff of our insurance subsidiaries receives support from home office technical, litigation, material damage, subrogation and medical audit personnel.
The claims departments of our insurance subsidiaries rigorously manage claims to assure that they settle legitimate claims quickly and fairly and that they identify questionable claims for defense. In the majority of cases, the personnel of our insurance subsidiaries, who have significant experience in the property and casualty insurance industry and know the service philosophy of our insurance subsidiaries, adjust claims. Our insurance subsidiaries provide various means of claims reporting on a
24-hours a day, seven-days a week basis, including toll-free numbers and electronic reporting through our website and mobile
applications.application. Our insurance subsidiaries strive to respond to notifications of claims promptly, generally within the day reported. Our insurance subsidiaries believe that, by responding promptly to claims, they provide quality customer service and minimize the ultimate cost of the claims. Our insurance subsidiaries engage independent adjusters as needed to handle claims in areas in which the volume of claims is not sufficient to justify the hiring of internal claims adjusters by our insurance subsidiaries. Our insurance subsidiaries also employ
privateindependent adjusters and
private investigators, structural experts and
various outside legal counsel to supplement their internal staff and to assist in the investigation of claims. Our insurance subsidiaries have a special investigative unit
primarily staffed by former law enforcement officers that attempts to identify and prevent fraud and abuse and to investigate questionable claims.
The management of the claims departments of our insurance subsidiaries develops and implements policies and procedures for the establishment of adequate claim reserves. Our insurance subsidiaries employ an actuarial staff that regularly reviews their reserves for incurred but not reported claims. The management and staff of the claims departments resolve policy coverage issues, manage and process reinsurance recoveries and handle salvage and subrogation matters. The litigation and personal injury sections of our insurance subsidiaries manage all claims litigation. Branch office claims above certain thresholds require home office review and settlement authorization. Our insurance subsidiaries provide their claims adjusters reserving and settlement authority based upon their experience and demonstrated abilities. Larger or more complicated claims require consultation and approval of senior claims department management.
-13-
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 2021 due to a number of factors, including supply chain disruption, higher used automobile values, increases in the cost of replacement automobile parts and rising labor rates. These trend changes give rise to greater uncertainty as to the pattern of future loss
settlements on bodily injury claims.settlements. Related uncertainties regarding future trends include
social inflation, availability and cost of building materials, availability of skilled labor, the rate of plaintiff attorney involvement in claims and the cost of medical technologies and
procedures and changes in the utilization of medical procedures. Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at December 31,
2018.2021. 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
$4.8 $6.3million.
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. Our insurance subsidiaries recognized
an increasea decrease in their liability for losses and loss expenses of prior years of
$35.6$31.2 million,
$6.6$12.9 million and
$3.0$12.9 million in
2018, 20172021, 2020 and
2016,2019, respectively. Our insurance subsidiaries made no significant changes in their reserving philosophy
key reserving assumptions 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
thesethose years. The
20182021 development represented
9.3%5.6% of the December 31,
20172020 net carried reserves and resulted primarily from
higher-than-expected severitylower-than-expected loss emergence in the
commercial multiple peril, personal automobile,
workers’ compensation and commercial automobile lines of business
offset by lower-than-expected severity in the workers’ compensation line of business, in accident years prior to 2018. The majority of the 2018 development related to increases in the liability for losses and loss expenses of prior years for Atlantic States, Southern and Peninsula. During 2018, our insurance subsidiaries received new information on previously-reported commercial automobile and personal automobile claims that led our insurance subsidiaries to conclude that their prior actuarial assumptions did not fully anticipate recent changes in severity and reporting trends. Our insurance subsidiaries have encountered increasing difficulties in projecting the ultimate severity of automobile losses over recent accident years, which our insurance subsidiaries attribute to worsening litigation trends and an increased-14-
delay in the reporting to our insurance subsidiaries of information with respect to the severity of claims. As a result, our insurance subsidiaries’ actuaries increased their projections of the ultimate cost of our insurance subsidiaries’ prior-year personal automobile and commercial automobile losses, and our insurance subsidiaries added $17.7 million to their reserves for personal automobile and $20.8 million to their reserves for commercial automobile for accident years prior to 2018. The 2017 development represented 1.9% of the December 31, 2016 net carried reserves and resulted primarily from higher-than-expected severity in the commercial multiple peril, personal automobile and commercial automobile lines of business, offset by lower-than-expected severity in the workers’ compensation line of business, in accident years prior to 2017.2021. The majority of the 20172021 development related to increasesdecreases in the liability for losses and loss expenses of prior years for Atlantic States and Peninsula.MICO. The 20162020 development represented 0.9%2.6% of the December 31, 20152019 net carried reserves and resulted primarily from higher-than-expected severity in the commercial multiple peril and commercial automobileliability lines of business, offset by lower-than-expected severity in the workers’ compensation lineand personal automobile lines of business, partially offset by higher-than-expected severity in the commercial automobile and commercial multi-peril lines of business, for accident years prior to 2016.2020. The majority of the 20162020 development related to increasesdecreases in the liability for losses and loss expenses of prior years for Atlantic States and Southern.
MICO. The 2019 development represented 2.7% of the December 31, 2018 net carried reserves and resulted primarily from lower-than-expected severity in the workers’ compensation line of business, partially offset by higher-than-expected severity in the commercial automobile and commercial multi-peril lines of business, for accident years prior to 2019. The majority of the 2019 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO.
Excluding the impact of severe weather events
and the COVID-19 pandemic, our insurance subsidiaries have noted stable amounts in the number of claims incurred and the number of claims outstanding at period ends relative to their premium base in recent years across most of their lines of business. However, the amount of the average claim outstanding has increased gradually over the past several years due to various factors such as rising
medical loss costsinflation and increased litigation trends. We have also experienced a general slowing of settlement rates in litigated
claims and lengthening of repair completion times for property and automobile claims. Our insurance subsidiaries could have to make further adjustments to their estimates in the future. However, on the basis of our insurance subsidiaries’ internal procedures, which analyze, among other things, their prior assumptions, their experience with similar cases and historical trends such as reserving patterns, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes, we believe that our insurance subsidiaries have made adequate provision for their liability for losses and loss expenses.
Atlantic States’ participation in the
underwriting pool with Donegal Mutual exposes Atlantic States to adverse loss development on the business
ofthat Donegal Mutual
thatcontributes to the
pool includes.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.
Donegal Mutual and our insurance subsidiaries operate together as the Donegal Insurance Group and share a combined business plan designed to achieve market penetration and underwriting profitability objectives. The products our insurance subsidiaries and Donegal Mutual offer are generally complementary, thereby allowing Donegal Insurance Group to offer a broader range of products to a given market and to expand 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 products compared to 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, because the pool homogenizes the risk characteristics of the predominant percentage of the business Donegal Mutual and Atlantic States write directly and each company shares the underwriting results according to each company’s participation percentage, each company realizes its percentage share of the underwriting results of the pool.
Differences between liabilities reported in our financial statements prepared on a GAAP basis and our insurance subsidiaries’ financial statements prepared on a SAP basis result from anticipating salvage and subrogation recoveries for GAAP but not for SAP. These differences amounted to
$20.0$23.5 million,
$18.0$21.0 million and
$16.8$20.2 million at December 31,
2018, 20172021, 2020 and
2016,2019, respectively.
-15-
The following table sets forth a reconciliation of the beginning and ending GAAP net liability of our insurance subsidiaries for unpaid losses and loss expenses for the periods indicated:
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| (in thousands) | | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
Gross liability for unpaid losses and loss expenses at beginning of year | | $ | 676,672 | | | $ | 606,665 | | | $ | 578,205 | |
Less reinsurance recoverable | | | 293,271 | | | | 259,147 | | | | 256,151 | |
| | | | | | | | | | | | |
Net liability for unpaid losses and loss expenses at beginning of year | | | 383,401 | | | | 347,518 | | | | 322,054 | |
| | | | | | | | | | | | |
Provision for net losses and loss expenses for claims incurred in the current year | | | 540,827 | | | | 480,647 | | | | 420,327 | |
Change in provision for estimated net losses and loss expenses for claims incurred in prior years | | | 35,631 | | | | 6,621 | | | | 2,989 | |
| | | | | | | | | | | | |
Total incurred | | | 576,458 | | | | 487,268 | | | | 423,316 | |
| | | | | | | | | | | | |
Net losses and loss expense payments for claims incurred during: | | | | | | | | | | | | |
The current year | | | 308,578 | | | | 288,380 | | | | 248,106 | |
Prior years | | | 175,883 | | | | 163,005 | | | | 149,746 | |
| | | | | | | | | | | | |
Total paid | | | 484,461 | | | | 451,385 | | | | 397,852 | |
| | | | | | | | | | | | |
Net liability for unpaid losses and loss expenses at end of year | | | 475,398 | | | | 383,401 | | | | 347,518 | |
Plus reinsurance recoverable | | | 339,267 | | | | 293,271 | | | | 259,147 | |
| | | | | | | | | | | | |
Gross liability for unpaid losses and loss expenses at end of year | | $ | 814,665 | | | $ | 676,672 | | | $ | 606,665 | |
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| (in thousands) | | 2021 | | | 2020 | | | 2019 | |
| Gross liability for unpaid losses and loss expenses at beginning of year | | $ | 962,007 | | | $ | 869,674 | | | $ | 814,665 | |
| Less reinsurance recoverable | | | 404,818 | | | | 362,768 | | | | 339,267 | |
| Net liability for unpaid losses and loss expenses at beginning of year | | | 557,189 | | | | 506,906 | | | | 475,398 | |
| Provision for net losses and loss expenses for claims incurred in the current year | | | 551,918 | | | | 472,709 | | | | 519,320 | |
| Change in provision for estimated net losses and loss expenses for claims incurred in prior years | | | (31,208 | ) | | | (12,945 | ) | | | (12,932 | ) |
| Total incurred | | | 520,710 | | | | 459,764 | | | | 506,388 | |
| Net losses and loss expense payments for claims incurred during: | | | | | | | | | | | | |
| The current year | | | 269,317 | | | | 236,984 | | | | 278,924 | |
| Prior years | | | 182,223 | | | | 172,497 | | | | 195,956 | |
| Total paid | | | 451,540 | | | | 409,481 | | | | 474,880 | |
| Net liability for unpaid losses and loss expenses at end of year | | | 626,359 | | | | 557,189 | | | | 506,906 | |
| Plus reinsurance recoverable | | | 451,261 | | | | 404,818 | | | | 362,768 | |
| Gross liability for unpaid losses and loss expenses at end of year | | $ | 1,077,620 | | | $ | 962,007 | | | $ | 869,674 | |
The following table sets forth the development of the liability for net unpaid losses and loss expenses of our insurance subsidiaries from
20082011 to
2018.2021. Loss data in the table includes business Atlantic States received from the underwriting pool.
“Net liability at end of year for unpaid losses and loss expenses” sets forth the estimated liability for net unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of net losses and loss expenses for claims arising in the current and all prior years that are unpaid at the balance sheet date, including losses incurred but not reported.
The “Net liability
re-estimated as of” portion of the table shows the
re-estimated amount of the previously recorded liability based on experience for each succeeding year. The estimate increases or decreases as payments are made and more information becomes known about the severity of the remaining unpaid claims. For example, the
20082011 liability has developed a deficiency after ten years because we expect the
re-estimated net losses and loss expenses to be
$6.5$16.0 million more than the estimated liability we initially established in
20082011 of
$161.3$243.0 million.
The “Cumulative deficiency (excess)” shows the cumulative deficiency or excess at December 31,
20182021 of the liability estimate shown on the top line of the corresponding column. A deficiency in liability means that the liability established in prior years was less than the amount of actual payments and currently
re-estimated remaining unpaid liability. An excess in liability means that the liability established in prior years exceeded the amount of actual payments and currently
re-estimated unpaid liability remaining.
The “Cumulative amount of liability paid through” portion of the table shows the cumulative net losses and loss expense payments made in succeeding years for net losses incurred prior to the balance sheet date. For example, the
20082011 column indicates that at December 31,
20182021 payments equal to
$164.4$252.2 million of the currently
re-estimated ultimate liability for net losses and loss expenses of
$167.8$259.0 million had been made.
Amounts shown in the 2008 column of the table include information for Sheboygan for all accident years prior to 2008. Amounts shown in the 2010 column of the table include information for MICO for all accident years prior to 2010.
-16-
| | | Year Ended December 31, | |
| (in thousands) | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | |
| Net liability at end of year for unpaid losses and loss expenses | | $ | 243,015 | | | $ | 250,936 | | | $ | 265,605 | | | $ | 292,301 | | | $ | 322,054 | | | $ | 347,518 | | | $ | 383,401 | | | $ | 475,398 | | | $ | 506,906 | | | $ | 557,189 | | | $ | 626,359 | |
| Net liability re-estimated as of: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One year later | | | 250,611 | | | | 261,294 | | | | 280,074 | | | | 299,501 | | | | 325,043 | | | | 354,139 | | | | 419,032 | | | | 462,466 | | | | 493,961 | | | | 525,981 | | | | | |
| Two years later | | | 255,612 | | | | 268,877 | | | | 281,782 | | | | 299,919 | | | | 329,115 | | | | 375,741 | | | | 413,535 | | | | 450,862 | | | | 479,927 | | | | | | | | | |
| Three years later | | | 257,349 | | | | 270,473 | | | | 281,666 | | | | 304,855 | | | | 338,118 | | | | 376,060 | | | | 404,902 | | | | 440,168 | | | | | | | | | | | | | |
| Four years later | | | 256,460 | | | | 270,794 | | | | 284,429 | | | | 307,840 | | | | 339,228 | | | | 372,230 | | | | 398,560 | | | | | | | | | | | | | | | | | |
| Five years later | | | 255,660 | | | | 271,954 | | | | 285,130 | | | | 310,354 | | | | 338,020 | | | | 370,960 | | | | | | | | | | | | | | | | | | | | | |
| Six years later | | | 256,388 | | | | 272,553 | | | | 287,439 | | | | 310,380 | | | | 338,200 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Seven years later | | | 257,132 | | | | 274,111 | | | | 287,063 | | | | 311,594 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Eight years later | | | 257,935 | | | | 274,472 | | | | 288,298 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine years later | | | 258,272 | | | | 275,385 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ten years later | | | 259,013 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative deficiency (excess) | | | 15,998 | | | | 24,449 | | | | 22,693 | | | | 19,293 | | | | 16,146 | | | | 23,442 | | | | 15,159 | | | | (35,230 | ) | | | (26,979 | ) | | | (31,208 | ) | | | | |
| Cumulative amount of liability paid through: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One year later | | $ | 119,074 | | | $ | 126,677 | | | $ | 131,766 | | | $ | 131,779 | | | $ | 149,746 | | | $ | 163,005 | | | $ | 175,883 | | | $ | 195,956 | | | $ | 172,497 | | | $ | 182,223 | | | | | |
| Two years later | | | 181,288 | | | | 191,208 | | | | 194,169 | | | | 206,637 | | | | 228,506 | | | | 250,678 | | | | 276,331 | | | | 275,993 | | | | 276,069 | | | | | | | | | |
| Three years later | | | 217,138 | | | | 225,956 | | | | 233,371 | | | | 251,654 | | | | 274,235 | | | | 306,338 | | | | 317,447 | | | | 335,310 | | | | | | | | | | | | | |
| Four years later | | | 234,392 | | | | 245,094 | | | | 255,451 | | | | 274,248 | | | | 300,715 | | | | 324,628 | | | | 342,583 | | | | | | | | | | | | | | | | | |
| Five years later | | | 241,538 | | | | 254,502 | | | | 265,841 | | | | 287,178 | | | | 309,630 | | | | 337,946 | | | | | | | | | | | | | | | | | | | | | |
| Six years later | | | 245,774 | | | | 259,437 | | | | 272,431 | | | | 292,327 | | | | 315,105 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Seven years later | | | 248,195 | | | | 263,386 | | | | 275,357 | | | | 295,106 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Eight years later | | | 250,272 | | | | 265,026 | | | | 277,315 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine years later | | | 251,696 | | | | 266,433 | | | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ten years later | | | 252,228 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| (in thousands) | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | |
| Gross liability at end of year | | $ | 495,619 | | | $ | 538,258 | | | $ | 578,205 | | | $ | 606,665 | | | $ | 676,672 | | | $ | 814,665 | | | $ | 869,674 | | | $ | 962,007 | | | $ | 1,077,620 | |
| Reinsurance recoverable | | | 230,014 | | | | 245,957 | | | | 256,151 | | | | 259,147 | | | | 293,271 | | | | 339,266 | | | | 362,768 | | | | 404,818 | | | | 451,261 | |
| Net liability at end of year | | | 265,605 | | | | 292,301 | | | | 322,054 | | | | 347,518 | | | | 383,401 | | | | 475,398 | | | | 506,906 | | | | 557,189 | | | | 626,359 | |
| Gross re-estimated liability | | | 520,208 | | | | 559,837 | | | | 589,947 | | | | 625,221 | | | | 677,919 | | | | 761,282 | | | | 806,750 | | | | 904,062 | | | | | |
| Re-estimated recoverable | | | 231,910 | | | | 248,243 | | | | 251,747 | | | | 254,261 | | | | 279,359 | | | | 321,114 | | | | 326,823 | | | | 378,081 | | | | | |
| Net re-estimated liability | | | 288,298 | | | | 311,594 | | | | 338,200 | | | | 370,960 | | | | 398,560 | | | | 440,168 | | | | 479,927 | | | | 525,981 | | | | | |
| Gross cumulative deficiency (excess) | | | 24,589 | | | | 21,579 | | | | 11,742 | | | | 18,556 | | | | 1,247 | | | | (53,383 | ) | | | (62,924 | ) | | | (57,945 | ) | | | | |
Our insurance subsidiaries and Donegal Mutual purchase certain third-party reinsurance on a combined basis.
Through December 31, 2018, Le Mars, MICO, Peninsula and Sheboygan also had separate third-party reinsurance programs that provided certain coverage that was commensurate with their relative size and exposures. Our insurance subsidiaries use several different reinsurers, all of which, consistent with the requirements of our insurance subsidiaries and Donegal Mutual, have 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- (Excellent) rating from A.M. Best.
-17-
The external reinsurance our insurance subsidiaries and Donegal Mutual
purchase includes:purchased for 2021 included:excess of loss reinsurance, under which the losses of Donegal Mutual and our insurance subsidiaries are automatically reinsured, through a series of contracts,recovered losses over a set retention of $1.0 million for property losses$2.0 million; and a retention of $2.0 million for casualty losses (including workers’ compensation losses); and
catastrophe reinsurance, under which Donegal Mutual and our insurance subsidiaries recover, through a series of reinsurance agreements,recovered 100% of an accumulation of many losses resulting from a single event, including natural disasters, over a set retention of $10.0 million and after exceeding an annual aggregate deductible $1.2$15.0 million up to aggregate losses of $190.0$185.0 million per occurrence.
The amount of coverage each of these types of reinsurance provides depends upon the amount, nature, size and location of the risk being reinsured.
For property insurance, our insurance subsidiaries
havehad excess of loss
treatiesreinsurance that
provideprovided for coverage of
$34.0$33.0 million per loss over a set retention of
$1.0 $2.0million. For liability insurance, our insurance subsidiaries
havehad excess of loss
treatiesreinsurance that
provideprovided for coverage of
$58.0$73.0 million per occurrence over a set retention of $2.0 million. For workers’ compensation insurance, our insurance subsidiaries
havehad excess of loss
treatiesreinsurance that
provideprovided for coverage of
$13.0$18.0 million on any one life over a set retention of $2.0 million.
Our insurance subsidiaries and Donegal Mutual also
purchasepurchased facultative reinsurance to cover certain exposures, including property exposures that
exceedexceeded the limits provided by their respective treaty reinsurance.
At December 31,
2018, 99.8%2021, 100.0% of all debt securities our insurance subsidiaries held had an investment-grade rating. The investment portfolios of our insurance subsidiaries did not contain any mortgage loans or any
non-performing assets at December 31,
2018.2021.
The following table shows the composition of the debt securities (at carrying value) in the investment portfolios of our insurance subsidiaries, excluding short-term investments, by rating at December 31,
2018: | | | | | | | | |
| (dollars in thousands) | | December 31, 2018 | |
Rating(1) | | Amount | | | Percent | |
U.S. Treasury and U.S. agency securities(2) | | $ | 430,005 | | | | 46.3 | % |
Aaa or AAA | | | 18,229 | | | | 2.0 | |
Aa or AA | | | 191,082 | | | | 20.5 | |
A | | | 143,801 | | | | 15.5 | |
BBB | | | 144,236 | | | | 15.5 | |
B | | | 2,004 | | | | 0.2 | |
| | | | | | | | |
Total | | $ | 929,357 | | | | 100.0 | % |
| | | | | | | | |
| (dollars in thousands) | | December 31, 2021 | |
Rating(1) | | Amount | | | Percent | |
U.S. Treasury and U.S. agency securities(2) | | $ | 359,161 | | | | 29.9 | % |
| Aaa or AAA | | | 26,073 | | | | 2.2 | |
| Aa or AA | | | 349,417 | | | | 29.1 | |
| A | | | 215,757 | | | | 18.0 | |
| BBB | | | 250,326 | | | | 20.8 | |
| Total | | $ | 1,200,734 | | | | 100.0 | % |
| (1) | Ratings assigned by Moody’s Investors Services, Inc. or Standard & Poor’s Corporation. |
| (2) | Includes mortgage-backed securities of $309.6$237.7 million. |
Our insurance subsidiaries invest in both taxable and
tax-exempt securities as part of their strategy to maximize
after-tax income.
Tax-exempt securities made up
approximately19.7%approximately 21.1%,
24.3%22.9% and
32.2%18.7% of the fixed-maturity securities in the combined investment portfolios of our insurance subsidiaries at December 31,
2018, 20172021, 2020 and
2016,2019, respectively.
-18-
The following table shows the classification of our investments and the investments of our insurance subsidiaries at December 31,
2018, 20172021, 2020 and
20162019 (at carrying value):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2018 | | | 2017 | | | 2016 | |
| (dollars in thousands) | | Amount | | | Percent of
Total | | | Amount | | | Percent of
Total | | | Amount | | | Percent of
Total | |
Fixed maturities(1): | | | | | | | | | | | | | | | | | | | | | | | | |
Held to maturity: | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 76,223 | | | | 7.4 | % | | $ | 71,736 | | | | 7.1 | % | | $ | 61,382 | | | | 6.5 | % |
Obligations of states and political subdivisions | | | 159,292 | | | | 15.5 | | | | 137,581 | | | | 13.7 | | | | 122,793 | | | | 13.0 | |
Corporate securities | | | 127,010 | | | | 12.3 | | | | 108,025 | | | | 10.7 | | | | 91,555 | | | | 9.6 | |
Mortgage-backed securities | | | 40,274 | | | | 3.9 | | | | 49,313 | | | | 4.9 | | | | 60,371 | | | | 6.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total held to maturity | | | 402,799 | | | | 39.1 | | | | 366,655 | | | | 36.4 | | | | 336,101 | | | | 35.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | | 44,210 | | | | 4.3 | | | | 44,049 | | | | 4.4 | | | | 38,588 | | | | 4.1 | |
Obligations of states and political subdivisions | | | 75,216 | | | | 7.3 | | | | 132,117 | | | | 13.1 | | | | 186,083 | | | | 19.7 | |
Corporate securities | | | 137,833 | | | | 13.4 | | | | 105,740 | | | | 10.5 | | | | 87,456 | | | | 9.2 | |
Mortgage-backed securities | | | 269,299 | | | | 26.1 | | | | 257,040 | | | | 25.6 | | | | 202,948 | | | | 21.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total available for sale | | | 526,558 | | | | 51.1 | | | | 538,946 | | | | 53.6 | | | | 515,075 | | | | 54.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total fixed maturities | | | 929,357 | | | | 90.2 | | | | 905,601 | | | | 90.0 | | | | 851,176 | | | | 90.0 | |
Equity securities(2) | | | 43,667 | | | | 4.2 | | | | 50,445 | | | | 5.0 | | | | 47,088 | | | | 5.0 | |
Investment in affiliate(3) | | | 41,026 | | | | 4.0 | | | | 38,774 | | | | 3.9 | | | | 37,885 | | | | 4.0 | |
Short-term investments(4) | | | 16,749 | | | | 1.6 | | | | 11,050 | | | | 1.1 | | | | 9,371 | | | | 1.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total investments | | $ | 1,030,799 | | | | 100.0 | % | | $ | 1,005,870 | | | | 100.0 | % | | $ | 945,520 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2021 | | | 2020 | | | 2019 | |
| (dollars in thousands) | | Amount | | | | | | Amount | | | | | | Amount | | | | |
Fixed maturities(1): | | | | | | | | | | | | | | | | | | |
| Held to maturity: | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 89,268 | | | | 7.0 | % | | $ | 77,435 | | | | 6.3 | % | | $ | 82,916 | | | | 7.5 | % |
| Obligations of states and political subdivisions | | | 371,436 | | | | 29.1 | | | | 312,319 | | | | 25.6 | | | | 204,634 | | | | 18.4 | |
| Corporate securities | | | 191,147 | | | | 15.0 | | | | 173,270 | | | | 14.2 | | | | 156,399 | | | | 14.1 | |
| Mortgage-backed securities | | | 16,254 | | | | 1.2 | | | | 23,585 | | | | 1.9 | | | | 32,145 | | | | 2.9 | |
| Total held to maturity | | | 668,105 | | | | 52.3 | | | | 586,609 | | | | 48.0 | | | | 476,094 | | | | 42.9 | |
| Available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | | 32,185 | | | | 2.5 | | | | 47,815 | | | | 3.9 | | | | 19,364 | | | | 1.7 | |
| Obligations of states and political subdivisions | | | 57,378 | | | | 4.5 | | | | 68,965 | | | | 5.7 | | | | 56,796 | | | | 5.1 | |
| Corporate securities | | | 221,611 | | | | 17.4 | | | | 212,708 | | | | 17.4 | | | | 159,244 | | | | 14.3 | |
| Mortgage-backed securities | | | 221,455 | | | | 17.3 | | | | 225,648 | | | | 18.5 | | | | 329,548 | | | | 29.7 | |
| Total available for sale | | | 532,629 | | | | 41.7 | | | | 555,136 | | | | 45.5 | | | | 564,952 | | | | 50.8 | |
| Total fixed maturities | | | 1,200,734 | | | | 94.0 | | | | 1,141,745 | | | | 93.5 | | | | 1,041,046 | | | | 93.7 | |
Equity securities(2) | | | 63,420 | | | | 5.0 | | | | 58,556 | | | | 4.8 | | | | 55,477 | | | | 5.0 | |
Short-term investments(3) | | | 12,692 | | | | 1.0 | | | | 20,901 | | | | 1.7 | | | | 14,030 | | | | 1.3 | |
| Total investments | | $ | 1,276,846 | | | | 100.0 | % | | $ | 1,221,202 | | | | 100.0 | % | | $ | 1,110,553 | | | | 100.0 | % |
| (1) | We refer to Notes 1 and 4 to our Consolidated Financial Statements. We value those fixed maturities we classify as held to maturity at amortized cost; we value those fixed maturities we classify as available for sale at fair value. The total fair value of fixed maturities we classified as held to maturity was $405.0$697.4 million at December 31, 2018, $380.52021, $632.6 million at December 31, 20172020 and $344.6$500.3 million at December 31, 2016.2019. The amortized cost of fixed maturities we classified as available for sale was $535.1 $523.3million at December 31, 2018, $538.4 2021, $535.0million at December 31, 20172020 and $511.6$556.8 million at December 31, 2016.2019. |
| (2) | We value equity securities at fair value. TotalThe total cost of equity securities was $40.9 $43.3million at December 31, 2018, $44.2 million at December 31, 2017 and2021, $42.4 million at December 31, 2016.2020 and $43.4 million at December 31, 2019 |
| (3) | We value our investment in our affiliate at cost, adjusted for our share of earnings and losses of our affiliate as well as changes in equity of our affiliate due to unrealized gains and losses.
|
(4) | We value short-term investments at cost, which approximates fair value. |
-19-
The following table sets forth the maturities (at carrying value) in the fixed maturity portfolio of our insurance subsidiaries at December 31,
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2018 | | | 2017 | | | 2016 | |
| (dollars in thousands) | | Amount | | | Percent of
Total | | | Amount | | | Percent of
Total | | | Amount | | | Percent of
Total | |
Due in(1): | | | | | | | | | | | | | | | | | | | | | | | | |
One year or less | | $ | 39,282 | | | | 4.2 | % | | $ | 53,826 | | | | 6.0 | % | | $ | 44,120 | | | | 5.2 | % |
Over one year through three years | | | 74,773 | | | | 8.1 | | | | 74,140 | | | | 8.2 | | | | 90,018 | | | | 10.6 | |
Over three years through five years | | | 84,987 | | | | 9.1 | | | | 82,476 | | | | 9.1 | | | | 67,640 | | | | 7.9 | |
Over five years through ten years | | | 256,267 | | | | 27.6 | | | | 221,904 | | | | 24.5 | | | | 197,967 | | | | 23.3 | |
Over ten years through fifteen years | | | 117,875 | | | | 12.7 | | | | 131,531 | | | | 14.5 | | | | 148,959 | | | | 17.5 | |
Over fifteen years | | | 46,600 | | | | 5.0 | | | | 35,371 | | | | 3.9 | | | | 39,153 | | | | 4.6 | |
Mortgage-backed securities | | | 309,573 | | | | 33.3 | | | | 306,353 | | | | 33.8 | | | | 263,319 | | | | 30.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 929,357 | | | | 100.0 | % | | $ | 905,601 | | | | 100.0 | % | | $ | 851,176 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2021 | | | 2020 | | | 2019 | |
| (dollars in thousands) | | Amount | | | | | | Amount | | | | | | Amount | | | | |
Due in(1): | | | | | | | | | | | | | | | | | | |
| One year or less | | $ | 48,771 | | | | 4.1 | % | | $ | 73,166 | | | | 6.4 | % | | $ | 29,209 | | | | 2.8 | % |
| Over one year through three years | | | 93,100 | | | | 7.7 | | | | 85,805 | | | | 7.5 | | | | 71,738 | | | | 6.9 | |
| Over three years through five years | | | 120,038 | | | | 10.0 | | | | 111,258 | | | | 9.8 | | | | 93,982 | | | | 9.0 | |
| Over five years through ten years | | | 362,266 | | | | 30.2 | | | | 341,947 | | | | 30.0 | | | | 297,836 | | | | 28.6 | |
| Over ten years through fifteen years | | | 165,327 | | | | 13.8 | | | | 139,604 | | | | 12.2 | | | | 116,368 | | | | 11.2 | |
| Over fifteen years | | | 173,523 | | | | 14.4 | | | | 140,732 | | | | 12.3 | | | | 70,220 | | | | 6.8 | |
| Mortgage-backed securities | | | 237,709 | | | | 19.8 | | | | 249,233 | | | | 21.8 | | | | 361,693 | | | | 34.7 | |
| | | $ | 1,200,734 | | | | 100.0 | % | | $ | 1,141,745 | | | | 100.0 | % | | $ | 1,041,046 | | | | 100.0 | % |
| (1) | Based on stated maturity dates with no prepayment assumptions. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. |
As shown above, our insurance subsidiaries held investments in mortgage-backed securities having a carrying value of
$309.6$237.7 million at December 31,
2018.2021. The mortgage-backed securities consist primarily of investments in governmental agency balloon pools with stated maturities between one and
3936 years. The stated maturities of these investments limit the exposure of our insurance subsidiaries to extension risk in the event that interest rates rise and prepayments decline. Our insurance subsidiaries perform an analysis of the underlying loans when evaluating a mortgage-backed security for purchase, and they select those securities that they believe will provide a return that properly reflects the prepayment risk associated with the underlying loans.
The following table sets forth the investment results of our insurance subsidiaries for the years ended December 31,
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| (dollars in thousands) | | 2018 | | | 2017 | | | 2016 | |
Invested assets(1) | | $ | 1,018,334 | | | $ | 975,695 | | | $ | 923,171 | |
Investment income(2) | | | 26,908 | | | | 23,527 | | | | 22,633 | |
Average yield | | | 2.6 | % | | | 2.4 | % | | | 2.5 | % |
Averagetax-equivalent yield | | | 2.8 | | | | 2.8 | | | | 3.0 | |
| | | Year Ended December 31, | |
| (dollars in thousands) | | 2021 | | | 2020 | | | 2019 | |
Invested assets(1) | | $ | 1,249,024 | | | $ | 1,165,878 | | | $ | 1,070,676 | |
Investment income(2) | | | 31,126 | | | | 29,504 | | | | 29,515 | |
| Average yield | | | 2.5 | % | | | 2.5 | % | | | 2.8 | % |
| Average tax-equivalent yield | | | 2.6 | | | | 2.7 | | | | 2.9 | |
| (1) | Average of the aggregate invested amounts at the beginning and end of the period. |
| (2) | Investment income is net of investment expenses and does not include investment gains or losses or provision for income taxes. |
Donegal Mutual and our insurance subsidiaries have an A.M. Best rating of A (Excellent), based upon the respective current financial condition and historical statutory results of operations of Donegal Mutual and our insurance subsidiaries. We believe that the A.M. Best rating of Donegal Mutual and our insurance subsidiaries is an important factor in their marketing of their products to their agents and customers. A.M. Best’s ratings are industry ratings based on a comparative analysis of the financial condition and operating performance of insurance companies. A.M. Best’s classifications are A++ and A+ (Superior), A and
A- (Excellent), B++ and B+ (Good), B and
B- (Fair), C++ and C+ (Marginal), C and
C- (Weak), D (Poor)
and, E (Under Regulatory Supervision), F (Liquidation) and S (Suspended). A.M. Best bases its ratings upon factors relevant to the payment of claims of policyholders and are not directed toward the protection of investors in insurance companies. According to A.M. Best, the “Excellent” rating that the Donegal Insurance Group maintains is assigned to those companies that, in A.M. Best’s opinion, have an excellent ability to meet their ongoing
obligations to policyholders.-20-
insurance obligations.
The supervision and regulation of insurance companies consists primarily of the laws and regulations of the various states in which the insurance companies transact business, with the primary regulatory authority being the insurance regulatory authorities in the state of domicile of the insurance company. Such supervision and regulation relate to numerous aspects of an insurance company’s business and financial condition. The primary purpose of such supervision and regulation is the protection of policyholders. The authority of the state insurance departments includes the establishment of standards of solvency that insurers must meet and maintain, the licensing of insurers and insurance agents to do business, the nature of, and limitations on, investments, premium rates for property and casualty insurance, the provisions that insurers must make for current losses and future liabilities, the deposit of securities for the benefit of policyholders, the approval of policy forms, notice requirements for the cancellation of policies and the approval of certain changes in control. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies.
In addition to state-imposed insurance laws and regulations, the National Association of Insurance Commissioners, or the NAIC, maintains a risk-based capital system, or RBC, for assessing the adequacy of the statutory capital and surplus of insurance companies that augments the states’ current fixed dollar minimum capital requirements for insurance companies. At December 31,
2018,2021, our insurance subsidiaries and Donegal Mutual each exceeded
by a substantial margin the minimum levels of statutory capital the RBC rules
require.require by a substantial margin.
Generally, every state has guaranty fund laws under which insurers licensed to do business in that state can be assessed on the basis of premiums written by the insurer in that state in order to fund policyholder liabilities of insolvent insurance companies. Under these laws in general, an insurer is subject to assessment, depending upon its market share of a given line of business, to assist in the payment of policyholder claims against insolvent insurers. Our insurance subsidiaries and Donegal Mutual have made accruals for their portion of assessments related to such insolvencies based upon the most current information furnished by the guaranty associations.
We are part of an insurance holding company system of which Donegal Mutual is the ultimate controlling person. All of the states in which our insurance companies and Donegal Mutual maintain a domicile have legislation that regulates insurance holding company systems. Each insurance company in the insurance holding company system must register with the insurance supervisory agency of its state of domicile and furnish information concerning the operations of companies within the insurance holding company system that may materially affect the operations, management or financial condition of the insurers within the system. Pursuant to these laws, the respective insurance departments in which our subsidiaries and Donegal Mutual maintain a domicile may examine our insurance subsidiaries or Donegal Mutual at any time, require disclosure of material transactions by the holding company with another member of the insurance holding company system and require prior notice or prior approval of certain transactions, such as “extraordinary dividends” from the insurance subsidiaries to the holding company. We have insurance subsidiaries domiciled in
Iowa, Maryland, Michigan, Pennsylvania
Virginia and
Wisconsin.Virginia.
The Pennsylvania Insurance Holding Companies Act, which generally applies to Donegal Mutual, us and our insurance subsidiaries, requires that all transactions within an insurance holding company system to which an insurer is a party must be fair and reasonable and that any charges or fees for services performed must be reasonable. Any management agreement, service agreement, cost sharing arrangement and material reinsurance agreement must be filed with the Pennsylvania Insurance Department, or the Department, and is subject to the Department’s review. We have filed with the Department the pooling agreement between Donegal Mutual and Atlantic States that established the underwriting pool and all material agreements between Donegal Mutual and our insurance subsidiaries.
Approval of the applicable insurance commissioner is also required prior to consummation of transactions affecting the control of an insurer. In virtually all states, including the states where our insurance subsidiaries are domiciled, the acquisition of 10% or more of the outstanding capital stock of an insurer or its holding company or the intent to acquire such an interest creates a rebuttable presumption of a change in control. Pursuant to an order issued in April 2003, the Department approved Donegal Mutual’s ownership of up to 70% of our outstanding Class A common stock and Donegal Mutual’s ownership of up to 100% of our outstanding Class B common stock.
Our insurance subsidiaries have the legal obligation under state insurance laws to participate in involuntary insurance programs for automobile insurance, as well as other property and casualty insurance lines, in the states in which they conduct business. These programs include joint underwriting associations, assigned risk plans, fair access to insurance requirements plans, reinsurance facilities, windstorm plans and tornado plans. Legislation establishing these programs requires all companies that write lines covered by these programs to provide coverage, either directly or through reinsurance, for insureds who are unable to obtain insurance in the voluntary market. The legislation creating these programs usually allocates a pro rata portion
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of risks attributable to such insureds to each company on the basis of the direct premiums it has written in that state or the number of automobiles it insures in that state. Generally, state law requires participation in these programs as a condition to obtaining a certificate of authority. Our loss ratio on insurance we write under these involuntary programs has traditionally been significantly greater than our loss ratio on insurance we voluntarily write in those states.
Regulatory requirements, including RBC requirements, may impact our insurance subsidiaries’ ability to pay dividends. The amount of statutory capital and surplus necessary for our insurance subsidiaries to satisfy regulatory requirements, including RBC requirements, was not significant in relation to our insurance subsidiaries’ statutory capital and surplus at December 31,
2018.2021. Generally, the maximum amount that one of our insurance subsidiaries may pay to us as ordinary dividends during any year after notice to, but without prior approval of, the insurance commissioner of its domiciliary state is limited to a stated percentage of that subsidiary’s statutory capital and surplus at December 31 of the preceding fiscal year or the net income of that subsidiary for its preceding fiscal year. Our insurance subsidiaries paid dividends to us of
$11.0$5.0 million,
$13.0$14.0 million and
$13.0$4.0 million in
2018, 20172021, 2020 and
2016,2019, respectively. At December 31,
2018,2021, the amount of ordinary dividends our insurance subsidiaries could pay to us during
2019,2022, without the prior approval of their respective domiciliary insurance commissioners, is shown in the following table.
| | | | |
Name of Insurance Subsidiary | | Ordinary
Dividend
Amount | |
Atlantic States | | $ | 19,438,647 | |
Le Mars | | | 1,959,394 | |
MICO | | | 5,570,844 | |
Peninsula | | | 1,722,132 | |
Sheboygan | | | 1,675,590 | |
Southern | | | 4,535,579 | |
| | | | |
Total | | $ | 34,902,186 | |
| | | | |
| Name of Insurance Subsidiary | | Ordinary Dividend Amount | |
| | | | |
| Atlantic States | | $ | 27,888,319 | |
| MICO | | | 7,670,872 | |
| Peninsula | | | 4,786,779 | |
| Southern | | | 6,927,576 | |
| Total | | $ | 47,273,546 | |
Donegal Mutual Insurance Company
Donegal Mutual organized as a mutual fire insurance company in Pennsylvania in 1889. At December 31,
2018,2021, Donegal Mutual had admitted assets of
$602.5 $735.9million and policyholders’ surplus of
$280.4$333.0 million. At December 31,
2018,2021, Donegal Mutual had total liabilities of
$322.1$402.9 million, including reserves for net losses and loss expenses of
$169.2$197.9 million and unearned premiums of
$72.6$72.5 million. Donegal Mutual’s investment portfolio of
$358.0$450.2 million at December 31,
20182021 consisted primarily of investment-grade bonds of
$120.3$208.5 million
its investment in DFSC’s common stock and its investment in our Class A common stock and our Class B common stock. At December 31,
2018,2021, Donegal Mutual owned
9,851,02510,542,692 shares, or approximately
43%41%, of our Class A common stock, which Donegal Mutual carried on its books at
$117.5$149.3 million, and 4,654,339 shares, or approximately 84%, of our Class B common stock, which Donegal Mutual carried on its books at
$55.5$65.9 million. We present Donegal Mutual’s financial information in accordance with SAP as the NAIC Accounting Practices and Procedures Manual requires. Donegal Mutual does not, nor is it required to, prepare financial statements in accordance with GAAP.
Cautionary Statement Regarding Forward-Looking Statements
This Form
10-K Report and the documents we incorporate by reference in this Form
10-K Report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include certain discussions relating to underwriting, premium and investment income volumes, business strategies, reserves, profitability and business relationships and our other business activities during
20182021 and beyond. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “objective,” “project,” “predict,” “potential,” “goal” and similar expressions. These forward-looking statements reflect our current views about future events and our current assumptions, and are subject to known and unknown risks and uncertainties that may cause our results, performance or achievements to differ materially from those we anticipate or imply by our forward-looking statements. We cannot control or predict many of the factors that could determine our future financial condition or results of operations. Such factors may include those we describe under “Risk Factors.” The forward-looking statements contained in this Form
10-K Report reflect our views and assumptions only as of the date of this Form
10-K Report. Except as required by law, we do not intend to update, and we assume no responsibility for updating, any forward-looking statements we have made. We qualify all of our forward-looking statements by these cautionary statements.
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Risks Relating to the Property and Casualty Insurance Industry
Industry trends, such as
increasedincreasing loss severity due to higher rates of litigation against the insurance industry and individual insurers, the willingness of courts to expand covered causes of loss, rising jury awards, escalating medical,
automobile and property repair costs
increasing loss frequency due to distracted driving and other factors
increasing loss severity and adverse weather conditions may contribute to increased costs and result in
the deterioration ofultimate loss settlements that exceed the reserves of our insurance subsidiaries.
Loss severity in the property and casualty insurance industry has increased in recent years, principally driven by factors such as distracted driving, larger court judgments, higher jury awards and increasing medical and automobile and property repair costs. The industry has also experiencedcosts, including increases in the frequency of automobile losses due to distracted driving, increases in miles driven due to lower fuel costs, lower unemployment ratesinflation and other factors.supply chain disruption. In addition, many classes of complainants have brought legal actions and proceedings that tend to increase the size of judgments. The propensity of policyholders and third-party claimants to litigate and the willingness of courts to expand causes of loss and the size of awards, to eliminate exclusions and to increase coverage limits may makeresult in ultimate settlements of current and future losses that exceed the loss reserves of our insurance subsidiaries.
Our insurance subsidiaries are subject to catastrophe losses and losses from other severe weather events, which are unpredictable and may adversely affect our results of operations, liquidity and financial condition.
The underwriting results of our insurance subsidiaries are subject to weather and other conditions that may adversely affect our financial condition, liquidity or results of operations. Because the occurrence and severity of catastrophes are inherently unpredictable and may vary significantly from year to year and region to region, our historical results of operations may not be indicative of our future results of operations. Our property and casualty insurance operations expose us to claims arising from catastrophic events affecting multiple policyholders. Such catastrophic events consist of various natural disasters, including, but not limited to, hurricanes, tropical storms, tornadoes, windstorms, hailstorms, fires and wildfires, flooding, landslides, earthquakes, severe winter weather events and man-made disasters such as terrorist attacks, explosions and infrastructure failures. Historically, our insurance subsidiaries have experienced weather-related losses from hurricanes and tropical storms in Mid-Atlantic and Southern states, tornadoes and hailstorms in Mid-Atlantic, Midwestern and Southern states and severe winter weather events in Mid-Atlantic, Midwestern and New England states.
Losses from catastrophic events are a function of both the extent of our insurance subsidiaries’ exposures, the frequency and severity of the events themselves and the level of reinsurance coverage our insurance subsidiaries purchase. The increased frequency and severity of weather-related catastrophes and other losses, such as from wildfires and flooding, incurred by the industry in 2021 and in prior years may be indicative of changing weather patterns due to climate change. Should those patterns continue to emerge, increased weather-related catastrophes in the states in which our insurance subsidiaries operate would lead to higher overall losses that they may be unable to offset through pricing actions.
Our insurance subsidiaries seek to reduce their exposure to catastrophe losses through their underwriting strategies and their purchase of catastrophe reinsurance. Nevertheless, reinsurance may prove inadequate
under certain circumstances. While the emerging science regarding climate change and its connection to extreme weather events continues to be studied, climate change, to the extent it produces rising temperatures and changes in weather patterns, could affect the frequency and severity of weather events and other losses and thus impact the affordability and availability of catastrophe reinsurance coverage for
currentour insurance subsidiaries. Our insurance subsidiaries' ability to appropriately manage catastrophe risk depends partially on catastrophe models, which may be affected by inaccurate or incomplete data, the uncertainty of the frequency and
severity of future
losses.events and the uncertain impact of changing climate conditions that tend to occur gradually over time.
Changing climate conditions could lead to new or revised regulations with which our insurance subsidiaries would have to comply. Such regulations could impact our the ability of our insurance subsidiaries to manage their exposures in areas impacted by increased weather activity, require our insurance companies to alter the terms and conditions of their policies or impact the ability of our insurance subsidiaries to obtain sufficient pricing increases to offset higher loss activity.
Our insurance subsidiaries must establish premium rates and loss and loss expense reserves from forecasts of the ultimate costs they expect will arise from risks underwritten during the policy period, and the profitability of our insurance subsidiaries could be adversely affected if their premium rates or reserves are insufficient to satisfy their ultimate costs.
One of the distinguishing features of the property and casualty insurance industry is that it prices its products before it knows its costs, since insurers generally establish their premium rates before they know the amount of losses they will incur. Accordingly, our insurance subsidiaries establish premium rates from forecasts of the ultimate costs they expect to arise from risks they have underwritten during the policy period.
TheseProposed increases in premium rates
are subject to regulatory approval on a state-by-state basis, and there is a lag between the time that our insurance subsidiaries file for such approval and the date upon which our insurance subsidiaries can implement any such approved premium rate increase across their book of business for a product in a particular state. The premium rates our insurance subsidiaries charge may not be sufficient to cover the ultimate losses
our insurance subsidiariesthey incur. Further, our insurance subsidiaries must establish reserves for losses and loss expenses as balance sheet liabilities based upon estimates involving actuarial and statistical projections at a given time of what our insurance subsidiaries expect their ultimate liability to be. Significant periods of time often elapse between the occurrence of an insured loss,
and the reporting of the loss and the
paymentsettlement of that loss. It is possible that our insurance subsidiaries’ ultimate liability could exceed these estimates because of the future development of known losses, the existence of losses that have occurred but are currently unreported and larger than historical settlements of pending and unreported claims. The process of estimating reserves is inherently judgmental and can be influenced by a number of factors, including the following:
trends in claim frequency and severity;
emerging economic and social trends;
economic and social inflation; and
changes in the regulatory and litigation environments.
If our insurance subsidiaries determine that their reserves are insufficient to cover their ultimate liability, they will increase their reserves. An increase in reserves results in an increase in losses and a reduction in net income for the period in which our insurance subsidiaries recognize a deficiency in reserves. Accordingly, an increase in reserves may adversely impact the business, liquidity, financial condition and results of operations of our insurance subsidiaries.
The financial results of our insurance subsidiaries depend primarily on their ability to underwrite risks effectively and to charge adequate rates to policyholders.
The financial condition, cash flows and results of operations of our insurance subsidiaries depend on their ability to underwrite and set rates accurately for a full spectrum of risks across a number of lines of insurance. Rate adequacy is necessary to generate sufficient premium to pay losses, loss adjustment expenses and underwriting expenses and to realize a profit.
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The ability to underwrite and set rates effectively is subject to a number of risks and uncertainties,
including:including those related to:the availability of sufficient, reliable data;
the ability to conduct a complete and accurate analysis of available data;
the ability to recognize in a timely manner changes in trends and to project both the severity and frequency of losses with reasonable accuracy;
uncertainties generally inherent in estimates and assumptions;
the ability to project changes in certain operating expense levels with reasonable certainty;
the development, selection and application of appropriate rating formulae or other pricing methodologies;
the effective development, governance and appropriate use of modeling tools to assist with correctly and consistently achieving the intended results in underwriting and pricing;
the ability to innovate with new pricing strategies and the success of those innovations onupon implementation;
the ability to secure regulatory approval of premium rates on an adequate and timely basis;
the ability to predict policyholder retention accurately;
unanticipated court decisions, legislation or regulatory action;
unanticipated changes in our claim settlement practices;
changes in driving patterns for auto exposures;
changes in weather patterns for property exposures;
changes in the medical sector of the economy;economy that impact bodily injury loss costs;
changes in auto repair costs, auto parts prices and used car prices;
the impact of emerging technologies, including the advent ofdriver assistance technologies and autonomous vehicles, on pricing, insurance coverages and loss costs;
the impact of inflation and other factors on the cost and availability of construction materials and labor;
the ability to monitor property concentration in catastrophe-prone areas, such as hurricane, earthquake and wind/hail regions; and
the general state of the economy in the states in which our insurance subsidiaries operate.
Such risks may result in
the premium rates of our insurance subsidiaries
being basedbasing their premium rates on inadequate or inaccurate data or inappropriate assumptions or methodologies and may cause our estimates of future changes in the frequency or severity of claims to be incorrect. As a result, our insurance subsidiaries could underprice risks, which would negatively affect our margins, or our insurance subsidiaries could overprice risks, which could reduce their
premium volume and competitiveness. In either event, underpricing or overpricing risks could adversely impact our operating results, financial condition and cash flows.
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The
cyclical naturepace of
innovation within the
property and casualty insurance industry may reduce the revenues and profit margins of our insurance subsidiaries.The property and casualty insurance industry is highly cyclical with respectrapidly increasing, and our insurance subsidiaries may be unable to both individual lines of businesseffectively implement new technologies and the overallanticipate changes in customer preferences and insurance industry. Premium rate levels relate to the availability ofneeds, which could put our insurance coverage, which varies according to the level of surplus available insubsidiaries at a competitive disadvantage and adversely affect their future profitability.
Innovation, recent technological developments, changing customer demographics and preferences, societal shifts and emerging technologies are greatly impacting the insurance industry.
The levelOur insurance subsidiaries compete with much larger insurers that are focused on implementing technology and innovative solutions to select and price risks, enhance the experience of
surplus in the industry varies with returns on invested capitaltheir customers and
regulatory barriers to withdrawal of surplus. Increases in surplus may result in increased price competition among property and casualty insurers.improve their operations. If our insurance subsidiaries
find it necessaryare unable to
reduce premiums or limit premium increases due to these competitive pressures on pricing,anticipate changes in customer expectations and keep pace with the technological changes their competitors implement, our insurance subsidiaries may
experience a reduction innot be able to attract and maintain quality accounts, adequately price risks or operate as efficiently as their
profit marginscompetitors. In addition, emerging technologies such as autonomous vehicles, driver-assistance and
revenues, an increase in their ratiosaccident avoidance features on vehicles, sensor technology and other forms of
losses and expenses to premiums and, therefore, lower profitability.automation may reduce the future need for, or decrease the future pricing of, the insurance products our insurance subsidiaries offer.
Loss or significant restriction of the use of credit scoring in the pricing and underwriting of the personal lines insurance products by our insurance subsidiaries could adversely affect their future profitability.
Our insurance subsidiaries use credit scoring as a factor in making risk selection and pricing decisions for personal lines insurance products where allowed by state law.
Recently, some consumer groups and regulators have questionedThere is increasing regulatory debate as to whether
the use of credit scoring unfairly discriminates against people with low incomes, minority groups and the elderly.
These consumerConsumer groups and regulators often call for the prohibition or restriction on the use of credit scoring in underwriting and pricing. Laws or regulations
enacted in a number of states that significantly curtail the use of credit scoring in the underwriting process could reduce the future profitability of our insurance subsidiaries.
Changes in applicable insurance laws or regulations or changes in the way insurance regulators administer those laws or regulations could adversely affect the operating environment of our insurance subsidiaries and increase their exposure to loss or put them at a competitive disadvantage.
Property and casualty insurers are subject to extensive supervision in their domiciliary states and in the states in which they do business. This regulatory oversight includes matters relating to:
licensing and examination;
approval of premium rates;
limitations on the nature and amount of certain investments;
mandated participation in involuntary markets and guaranty funds;
transactions between affiliates;
the amount of dividends that insurers may pay; and
restrictions on underwriting standards.
Such regulation and supervision are primarily for the benefit and protection of policyholders rather than stockholders.
For instance, our insurance subsidiaries are subject to involuntary participation in specified markets in various states in which they operate and the premium rates our insurance subsidiaries may charge do not always correspond with the underlying costs of providing that coverage.-25-
The NAIC and state insurance regulators
arere-examiningre-examine existing laws and regulations
from time to time, specifically focusing
on:on areas such as:insurance company investments;
issues relating to the solvency of insurance companies;
risk-based capital guidelines;
restrictions on the terms and conditions included in insurance policies;
certain methods of accounting;
reserves for unearned premiums, losses and other purposes;
the values at which insurance companies may carry investment securities and the definition of other-than-temporary impairment of investment securities; and
interpretations of existing laws and the development of new laws.
Changes in state laws and regulations, as well as changes in the way state regulators view related-party transactions in particular, could change the operating environment of our insurance subsidiaries and have an adverse effect on their business.
The state insurance regulatory framework has recently come under increased federal scrutiny. Congress is considering proposals that it should create an optional federal charter for insurers. Federal chartering has the potential to create an uneven playing field for insurers by subjecting federally-chartered and state-chartered insurers to different regulatory requirements. Federal chartering also raises the possibility of duplicative or conflicting federal and state requirements. In addition, if federal legislation repeals the partial exemption for the insurance industry from federal antitrust laws, our ability to collect and share loss cost data with the industry could adversely affect the results of operations of our insurance subsidiaries.
Insurance companies are subject to assessments, based on their market share in a given line of business, to assist in the payment of unpaid claims and related costs of insolvent insurance companies. Such assessments could adversely affect the financial condition of our insurance subsidiaries.
Our insurance subsidiaries are subject to assessments pursuant to the guaranty fund laws of the various states in which they conduct business. Generally, under these laws, our insurance subsidiaries can be assessed, depending upon the market share of our insurance subsidiaries in a given line of insurance business, to assist in the payment of unpaid claims and related costs of insolvent insurance companies in those states.
For example, our insurance subsidiaries were assessed approximately $800,000 in 2018 pursuant to the guaranty fund laws of Pennsylvania to assist in the payment of unpaid claims and related costs of insolvent insurance companies in that state. We cannot predict the number and magnitude of future insurance company failures in the states in which our insurance subsidiaries conduct business, but future assessments could adversely affect the business, financial condition and results of operations of our insurance subsidiaries.
Risks Relating to Us and Our Business
The emergence of COVID-19 has affected the business operations of our insurance subsidiaries and Donegal Mutual, and economic disruption related to the COVID-19 pandemic may adversely affect our revenues, profitability, results of operations, cash flows, liquidity and financial condition.
During 2020 and 2021, the COVID-19 pandemic resulted in significant disruptions in economic activity throughout our operating regions. We cannot predict at this time the ultimate impact that the economic and financial disruption related to the ongoing COVID-19 pandemic or any other future pandemic will have on us. Risks related to COVID-19 or a future pandemic include, but are not limited to, the following:
the business operations or a specific operational function of our insurance subsidiaries and Donegal Mutual could be disrupted by the illness of significant numbers of their employees and remedial efforts that would be required upon discovery of exposure to a communicable illness within their facilities;
the business operations of our insurance subsidiaries and Donegal Mutual are dependent upon technology systems for which regular physical access is required to maintain critical operational capabilities, and the business operations of our insurance subsidiaries and Donegal Mutual would be adversely impacted by government mandates requiring closure of facilities where those technology systems are located or restricting physical access to such facilities;
the revenues of our insurance subsidiaries and Donegal Mutual may decrease as a result of reduced demand for their insurance products as economic disruption adversely impacts current and potential insurance customers;
our insurance subsidiaries and Donegal Mutual may incur an increase in their losses and loss expenses in certain lines of business as a result of COVID-19 or a future pandemic and related economic disruption, and such losses and loss expenses may exceed the reserves our insurance subsidiaries and Donegal Mutual have established or may establish in the future;
our insurance subsidiaries and Donegal Mutual may incur increased costs related to legal disputes over policy coverages or exclusions and their defense against litigation related to COVID-19 or a future pandemic;
legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries and Donegal Mutual to pay losses for damages that their policies explicitly excluded or did not intend to cover;
legislative, judicial and regulatory actions may require our insurance subsidiaries and Donegal Mutual to reduce or refund premiums, suspend cancellation of policies for non-payment of premiums or otherwise grant extended grace periods and time allowances for the payment of premium balances due to them;
our insurance subsidiaries and Donegal Mutual may not be able to collect premium balances due to them, resulting in reduced operating cash flows and an increase in premium write-offs that would increase their operating expenses;
our insurance subsidiaries may suffer declines in the market values of their investments as a result of financial market volatility related to pandemic concerns and related economic disruption; and
economic disruption related to COVID-19 or a future pandemic could result in significant declines in the credit quality of issuers, ratings downgrades or changes in financial market conditions and regulatory changes that might adversely impact the value of the fixed-maturity investments that our insurance subsidiaries own.
Donegal Mutual is our controlling stockholder. Donegal Mutual and its directors and executive officers have potential conflicts of interest between the best interests of our stockholders and the best interests of the policyholders of Donegal Mutual.
Donegal Mutual controls the election of all of the members of our board of directors. Six of the eleven members of our board of directors are also directors of Donegal Mutual. Donegal Mutual and we share the same executive officers. These common directors and executive officers have a fiduciary duty to our stockholders and also have a fiduciary duty to the policyholders of Donegal Mutual. Among the potential conflicts of interest that could arise from these separate fiduciary duties are the following:
we and Donegal Mutual periodically review the percentage participation of Atlantic States and Donegal Mutual in the underwriting pool that Donegal Mutual and Atlantic States have maintained since 1986;
our insurance subsidiaries and Donegal Mutual annually review and then establish the terms of certain reinsurance agreements between our insurance subsidiaries and Donegal Mutual. Our objective, over the long-term, is for these agreements to have approximately an equal balance between payments and recoveries;Mutual;
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Wewe and Donegal Mutual periodically allocate certain shared expenses among ourselves and our insurance subsidiaries in accordance with various inter-company expense-sharing agreements; and
we and our insurance subsidiaries may enter into other transactions or contractual relationships with Donegal Mutual, including, for example, our purchases from time to time from Donegal Mutual of the surplus note of a mutual insurance company that will subsequently convert into a stock insurance company and ultimately become one of our wholly owned subsidiaries.Mutual.
Donegal Mutual has sufficient voting power to determine the outcome of substantially all matters submitted to our stockholders for approval.
Each share of our Class A common stock has
one-tenth of a vote per share and generally votes as a single class with our Class B common stock. Each share of our Class B common stock has one vote per share and generally votes as a single class with our Class A common stock. Donegal Mutual has the right to vote approximately
72%70% of the combined voting power of our Class A common stock and our Class B common stock and has sufficient voting control to and has acted to:
elect all of the members of our board of directors, who determine our management and policies; and
control the outcome of any corporate transaction or other matter submitted to a vote of our stockholders for approval, including mergers or other acquisition proposals and the sale of all or substantially all of our assets, in each case regardless of how all of our stockholders other than Donegal Mutual vote their shares.
The interests of Donegal Mutual in maintaining this greater-than-majority voting control of us may have an adverse effect on the price of our Class A common stock and the price of our Class B common stock because of the absence of any potential “takeover” premium and may, therefore, be inconsistent with the interests of our stockholders other than Donegal Mutual.
Donegal Mutual’s majority voting control of us, certain provisions of our certificate of incorporation and
by-laws and certain provisions of Delaware law make it remote that anyone could acquire actual control of us unless Donegal Mutual were in favor of another person’s acquisition of control of us.
Donegal Mutual’s majority voting control of us, certain anti-takeover provisions in our certificate of incorporation and
by-laws and certain provisions of the Delaware General Corporation Law, or the DGCL, could delay or prevent the removal of members of our board of directors and could make a merger, tender offer or proxy contest involving us more expensive as well as unlikely to succeed, even if such events were in the best interests of our stockholders other than Donegal Mutual. These factors could also discourage a third party from attempting to acquire control of us. In particular, our certificate of incorporation and
by-laws include the following anti-takeover provisions:
our board of directors is classified into three classes, so that our stockholders elect onlyone-third of the members of our board of directors each year;
our stockholders may remove our directors only for cause;
our stockholders may not take stockholder action except at an annual or special meeting of our stockholders;
the request of stockholders holding at least 20% of the combined voting power of our Class A common stock and our Class B common stock is required for a stockholder to call a special meeting of our stockholders;
ourby-laws require that stockholders provide advance notice to us to nominate candidates for election to our board of directors or to propose any other item of stockholder business at a stockholders’ meeting;
we do not permit cumulative voting rights in the election of our directors;
our certificate of incorporation does not provide for preemptive rights in connection with any issuance of securities by us; and
our board of directors may issue, without stockholder approval unless otherwise required by law, preferred stock with such terms as our board of directors may determine.
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We have authorized preferred stock that we could issue without stockholder approval to make it more difficult for a third party to acquire us.
We have 2.0 million authorized shares of preferred stock that we could issue in one or more series without further stockholder approval, unless the DGCL or the rules of the NASDAQ Global Select Market otherwise require, and upon such terms and conditions, and having such rights, privileges and preferences, as our board of directors may determine. Our potential issuance of preferred stock may make it more difficult for a third party to acquire control of us.
Because we are an insurance holding company, no person can acquire or seek to acquire a 10% or greater interest in us without first obtaining approval of the insurance commissioners of the states of domicile of each of our insurance subsidiaries.
We own insurance subsidiaries domiciled in the states of
Iowa, Maryland, Michigan, Pennsylvania
Virginia and
Wisconsin,Virginia, and Donegal Mutual owns or controls insurance companies domiciled in Georgia and New Mexico. The insurance laws of each of these states provide that no person can acquire or seek to acquire a 10% or greater interest in us without first filing specified information with the insurance commissioners of those states and obtaining the prior approval of the proposed acquisition of a 10% or greater interest in us by each of the state insurance commissioners based on statutory standards designed to protect the safety and soundness of us and our insurance subsidiaries.
Our insurance subsidiaries
and Donegal Mutual currently conduct business in a limited number of states, with a concentration of business in Pennsylvania, Michigan, Maryland,
Delaware, Virginia and Georgia. Any single catastrophe occurrence or other condition affecting losses in these states could adversely affect the results of operations of our insurance subsidiaries.
Our insurance subsidiaries
and Donegal Mutual conduct business in
2224 states located primarily in the
Mid-Atlantic, Midwestern, New England,
Southern and
SouthernSouthwestern states. A substantial portion of their business consists of private passenger and commercial automobile, homeowners,
commercial multi-peril and workers’ compensation insurance in Pennsylvania, Michigan, Maryland,
Delaware, Virginia and Georgia. While our insurance subsidiaries and Donegal Mutual actively manage their respective exposure to catastrophes through their underwriting processes and the purchase of reinsurance, a single catastrophic occurrence, destructive weather pattern, general economic trend, terrorist attack, regulatory development or other condition affecting one or more of the states in which our insurance subsidiaries conduct substantial business could materially adversely affect their business, financial condition and results of operations. Common catastrophic events include hurricanes, earthquakes, tornadoes, wind and
hail storms,hailstorms, fires, explosions and severe winter storms.
If the independent agents who market the products of our insurance subsidiaries
and Donegal Mutual do not maintain their current levels of premium writing with us
and Donegal Mutual, fail to comply with established underwriting guidelines of our insurance subsidiaries
and Donegal Mutual or otherwise inappropriately market the products of our insurance subsidiaries
and Donegal Mutual, the business, financial condition and results of operations of our insurance subsidiaries could be adversely affected.
Our insurance subsidiaries
and Donegal Mutual market their insurance products solely through a network of approximately
2,4002,300 independent insurance agencies. This agency distribution system is one of the most important components of the competitive profile of our insurance
subsidiaries.subsidiaries and Donegal Mutual. As a result, our insurance subsidiaries
and Donegal Mutual depend to a material extent upon their independent agents, each of whom has the authority to bind one or more of our insurance subsidiaries
or Donegal Mutual to insurance coverage. To the extent that such independent agents’ marketing efforts fail to result in the maintenance of their current levels of volume and quality or they bind our insurance subsidiaries
or Donegal Mutual to unacceptable insurance risks, fail to comply with the established underwriting guidelines of our insurance subsidiaries
and Donegal Mutual or otherwise inappropriately market the products of our insurance subsidiaries
and Donegal Mutual, the business, financial condition and results of operations of our insurance subsidiaries could suffer.
The business of our insurance subsidiaries
and Donegal Mutual may not continue to grow and may be materially adversely affected if our insurance subsidiaries
and Donegal Mutual cannot retain existing, and attract new, independent agents or if insurance consumers increase their use of insurance
marketing systemsdistribution channels other than independent agents.
Our
The ability of our insurance
subsidiaries’ abilitysubsidiaries and Donegal Mutual to retain existing, and to attract new, independent agents is essential to the continued growth of the business of our insurance
subsidiaries.subsidiaries and Donegal Mutual. If independent agents find it easier to do business with the competitors of our insurance subsidiaries
and Donegal Mutual, our insurance subsidiaries
and Donegal Mutual could find it difficult to retain their existing business or to attract new business. While our insurance subsidiaries
and Donegal Mutual believe they maintain good relationships with the independent agents they have appointed, our insurance subsidiaries
and Donegal Mutual cannot be certain that these independent agents will continue to sell the products of our insurance subsidiaries
and Donegal Mutual to the consumers these independent agents represent. Some of the factors that could adversely affect the ability of our insurance subsidiaries
and Donegal Mutual to retain existing, and attract new, independent agents include:
the significant competition among insurance companies to attract independent agents;
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the labor-intensive and time-consuming process of selecting new independent agents;
the insistence of our insurance subsidiaries and Donegal Mutual that independent agents adhere to consistent underwritingcertain standards; and
the ability of our insurance subsidiaries and Donegal Mutual to pay competitive and attractive commissions, bonuses and other incentives to independent agents.agents; and
the ongoing consolidation of independent agencies, which may result in the acquisition of independent agencies from which our insurance subsidiaries and Donegal Mutual currently receive business by larger entities with which our insurance subsidiaries and Donegal Mutual do not have business relationships.
While our insurance subsidiaries
and Donegal Mutual sell insurance to policyholders solely through their network of independent agencies, many competitors of our insurance subsidiaries
and Donegal Mutual sell insurance through a variety of delivery methods, including independent agencies, captive agencies
the Internet and direct sales. To the extent that current and potential policyholders change their
marketing systemdistribution channel preference, the business, financial condition and results of operations of our insurance subsidiaries may be adversely affected.
We are dependent on dividends from our insurance subsidiaries for the payment of our operating expenses
our debt service and dividends to our stockholders; however, there are regulatory restrictions and business considerations that may limit the amount of dividends our insurance subsidiaries may pay to us.
As a holding company, we rely primarily on dividends from our insurance subsidiaries as a source of funds to meet our corporate obligations and to pay dividends to our stockholders. The amount of dividends our insurance subsidiaries can pay to us is subject to regulatory restrictions and depends on the amount of surplus our insurance subsidiaries maintain. From time to time, the NAIC and various state insurance regulators consider modifying the method of determining the amount of dividends that an insurance company may pay without prior regulatory approval. The maximum amount of ordinary dividends that our insurance subsidiaries can pay to us in
20192022 without prior regulatory approval is approximately
$34.9$47.3 million. Other business and regulatory considerations, such as the impact of dividends on surplus that could affect the ratings of our insurance subsidiaries, competitive conditions, RBC requirements, the investment results of our insurance subsidiaries and the amount of premiums that our insurance subsidiaries write could also adversely impact the ability of our insurance subsidiaries to pay dividends to us.
If A.M. Best downgrades the rating it has assigned to Donegal Mutual or any of our insurance subsidiaries, it would adversely affect their competitive position.
Industry ratings are a factor in establishing and maintaining the competitive position of insurance companies. A.M. Best, an industry-accepted source of insurance company financial strength ratings, rates Donegal Mutual and our insurance subsidiaries. A.M. Best ratings provide an independent opinion of an insurance company’s financial health and its ability to meet its obligations to its policyholders. We believe that the financial strength rating of A.M. Best is material to the operations of Donegal Mutual and our insurance subsidiaries.
For example, certain lenders require customers to purchase insurance from an insurance carrier that has received an A.M. Best rating that exceeds a certain level. Currently, Donegal Mutual and our insurance subsidiaries each have an A (Excellent) rating from A.M. Best.
IfIn March 2021, A.M. Best affirmed its A (Excellent) ratings of Donegal Mutual and our insurance subsidiaries. However, if A.M. Best were to downgrade the rating of Donegal Mutual or any of our insurance subsidiaries, it would adversely affect the competitive position of Donegal Mutual or that insurance subsidiary and make it more difficult for it to market its products and retain its existing policyholders.
The growth and profitability of our insurance subsidiaries depend, in part, on the effective maintenance and ongoing development of Donegal Mutual’s information technology systems, and the allocation of related costs to our insurance subsidiaries may adversely impact their profitability.
Our insurance subsidiaries utilize Donegal Mutual’s information technology systems to conduct their insurance business, including policy quoting and issuance, claims processing, processing of incoming premium payments and other important functions. As a result, the ability of our insurance subsidiaries to grow their business and conduct profitable operations depends on Donegal Mutual’s ability to maintain its existing information technology systems and to develop new technology systems that will support the business of Donegal Mutual and our insurance subsidiaries in a cost-efficient manner and provide information technology capabilities equivalent to those of our competitors. The allocation among our insurance subsidiaries and Donegal Mutual of the costs of developing and maintaining Donegal Mutual’s information technology systems may adversely impact our insurance subsidiaries’ expense ratio and underwriting profitability, and such costs may exceed Donegal Mutual’s and our expectations.
Donegal Mutual is currently in the midst of a multi-year effort to modernize certain of its key infrastructure and applications systems. These new systems are intended to provide various benefits to the member companies of the Donegal Insurance Group, including streamlined workflows and business processes, service enhancements for their agents and policyholders, opportunities to implement new product models and innovative business solutions, greater utilization of data analytics and operational efficiencies. Our insurance subsidiaries began to issue workers’ compensation policies from the new systems in the second quarter of 2020 and began to issue personal lines policies from the new systems, including a new personal lines agency portal, in the fourth quarter of 2021. Over the next several years, Donegal Mutual expects to implement new systems for the remaining lines of business that the Donegal Insurance Group offers currently. Even with Donegal Mutual's and our best planning and efforts and the involvement of third-party experts, Donegal Mutual may not complete the implementation of these new systems within its planned time frames or budget. Further, Donegal Mutual’s information technology systems may not deliver the benefits Donegal Mutual and we expect and may fail to keep pace with our competitors’ information technology systems. As a result, Donegal Mutual and our insurance subsidiaries may not have the ability to grow their business and meet their profitability objectives.
Our strategy to grow in part through acquisitions of
smallerother insurance companies exposes us to risks that could adversely affect our results of operations and financial condition.
The affiliation with, and acquisition of,
smaller, and often undercapitalized,other insurance companies involves risks that could adversely affect our results of operations and financial condition. The risks associated with these affiliations and acquisitions include:
the potential inadequacy of reserves for losses and loss expenses of the other insurer;
the need to supplement management of the other insurer with additional experienced personnel;
conditions imposed by regulatory agencies that make the realization of cost-savings through integration of the operations of the other insurer with our operations more difficult;
our management's lack of familiarity with the geography, demographics and distribution systems in the markets the other insurer serves that cause the other insurer to fail to meet the growth and profitability objectives we anticipated at the time of the acquisition or affiliation;
the need of the other insurer for additional capital that we did not anticipate at the time of the acquisition or affiliation; and
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the use of more of our management’s time in improving the operations of the other insurer than we originally anticipated.
If we cannot obtain sufficient capital to fund the organic growth of our insurance subsidiaries and to make acquisitions, we may not be able to expand our business.
Our strategy is to expand our business through the organic growth of our insurance subsidiaries and through our strategic acquisitions of regional insurance companies. Our insurance subsidiaries
willmay require additional capital in the future to support this strategy. If we cannot obtain sufficient capital on satisfactory terms and conditions, we may not be able to expand the business of our insurance subsidiaries or to make future acquisitions. Our ability to obtain additional financing will depend on a number of factors, many of which are beyond our control. For example, we may not be able to obtain additional debt or equity financing because we or our insurance subsidiaries may already have substantial debt at the time, because we or our insurance subsidiaries do not have sufficient cash flow to service or repay our existing or additional debt or because financial institutions are not making financing available. In addition, any equity capital we obtain in the future could be dilutive to our existing stockholders.
A number of
Competition within the
competitorsproperty and casualty insurance industry may adversely impact the revenues and profit margins of our insurance
subsidiaries have greater financial strength than our insurance subsidiaries, and these competitors may be able to offer their products at lower prices than our insurance subsidiaries can afford to offer their products.subsidiaries.
The property and casualty insurance industry is intensely competitive. Competition can be based on many factors, including:
the perceived financial strength of the insurer;
policy terms and conditions;
Our insurance subsidiaries
and Donegal Mutual compete with many regional and national property and casualty insurance companies, including direct sellers of insurance products, insurers having their own agency organizations and other insurers represented by independent agents. Many of these insurers have greater capital than our insurance subsidiaries
and Donegal Mutual, have substantially greater financial, technical and operating resources,
have substantially greater exposure and access to potential customers and have equal or higher ratings from A.M. Best than our insurance
subsidiaries.subsidiaries and Donegal Mutual. In addition, our competitors may become increasingly better capitalized in the future as the property and casualty insurance industry continues to consolidate.
The greater capitalization of many of the competitors of our insurance subsidiaries
and Donegal Mutual enables them to operate with lower profit margins and, therefore, allows them to market their products more aggressively, to take advantage more quickly of new marketing opportunities and to offer lower premium rates.
In addition to established insurers, our insurance subsidiaries and Donegal Mutual compete with a growing number of start-ups, some of which have received substantial infusions of capital, that seek to disrupt traditional business platforms and distribution channels. Our insurance subsidiaries
and Donegal Mutual may not be able to maintain their current competitive position in the markets in which they operate if their competitors offer prices for their products that are lower than the prices our insurance subsidiaries
and Donegal Mutual are prepared to offer. Moreover, if these competitors lower the price of their products and our insurance subsidiaries
and Donegal Mutual meet their pricing, the profit margins and revenues of our insurance subsidiaries
and Donegal Mutual may decrease and their ratios of claims and expenses to premiums may increase. All of these factors could materially adversely affect the financial condition and results of operations of our insurance subsidiaries and their A.M. Best ratings.
Because the
The investment portfolios of our insurance subsidiaries consist primarily of fixed-income
securities, theirsecurities; therefore, the investment income and the fair value of
theirthe investment portfolios
of our insurance subsidiaries could decrease as a result of a number of factors.
Our insurance subsidiaries invest the premiums they receive from their policyholders and maintain investment portfolios that consist primarily of fixed-income securities. The
effective management of these investment portfolios is an important component of the profitability of our insurance subsidiaries. Our insurance subsidiaries derive a significant portion of their operating income from the income they receive on their invested assets. A number of factors may affect the quality and/or yield of their investment portfolios, including the general economic and business environment, government monetary policy, changes in the
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credit quality of the issuers of the fixed-income securities our insurance subsidiaries own, changes in market conditions and regulatory changes. The fixed-income securities our insurance subsidiaries own consist primarily of securities issued by domestic entities that are backed by either by the credit or collateral of the underlying issuer. Factors such as an economic downturn, disruption in the credit market or the availability of credit, a regulatory change pertaining to a particular issuer’s industry, a significant deterioration in the cash flows of the issuer or a change in the issuer’s marketplace may adversely affect the ability of our insurance subsidiaries to collect principal and interest from the issuer in which they invest.
The investments of our insurance subsidiaries are also subject to risk resulting from interest rate fluctuations. Increasing interest rates or a widening in the spread between interest rates available on U.S. Treasury securities and corporate debt or asset-backed securities, for example, will typically have an adverse impact on the market values of fixed-rate securities. If interest rates remain at historically low levels, our insurance subsidiaries will generally have a lower overall rate of return on investments of cash their operations generate. In addition, in the event of the call or maturity of investments in a low interest rate environment, our insurance subsidiaries may not be able to reinvest the proceeds in securities with comparable interest rates. Changes in interest rates may reduce both the profitability and the return on the invested capital of our insurance subsidiaries.
We and our insurance subsidiaries depend on key personnel. The loss of any member of our executive management or the senior management of our insurance subsidiaries could negatively affect the continuation of our business strategies and achievement of our growth objectives.
The loss of, or failure to attract, key personnel could significantly impede our financial plans, growth, marketing and other objectives and those of our insurance subsidiaries. The continued success of our insurance subsidiaries depends to a substantial extent on the ability and experience of their senior management. Our insurance subsidiaries and we believe that our future success is dependent on our ability to attract and retain additional skilled and qualified personnel and to expand, train and manage our employees. We and Donegal Mutual have
two to three-year automatically-renewing employment agreements with our senior officers, including all of our named executive officers.
The reinsurance agreements on which our insurance subsidiaries rely do not relieve our insurance subsidiaries from their primary liability to their policyholders, and our insurance subsidiaries face a risk of
non-payment from their reinsurers as well as the
non-availability of reinsurance in the future.
Our insurance subsidiaries rely on reinsurance agreements to limit their maximum net loss from large single catastrophic risks or excess of loss risks in areas where our insurance subsidiaries may have a concentration of policyholders. Reinsurance also enables our insurance subsidiaries to increase their capacity to write insurance because it has the effect of leveraging the surplus of our insurance subsidiaries. Although the reinsurance our insurance subsidiaries maintain provides that the reinsurer is liable to them for any reinsured losses, the reinsurance agreements do not generally relieve our insurance subsidiaries from their primary liability to their policyholders if the reinsurer fails to pay the reinsurance claims of our insurance subsidiaries. To the extent that a reinsurer is unable to pay losses for which it is liable to our insurance subsidiaries, our insurance subsidiaries remain liable for such losses. At December 31,
2018,2021, our insurance subsidiaries had approximately
$137.8$138.2 million of reinsurance receivables from third-party reinsurers relating to paid and unpaid losses. Any insolvency or inability of these reinsurers to make timely payments to our insurance subsidiaries under the terms of their reinsurance agreements would adversely affect the results of operations of our insurance subsidiaries.
Michigan law requires MICO to provide
unlimited lifetimecertain medical benefits under the personal injury protection, or PIP, coverage of the personal automobile and commercial automobile policies it writes in the State of Michigan. Michigan law also requires MICO to be a member of the Michigan Catastrophic Claims Association, or MCCA, in order to write automobile insurance. The MCCA receives funding through assessments that its members collect from policyholders in the state and provides reinsurance for PIP claims that exceed a set retention. At December 31,
2018,2021, MICO had approximately
$65.6$65.9 million of reinsurance receivables from MCCA relating to paid and unpaid losses. The MCCA has generated significant operating deficits in
past years. While the MCCA generated an increase in surplus in recent
years.years, the MCCA board approved the return of a significant portion of its accumulated surplus to policyholders in the form of cash refunds in early 2022. Although we currently consider the risk to be remote, should the MCCA be unable to fulfill its payment obligations to MICO in the future, MICO’s financial condition and results of operations could be adversely affected.
In addition, our insurance subsidiaries face a risk of the
non-availability of reinsurance or an increase in reinsurance costs that could adversely affect their ability to write business or their results of operations. Market conditions beyond the control of our insurance subsidiaries, such as the amount of surplus in the reinsurance market and the frequency and severity of natural and
man-made catastrophes, affect both the availability and the cost of the reinsurance our insurance subsidiaries purchase. If our insurance subsidiaries cannot maintain their current level of reinsurance or purchase new reinsurance protection in amounts that our insurance subsidiaries consider sufficient, our insurance subsidiaries would either have to accept an increase in their net risk retention or reduce their insurance writings, either of which could adversely affect them.
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The
growth and profitability of our insurance subsidiaries depend, in part, on the effective maintenance and ongoing developmentdisruption or failure of Donegal Mutual’s information technology
systems.Our insurance subsidiaries utilize Donegal Mutual’s information technology systems to conduct their insurance business, including policy quoting and issuance, claims processing, processing of incoming premium payments and other important functions. As a result, the ability of our insurance subsidiaries to grow their business and conduct profitable operations depends on Donegal Mutual’s ability to maintain its existing information technology systems and to develop new technology systems that will support the business of Donegal Mutual and our insurance subsidiaries in a cost-efficient manner and provide information technology capabilities equivalent to those of our competitors. The allocation among our insurance subsidiaries and Donegal Mutual of the costs of developing and maintaining Donegal Mutual’s information technology systems may impact adversely our insurance subsidiaries’ expense ratio and underwriting profitability, and such costs may exceed Donegal Mutual’s and our expectations. In addition, while Donegal Mutual is committed to developing and maintaining information technology systems that will allow Donegal Mutual and our insurance subsidiaries to compete effectively, Donegal Mutual may encounter difficulties as it implements new systems to modernize certain key infrastructure systems over the next several years. Donegal Mutual’s information technology systems may not deliver the benefits Donegal Mutual and we expect and may fail to keep pace with our competitors’ information technology systems. As a result, Donegal Mutual and our insurance subsidiaries may not have the ability to grow their business and meet their profitability objectives.
Our insurance subsidiaries rely on Donegal Mutual’s information technology systems, and the disruption or failure of these systems or the compromise of the security of those systems that results in the theft or misuse of confidential information could materially impact adversely the business of Donegal Mutual and our insurance subsidiaries.
Our insurance subsidiaries’ business operations depend significantly upon the availability and successful operation of Donegal Mutual’s information technology
systems in order to process new and renewal business, service their policies, process and settle claims and facilitate processing of premium payments.systems. In addition, in the normal course of their operations, Donegal Mutual and our insurance subsidiaries collect, utilize and maintain confidential information regarding individuals and businesses. While Donegal Mutual has established various security measures to protect its information technology systems and confidential data, unanticipated computer viruses, malware,
ransomware, power outages, unauthorized access or other cyberattacks could disrupt those systems or result in the misappropriation or loss of confidential data. Donegal Mutual could experience technology system failures or other outages that would impact the availability of its information technology systems.
Donegal Mutual has experienced brief disruptions of systems in the past, including those systems that allow underwriting and processing of new policies. Disruption in the availability of Donegal Mutual’s information technology systems could
impactaffect the ability of Donegal Mutual and our insurance subsidiaries to underwrite and process their policies timely, process and settle claims promptly and provide expected levels of customer service to agents and policyholders.
While Donegal Mutual has identified threats to the security of its information technology systems, Donegal Mutual and we are unaware of any significant breach of the security measures Donegal Mutual maintains. A significant breach of the security of Donegal Mutual’s information technology systems that results in the misappropriation or misuse of confidential information could damage the business reputation of Donegal Mutual and our insurance subsidiaries and could expose Donegal Mutual and our insurance subsidiaries to litigation. The financial impact to Donegal Mutual, us and our insurance subsidiaries of a significant breach could be material.
Risks Relating to Our Common Stock
The price of our common stock may be adversely affected by its low trading volume.
Our Class A common stock and our Class B common stock have limited liquidity. Reported average daily trading volume for our Class A common stock and our Class B common stock for the year ended December 31,
20182021 was approximately
24,587shares55,506shares and approximately
707802 shares, respectively. This limited liquidity could subject our shares of Class A common stock and our shares of Class B common stock to greater price volatility.
Donegal Mutual’s majority voting control of our stock, anti-takeover provisions of our certificate of incorporation and
by-laws and certain state laws make it unlikely anyone could acquire control of us unless Donegal Mutual were in favor of the acquisition of control.
Donegal Mutual’s ownership of our Class A common stock and Class B common stock, certain anti-takeover provisions of our certificate of incorporation and
by-laws, certain provisions of Delaware law and the insurance laws and regulations of
Iowa, Georgia,
Maryland, Michigan, New Mexico, Pennsylvania
Virginia and
WisconsinVirginia could delay or prevent the removal of members of our board of directors and could make it more difficult for a merger, tender offer or proxy contest involving us to succeed, even if our stockholders other than Donegal Mutual believed any of such events would be beneficial to them. These factors could also discourage a third party from attempting to acquire control of us. The classification of our board of directors could also have the effect of delaying or preventing a change in our control.
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In addition, we have 2,000,000 authorized shares of preferred stock that we could issue in one or more series without stockholder approval, to the extent applicable law permits, and upon such terms and conditions, and having such rights, privileges and preferences, as our board of directors may determine. Our ability to issue preferred stock could make it difficult for a third party to acquire us. We have no current plans to issue any preferred stock.
| Item 1B. | Unresolved Staff Comments. |
We have no unresolved written comments from the Securities and Exchange Commission
(“SEC”) staff regarding our filings under the Exchange Act.
We and our insurance subsidiaries share administrative headquarters with Donegal Mutual in a building in Marietta, Pennsylvania that Donegal Mutual owns. Donegal Mutual
charges us andallocates to our insurance subsidiaries
for an appropriate portiontheir proportionate share of
the buildingbuilding-related expenses under
an inter-companya services allocation agreement. The Marietta headquarters has approximately 270,000 square feet of office space. Southern owns a facility of approximately 10,000 square feet in Glen Allen, Virginia.
Le Mars owns a facility of approximately 25,500 square feet in Le Mars, Iowa and Sheboygan owns a facility of approximately 8,800 square feet in Sheboygan Falls, Wisconsin.
| Item 3. | Legal Proceedings. |
Our insurance subsidiaries are parties to routine litigation that arises in the ordinary course of their insurance business. We believe that the resolution of these lawsuits will not have a material adverse effect on the financial condition or results of operations of our insurance subsidiaries.
| Item 4. | Mine Safety Disclosures. |
PART II
Executive Officers of the RegistrantThe following table sets forth information regarding the executive officers of Donegal Mutual and the Registrant as of December 31, 2018, each of whom has served with us for more than 10 years:
| | | | | | |
Name
| | Age | | | Position
|
Kevin G. Burke
| | | 53 | | | President and Chief Executive Officer of Donegal Mutual since 2018; President and Chief Executive Officer of us since 2015; Executive Vice President and Chief Operating Officer of Donegal Mutual from 2014 to 2018; Senior Vice President of Human Resources of Donegal Mutual and us from 2005 to 2014; Vice President of Human Resources of Donegal Mutual and us from 2001 to 2005; other positions from 2000 to 2001.
|
Cyril J. Greenya
| | | 74 | | | Senior Vice President and Chief Underwriting Officer of Donegal Mutual and us since 2005; Senior Vice President, Underwriting, of Donegal Mutual from 1997 to 2005; other positions from 1986 to 1997.
|
Richard G. Kelley
| | | 64 | | | Senior Vice President and Head of Field Operations of Donegal Mutual and us since 2018; Senior Vice President of Donegal Mutual from 2007 to 2018; other positions from 2000 to 2007.
|
Jeffrey D. Miller
| | | 54 | | | Executive Vice President and Chief Financial Officer of Donegal Mutual and us since 2014; Senior Vice President and Chief Financial Officer of Donegal Mutual and us from 2005 to 2014; Vice President and Controller of Donegal Mutual and us from 2000 to 2005; other positions from 1995 to 2000.
|
Sanjay Pandey
| | | 52 | | | Senior Vice President and Chief Information Officer of Donegal Mutual and us since 2013; Vice President and Chief Information Officer of Donegal Mutual and us from 2009 to 2013; other positions from 2000 to 2009.
|
Robert G. Shenk
| | | 65 | | | Senior Vice President, Claims, of Donegal Mutual and us since 1997; other positions from 1986 to 1997; retiring in March 2019.
|
Daniel J. Wagner
| | | 58 | | | Senior Vice President and Treasurer of Donegal Mutual and us since 2005; Vice President and Treasurer of Donegal Mutual and us from 2000 to 2005; other positions from 1993 to 2000.
|
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our Class A common stock and Class B common stock trade on the NASDAQ Global Select Market under the symbols “DGICA” and “DGICB,” respectively.
At the close of business on March 1,
2019,2022, we had approximately
1,843 1,700holders of record of our Class A common stock and approximately
274235 holders of record of our Class B common stock.
We declared dividends of
$0.57$0.64 per share on our Class A common stock and
$0.50$0.57 per share on our Class B common stock in
2018,2021, compared to
$0.56$0.60 per share on our Class A common stock and
$0.49$0.53 per share on our Class B common stock in
2017.-35-
2020.
The following graph provides an indicator of cumulative total stockholder returns on our Class A common stock and our Class B common stock for the period beginning on December 31,
20132016 and ending on December 31,
2018,2021, compared to the Russell 2000 Index and a peer group comprised of
sevensix property and casualty insurance companies over the same period. The peer group consists of Cincinnati Financial Corp.,
EMC Insurance Group Inc., Hanover Insurance, Horace Mann Educators,
Kemper Corp., Selective Insurance Group Inc.
, State Auto Financial Corp. and United Fire
and Casualty Co.Group Inc. The graph shows the change in value of an initial $100 investment on December 31,
2013,2016, assuming reinvestment of all dividends.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
Donegal Group Inc. Class A | | $ | 100.00 | | | $ | 104.03 | | | $ | 94.96 | | | $ | 122.20 | | | $ | 125.13 | | | $ | 102.59 | |
Donegal Group Inc. Class B | | | 100.00 | | | | 92.69 | | | | 72.90 | | | | 72.34 | | | | 71.49 | | | | 57.53 | |
Russell 2000 Index | | | 100.00 | | | | 103.53 | | | | 97.62 | | | | 116.63 | | | | 131.96 | | | | 115.89 | |
Peer Group | | | 100.00 | | | | 107.17 | | | | 124.80 | | | | 159.77 | | | | 174.21 | | | | 186.53 | |
| | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | |
| Donegal Group Inc. Class A | | $ | 100.00 | | | $ | 102.40 | | | $ | 83.96 | | | $ | 94.96 | | | $ | 93.03 | | | $ | 98.60 | |
| Donegal Group Inc. Class B | | | 100.00 | | | | 98.82 | | | | 79.53 | | | | 84.56 | | | | 85.48 | | | | 101.43 | |
| Russell 2000 Index | | | 100.00 | | | | 114.65 | | | | 102.03 | | | | 129.10 | | | | 155.20 | | | | 177.73 | |
| Peer Group | | | 100.00 | | | | 113.94 | | | | 119.78 | | | | 149.71 | | | | 134.96 | | | | 157.76 | |
Value Line
Inc.Publishing LLC prepared the foregoing performance graph and data. The performance graph and accompanying data shall not be deemed
“filed”"filed" as part of this Form
10-K Report for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section and should not be deemed incorporated by reference into any other filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate the performance graph and accompanying data by reference into such filing.
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| Item 6. | Selected Financial Data.
[Reserved] |
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
Income Statement Data | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 741,290,873 | | | $ | 702,514,755 | | | $ | 656,204,797 | | | $ | 605,640,728 | | | $ | 556,497,535 | |
Investment income, net | | | 26,907,656 | | | | 23,527,304 | | | | 22,632,730 | | | | 20,949,698 | | | | 18,344,382 | |
Investment (losses) gains | | | (4,801,509 | ) | | | 5,705,255 | | | | 2,525,575 | | | | 1,934,424 | | | | 3,134,081 | |
Total revenues | | | 771,828,320 | | | | 739,026,537 | | | | 688,423,020 | | | | 636,387,263 | | | | 586,547,742 | |
(Loss) income before income tax (benefit) expense | | | (48,236,849 | ) | | | 12,114,462 | | | | 41,328,407 | | | | 27,592,268 | | | | 16,282,817 | |
Income tax (benefit) expense | | | (15,476,509 | ) | | | 4,998,362 | | | | 10,527,270 | | | | 6,602,235 | | | | 1,743,799 | |
Net (loss) income | | | (32,760,340 | ) | | | 7,116,100 | | | | 30,801,137 | | | | 20,990,033 | | | | 14,539,018 | |
Basic (loss) earnings per share—Class A | | | (1.18 | ) | | | 0.27 | | | | 1.19 | | | | 0.78 | | | | 0.56 | |
Diluted (loss) earnings per share—Class A | | | (1.18 | ) | | | 0.26 | | | | 1.16 | | | | 0.77 | | | | 0.55 | |
Cash dividends per share—Class A | | | 0.57 | | | | 0.56 | | | | 0.55 | | | | 0.54 | | | | 0.53 | |
Basic (loss) earnings per share—Class B | | | (1.09 | ) | | | 0.22 | | | | 1.06 | | | | 0.69 | | | | 0.49 | |
Diluted (loss) earnings per share—Class B | | | (1.09 | ) | | | 0.22 | | | | 1.06 | | | | 0.69 | | | | 0.49 | |
Cash dividends per share—Class B | | | 0.50 | | | | 0.49 | | | | 0.48 | | | | 0.47 | | | | 0.46 | |
Balance Sheet Data at Year End | | | | | | | | | | | | | | | | | | | | |
Total investments | | $ | 1,030,798,566 | | | $ | 1,005,869,705 | | | $ | 945,519,655 | | | $ | 900,822,274 | | | $ | 832,941,077 | |
Total assets | | | 1,832,078,267 | | | | 1,737,919,778 | | | | 1,623,131,037 | | | | 1,537,834,415 | | | | 1,458,654,644 | |
Debt obligations | | | 65,000,000 | | | | 64,000,000 | | | | 74,000,000 | | | | 86,000,000 | | | | 58,500,000 | |
Stockholders’ equity | | | 398,869,901 | | | | 448,696,104 | | | | 438,615,320 | | | | 408,388,568 | | | | 416,134,643 | |
Book value per share | | | 14.05 | | | | 15.95 | | | | 16.21 | | | | 15.66 | | | | 15.40 | |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Donegal Mutual Insurance Company (“Donegal Mutual”) organized us as an insurance holding company on August 26, 1986. See
“Business—“Business - History and Organizational Structure” for more information. Our insurance subsidiaries, Atlantic States Insurance Company (“Atlantic States”), Southern Insurance Company of Virginia (“Southern”),
Le Mars Insurance Company (“Le Mars”), The Peninsula Insurance Company and Peninsula Indemnity Company (collectively, “Peninsula”),
Sheboygan Falls Insurance Company (“Sheboygan Falls”) and Michigan Insurance Company (“MICO”)
and their affiliates write
personalcommercial and
commercialpersonal lines of property and casualty coverages exclusively through a network of independent insurance agents in certain
Mid-Atlantic, Midwest, New England,
Southern and
SouthernSouthwestern states.
The personal lines products of our insurance subsidiaries consist primarily of homeowners and private passenger automobile policies. The commercial lines products of our insurance subsidiaries consist primarily of commercial automobile, commercial multi-peril and workers’ compensation policies.
During 2018, we and Donegal Mutual implemented a number of actions to improve our financial results and enhance our operations in the future. Those actions included implementing premium rate increases in many The personal lines products of our operating statesinsurance subsidiaries consist primarily of homeowners and business lines, strengthening our loss reserves in response to changing loss reporting and litigation trends, entering into a transfer agreement to facilitate an orderly exit from the personal lines markets in seven states where we projected continuing underwriting losses, consolidating a regional branch office into our home office, consolidating our reinsurance program for 2019 and initiating a multi-year systems modernization project.
private passenger automobile policies.
At December 31,
2018, we owned 48.2% of the outstanding stock of Donegal Financial Services Corporation (“DFSC”), a grandfathered unitary savings and loan holding company, and Donegal Mutual owned the remaining 51.8% of the outstanding stock of DFSC. We and Donegal Mutual Insurance Company sold DFSC to Northwest Bancshares, Inc. (“Northwest”) on March 8, 2019, resulting in proceeds valued at approximately $85.8 million in a combination of cash and Northwest common stock. Immediately prior to the closing of the merger, DFSC paid a dividend of approximately $29.2 million to us and Donegal Mutual. As the owner of 48.2% of DFSC’s common stock, we received a dividend payment from DFSC of approximately $14.1 million and consideration from Northwest valued at approximately $41.4 million. We will record a gain from the sale of DFSC in our results of operations for the first quarter of 2019. This transaction represented the culmination of a banking strategy that began with the formation of DFSC in 2000. We and Donegal Mutual will utilize proceeds from the sale of DFSC to support expansion of our combined property and casualty insurance operations.At December 31, 2018,2021, Donegal Mutual held approximately 43%41% of our outstanding Class A common stock and approximately 84% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately 72%70% of the combined voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock.
Donegal Mutual and Atlantic States
entered intohave participated in a proportional reinsurance agreement, or pooling agreement,
effective October 1,since 1986. Under
thisthe pooling agreement, Donegal Mutual and Atlantic States
pool and then share proportionatelycontribute substantially all of their respective premiums, losses and
expenses.loss expenses to the underwriting pool, and the underwriting pool, acting through Donegal Mutual, then allocates 80% of the pooled business to Atlantic
States’States. Thus, Donegal Mutual and Atlantic States share the underwriting results of the pooled business in proportion to their respective participation in the
pool has been 80% since March 1, 2008.underwriting pool. The operations of our insurance subsidiaries and Donegal Mutual are interrelated due to the pooling agreement and other factors. While maintaining the separate corporate existence of each company, our insurance subsidiaries
andconduct business together with Donegal Mutual
conduct business togetherand its insurance subsidiaries as the Donegal Insurance Group.
As such,The Donegal
MutualInsurance Group is not a legal entity, is not an insurance company and
ourdoes not issue or administer insurance
subsidiaries sharepolicies. Rather, it is a trade name that refers to the
same business philosophy, the same management, the same employees and the same facilities and offer the same typesgroup of insurance
products.companies that are affiliated with Donegal Mutual. See
“Business—History and Organizational Structure”“Business - Relationship with Donegal Mutual” for more information regarding the pooling agreement and other transactions with our affiliates.
In July 2013, our board of directors authorized a share repurchase program pursuant to which we have the authority to purchase up to 500,000 additional shares of our Class A common stock at prices prevailing from time to time in the open market subject to the provisions of the SECRule 10b-18 and in privately negotiated transactions. We did not purchase any shares of our Class A common stock under this program during 2018 or 2017. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through December 31, 2018.
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 GAAP.
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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.
Liability 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. 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 acase-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. These trend changes give rise to greater uncertainty as to the pattern of future loss settlements on bodily injury claims. Related uncertainties regarding future trends include the cost of medical technologies and procedures and changes in the utilization of medical procedures. Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at December 31, 2018. For every 1% change in our insurance subsidiaries’ loss and loss expense reserves, net of reinsurance recoverable, the effect on ourpre-tax results of operations would be approximately $4.8 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. During 2018, our insurance subsidiaries received new information on previously-reported commercial automobile and personal automobile claims that led our insurance subsidiaries
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to conclude that their prior actuarial assumptions did not fully anticipate recent changes in severity and reporting trends. Our insurance subsidiaries have encountered increasing difficulties in projecting the ultimate severity of automobile losses over recent accident years, which our insurance subsidiaries attribute to worsening litigation trends and an increased delay in the reporting to our insurance subsidiaries of information with respect to the severity of claims. As a result, our insurance subsidiaries’ actuaries increased their projections of the ultimate cost of our insurance subsidiaries’ prior-year personal automobile and commercial automobile losses.
Our insurance subsidiaries recognized an increase in their liability for losses and loss expenses of prior years of $35.6 million, $6.6 million and $3.0 million in 2018, 2017 and 2016, 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 these years. The 2018 development represented 9.3% of the December 31, 2017 net carried reserves and resulted primarily from higher-than-expected severity in the commercial multiple peril, personal automobile and commercial automobile lines of business, offset by lower-than-expected severity in the workers’ compensation line of business, in accident years prior to 2018. The majority of the 2018 development related to increases in the liability for losses and loss expenses of prior years for Atlantic States, Southern and Peninsula. The 2017 development represented 1.9% of the December 31, 2016 net carried reserves and resulted primarily from higher-than-expected severity in the commercial multiple peril, personal automobile and commercial automobile lines of business, offset by lower-than-expected severity in the workers’ compensation line of business, in accident years prior to 2017. The majority of the 2017 development related to increases in the liability for losses and loss expenses of prior years for Atlantic States and Peninsula. The 2016 development represented 0.9% of the December 31, 2015 net carried reserves and resulted primarily from higher-than-expected severity in the commercial multiple peril and commercial automobileliability lines of business, offset by lower-than-expected severity in the workers’ compensation line of business in accident years prior to 2016. The majority of the 2016 development related to increases in the liability for losses and loss expenses of prior years for Atlantic States and Southern.
Excluding the impact of severe weather events, our insurance subsidiaries have noted stable amounts in the number of claims incurred and the number of claims outstanding at period ends relative to their premium base in recent years across most of their lines of business. However, the amount of the average claim outstanding has increased gradually over the past several years due to various factors such as rising medical loss costs and increased litigation trends. We have also experienced a general slowing of settlement rates in litigated claims. Our insurance subsidiaries could have to make further adjustments to their estimates in the future. However, on the basis of our insurance subsidiaries’ internal procedures, which analyze, among other things, their prior assumptions, their experience with similar cases and historical trends such as reserving patterns, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes, we believe that our insurance subsidiaries have made adequate provision for their liability for losses and loss expenses.
Atlantic States’ participation in the pool with Donegal Mutual exposes Atlantic States to adverse loss development on the business of Donegal Mutual that the pool includes. However, pooled business represents the predominant percentage of the net underwriting activity of both companies, and Donegal Mutual and Atlantic States share proportionately any adverse risk development relating to the pooled business. The business in the pool is homogeneous and each company has apro-rata share of the entire pool. Since the predominant percentage of the business of Atlantic States and Donegal Mutual is pooled and the results shared by each company according to its participation level under the terms of the pooling agreement, the intent of the underwriting pool is to produce a more uniform and stable underwriting result from year to year for each company than either would experience individually and to spread the risk of loss between the companies.
Donegal Mutual and our insurance subsidiaries operate together as the Donegal Insurance Group and share a combined business plan designed to achieve market penetration and underwriting profitability objectives. The products our insurance subsidiaries and Donegal Mutual offer are generally complementary, thereby allowing Donegal Insurance Group to offer a broader range of products to a given market and to expand 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 products compared to 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, because the pool homogenizes the risk characteristics of the predominant percentage of the business Donegal Mutual and Atlantic States write directly and each company shares the underwriting results according to each company’s participation percentage, each company realizes its percentage share of the underwriting results of the pool.
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Donegal Mutual completed the merger of Mountain States Mutual Casualty Company, or Mountain States, with and into Donegal Mutual effective May 25, 2017. Donegal Mutual was the surviving company in the merger, and Mountain States’ insurance subsidiaries, Mountain States Indemnity Company and Mountain States Commercial Insurance Company (collectively, the “Mountain States insurance subsidiaries”), became insurance subsidiaries of Donegal Mutual upon completion of the merger. Upon completion of the merger, Donegal Mutual assumed all of the policy obligations of Mountain States and began to market its products together with the Mountain States insurance subsidiaries as the Mountain States Insurance Group in four Southwestern states. Donegal Mutual also entered into a 100% quota-share reinsurance agreement with the Mountain States insurance subsidiaries on the merger date. Beginning with policies effective in 2021, Donegal Mutual began to place the business of the Mountain States Insurance Group into the underwriting pool. As a result, our consolidated financial results through December 31, 2020 excluded the results of the Mountain States Insurance Group operations in those Southwestern states.
We and Donegal Mutual Insurance Company sold Donegal Financial Services Corporation (“DFSC”) to Northwest Bancshares, Inc. (“Northwest”) on March 8, 2019, resulting in proceeds valued at approximately $85.8 million in a combination of cash and Northwest common stock. Immediately prior to the closing of the merger, DFSC paid a dividend of approximately $29.2 million to us and Donegal Mutual. As the owner of 48.2% of DFSC’s common stock, we received a dividend payment from DFSC of approximately $14.1 million and consideration from Northwest valued at approximately $41.4 million. We recorded a gain of $12.7 million from the sale of DFSC in our results of operations during 2019. We sold the Northwest common stock that we received as part of the consideration during 2019. This transaction represented the culmination of a banking strategy that began with the formation of DFSC in 2000.
Effective December 1, 2019, our insurance subsidiaries Le Mars Insurance Company (“Le Mars”) and Sheboygan Falls Insurance Company (“Sheboygan Falls”) merged with and into Atlantic States (the “Mergers”). As a result of the Mergers, the separate corporate existences of Le Mars and Sheboygan Falls ceased and Atlantic States continued as the surviving insurance company. Atlantic States placed the business of Le Mars and Sheboygan Falls, as their policies renewed subsequent to the effective date of the Mergers, into the underwriting pool.
In July 2013, our board of directors authorized a share repurchase program pursuant to which we have the authority to purchase up to 500,000 additional 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 2021 or 2020. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through December 31, 2021.
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 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.
Liability 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 2021 due to a number of factors, including supply chain disruption, higher used automobile values, increases in the cost of replacement automobile parts and rising labor rates. These trend changes give rise to greater uncertainty as to the pattern of future loss settlements. Related uncertainties regarding future trends include social inflation, availability and cost of building materials, availability of skilled labor, the rate of plaintiff attorney involvement in claims and the cost of medical technologies and procedures. Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at December 31, 2021. 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 $6.3million.
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.
Our insurance subsidiaries recognized a decrease in their liability for losses and loss expenses of prior years of $31.2 million, $12.9 million and $12.9 million in 2021, 2020 and 2019, respectively. Our insurance subsidiaries made no significant changes in their reserving philosophy or claims management personnel, and they have made no significant offsetting changes in estimates that increased or decreased their loss and loss expense reserves in those years. The 2021 development represented 5.6% of the December 31, 2020 net carried reserves and resulted primarily from lower-than-expected loss emergence in the personal automobile, workers’ compensation and commercial automobile lines of business for accident years prior to 2021. The majority of the 2021 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO. The 2020 development represented 2.6% of the December 31, 2019 net carried reserves and resulted primarily from lower-than-expected severity in the workers’ compensation and personal automobile lines of business, partially offset by higher-than-expected severity in the commercial automobile and commercial multi-peril lines of business, for accident years prior to 2020. The majority of the 2020 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO. The 2019 development represented 2.7% of the December 31, 2018 net carried reserves and resulted primarily from lower-than-expected severity in the workers’ compensation line of business, partially offset by higher-than-expected severity in the commercial automobile and commercial multi-peril lines of business, for accident years prior to 2019. The majority of the 2019 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO.
Excluding the impact of severe weather events and the COVID-19 pandemic, our insurance subsidiaries have noted stable amounts in the number of claims incurred and the number of claims outstanding at period ends relative to their premium base in recent years across most of their lines of business. However, the amount of the average claim outstanding has increased gradually over the past several years due to various factors such as rising medical loss costs and increased litigation trends. We have also experienced a general slowing of settlement rates in litigated claims. Our insurance subsidiaries could have to make further adjustments to their estimates in the future. However, on the basis of our insurance subsidiaries’ internal procedures, which analyze, among other things, their prior assumptions, their experience with similar cases and historical trends such as reserving patterns, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes, we believe that our insurance subsidiaries have made adequate provision for their liability for losses and loss expenses.
Atlantic States’ participation in the pool with Donegal Mutual exposes Atlantic States to adverse loss development on the business of Donegal Mutual that the pool includes. However, pooled business represents the predominant percentage of the net underwriting activity of both companies, and Donegal Mutual and Atlantic States share proportionately any adverse risk development relating to the pooled business. The business in the pool is homogeneous and each company has a pro-rata share of the entire pool. Since the predominant percentage of the business of Atlantic States and Donegal Mutual is pooled and the results shared by each company according to its participation level under the terms of the pooling agreement, the intent of the underwriting pool is to produce a more uniform and stable underwriting result from year to year for each company than either would experience individually and to spread the risk of loss between the companies.
Our insurance subsidiaries’ liability for losses and loss expenses by major line of business at December 31,
20182021 and
20172020 consisted of the following:
| | | | | | | | |
| | | 2018 | | | 2017 | |
| | | (in thousands) | |
Commercial lines: | | | | | | | | |
Automobile | | $ | 106,734 | | | $ | 74,299 | |
Workers’ compensation | | | 109,512 | | | | 103,318 | |
Commercial multi-peril | | | 85,937 | | | | 71,011 | |
Other | | | 5,207 | | | | 4,119 | |
| | | | | | | | |
Total commercial lines | | | 307,390 | | | | 252,747 | |
| | | | | | | | |
Personal lines: | | | | | | | | |
Automobile | | | 144,788 | | | | 110,512 | |
Homeowners | | | 18,374 | | | | 18,508 | |
Other | | | 4,846 | | | | 1,634 | |
| | | | | | | | |
Total personal lines | | | 168,008 | | | | 130,654 | |
| | | | | | | | |
Total commercial and personal lines | | | 475,398 | | | | 383,401 | |
Plus reinsurance recoverable | | | 339,267 | | | | 293,271 | |
| | | | | | | | |
Total liability for losses and loss expenses | | $ | 814,665 | | | $ | 676,672 | |
| | | | | | | | |
The substantial increases in reserves in 2018 compared to 2017 reflected changes in actuarial assumptions that resulted in higher projections of the ultimate cost of our insurance subsidiaries’ losses for claims that occurred in 2018 and prior years.
| | | 2021 | | | 2020 | |
| | | (in thousands) | |
| Commercial lines: | | | | | | |
| Automobile | | $ | 172,302 | | | $ | 151,813 | |
| Workers’ compensation | | | 122,398 | | | | 118,037 | |
| Commercial multi-peril | | | 168,445 | | | | 126,299 | |
| Other | | | 18,530 | | | | 13,212 | |
| Total commercial lines | | | 481,675 | | | | 409,361 | |
| | | | | | | | | |
| Personal lines: | | | | | | | | |
| Automobile | | | 109,915 | | | | 120,861 | |
| Homeowners | | | 26,169 | | | | 20,976 | |
| Other | | | 8,600 | | | | 5,991 | |
| Total personal lines | | | 144,684 | | | | 147,828 | |
| | | | | | | | | |
| Total commercial and personal lines | | | 626,359 | | | | 557,189 | |
| Plus reinsurance recoverable | | | 451,261 | | | | 404,818 | |
| Total liability for losses and loss expenses | | $ | 1,077,620 | | | $ | 962,007 | |
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 loss and loss expense reserves. We established the range of reasonably likely changes based on a review of changes in accident year development by line of business and applied it to our insurance subsidiaries’ loss reserves as a whole. The selected range does not necessarily indicate what could be the potential best or worst case or the most-likely scenario. The following table sets forth 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 considered in establishing loss and loss expense reserves:
| | | | | | | | | | | | | | | | |
Change in Loss and
Loss Expense Reserves
Net of Reinsurance | | Adjusted Loss and Loss
Expense Reserves Net
of Reinsurance at
December 31, 2018 | | | Percentage Change in
Equity at
December 31, 2018(1) | | | Adjusted Loss and Loss
Expense Reserves Net
of Reinsurance at
December 31, 2017 | | | Percentage Change in
Equity at
December 31, 2017(1) | |
| (dollars in thousands) | |
| -10.0% | | $ | 427,858 | | | | 9.4 | % | | $ | 345,061 | | | | 6.8 | % |
| -7.5 | | | 439,743 | | | | 7.1 | | | | 354,646 | | | | 5.1 | |
| -5.0 | | | 451,628 | | | | 4.7 | | | | 364,231 | | | | 3.4 | |
| -2.5 | | | 463,513 | | | | 2.4 | | | | 373,816 | | | | 1.7 | |
| Base | | | 475,398 | | | | — | | | | 383,401 | | | | — | |
| 2.5 | | | 487,283 | | | | -2.4 | | | | 392,986 | | | | -1.7 | |
| 5.0 | | | 499,168 | | | | -4.7 | | | | 402,571 | | | | -3.4 | |
| 7.5 | | | 511,053 | | | | -7.1 | | | | 412,156 | | | | -5.1 | |
| 10.0 | | | 522,938 | | | | -9.4 | | | | 421,741 | | | | -6.8 | |
(1) | Net of income tax effect.
|
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Change in Loss and Loss Expense Reserves Net of Reinsurance | | | Adjusted Loss and Loss Expense Reserves Net of Reinsurance at December 31, 2021 | | | Percentage Change in Equity at December 31, 2021(1) | | | Adjusted Loss and Loss Expense Reserves Net of Reinsurance at December 31, 2020 | | | Percentage Change in Equity at December 31, 2020(1) | |
| (dollars in thousands) | |
| -10.0 | % | | $ | 563,723 | | | | 9.3 | % | | $ | 501,470 | | | | 8.5 | % |
| -7.5 | | | | 579,382 | | | | 7.0 | | | | 515,400 | | | | 6.4 | |
| -5.0 | | | | 595,041 | | | | 4.7 | | | | 529,330 | | | | 4.3 | |
| -2.5 | | | | 610,700 | | | | 2.3 | | | | 543,259 | | | | 2.1 | |
| Base | | | | 626,359 | | | | — | | | | 557,189 | | | | — | |
| 2.5 | | | | 642,018 | | | | -2.3 | | | | 571,119 | | | | -2.1 | |
| 5.0 | | | | 657,677 | | | | -4.7 | | | | 585,048 | | | | -4.3 | |
| 7.5 | | | | 673,336 | | | | -7.0 | | | | 598,978 | | | | -6.4 | |
| 10.0 | | | | 688,995 | | | | -9.3 | | | | 612,908 | | | | -8.5 | |
(1) Net of income tax effect.
Our insurance subsidiaries base their reserves for unpaid losses and loss expenses on current trends in loss and loss expense development and reflect their best estimates for future amounts needed to pay losses and loss expenses with respect to incurred events currently known to them plus incurred but not reported (“IBNR”) claims. Our insurance subsidiaries develop their reserve estimates based on an assessment of known facts and circumstances, review of historical loss settlement patterns, estimates of trends in claims severity, frequency, legal and regulatory changes and other assumptions. Our insurance subsidiaries consistently apply actuarial loss reserving techniques and assumptions, which rely on historical information as adjusted to reflect current conditions, including consideration of recent case reserve activity. Our insurance subsidiaries use the
most-likely numberpoint estimate their actuaries
determine.Forselect.For the year ended December 31,
2018,2021, the actuaries developed a range from a low of
$436.1$575.7 million to a high of
$518.3 $681.5million and
withselected a
most-likely numberpoint estimate of
$475.4$626.4 million. The actuaries’ range of estimates for commercial lines in
20182021 was
$282.0$442.8 million to
$335.0$524.0 million, and the actuaries selected
the most-likely numbera point estimate of
$307.4$481.7 million. The actuaries’ range of estimates for personal lines in
20182021 was
$154.0$132.9 million to
$183.2$157.5 million, and the actuaries selected
the most-likely numbera point estimate of
$168.0$144.7 million. For the year ended December 31,
2017,2020, the actuaries developed a range from a low of
$353.0$512.9 million to a high of
$416.5$605.3 million and
withselected a
most-likely numberpoint estimate of
$383.4$557.2 million. The actuaries’ range of estimates for commercial lines in
20172020 was
$232.8$376.9 million to
$274.5$444.7 million, and the actuaries selected
the most-likely numbera point estimate of
$252.7$409.4 million. The actuaries’ range of estimates for personal lines in
20172020 was
$120.2$136.0 million to
$142.0$160.6 million, and the actuaries selected
the most-likely numbera point estimate of
$130.7$147.8 million.
The substantial increases in the actuaries’ range of estimates in 2018 compared to 2017 reflected changes in actuarial assumptions that resulted in higher projections of the ultimate cost of our insurance subsidiaries’ losses for claims that occurred in 2018 and prior years.
Our insurance subsidiaries seek to enhance their underwriting results by carefully selecting the product lines they underwrite. For personal lines products, our insurance subsidiaries insure standard and preferred risks in private passenger automobile and homeowners lines. For commercial lines products, the commercial risks that our insurance subsidiaries primarily insure are business offices, wholesalers, service providers, contractors, artisans and light manufacturing operations. Our insurance subsidiaries have limited exposure to asbestos and other environmental liabilities. Our insurance subsidiaries write no medical malpractice liability risks. Through the consistent application of this disciplined underwriting philosophy, our insurance subsidiaries have avoided many of the “long-tail” issues other insurance companies have faced. We consider workers’ compensation to be a “long-tail” line of business, in that workers’ compensation claims tend to be settled over a longer time frame than those in the other lines of business of our insurance subsidiaries.
The following table presents
20182021 and
20172020 claim count and payment amount information for workers’ compensation. Workers’ compensation losses primarily consist of indemnity and medical costs for injured workers.
| | | | | | | | |
| | | For the Year Ended December 31, | |
| (dollars in thousands) | | 2018 | | | 2017 | |
Number of claims pending, beginning of period | | | 2,906 | | | | 2,710 | |
Number of claims reported | | | 6,475 | | | | 6,348 | |
Number of claims settled or dismissed | | | 6,479 | | | | 6,152 | |
Number of claims pending, end of period | | | 2,902 | | | | 2,906 | |
Losses paid | | $ | 43,129 | | | $ | 41,970 | |
Loss expenses paid | | | 9,226 | | | | 9,474 | |
| | | For the Year Ended December 31, | |
| (dollars in thousands) | | 2021 | | | 2020 | |
| Number of claims pending, beginning of period | | | 2,898 | | | | 3,014 | |
| Number of claims reported | | | 6,883 | | | | 5,935 | |
| Number of claims settled or dismissed | | | 6,445 | | | | 6,051 | |
| Number of claims pending, end of period | | | 3,336 | | | | 2,898 | |
| | | | | | | | | |
| Losses paid | | $ | 50,664 | | | $ | 38,204 | |
| Loss expenses paid | | | 10,067 | | | | 9,065 | |
Management Evaluation of Operating Results
Despite challenging insurance market conditions, increasing casualty loss severity trends and unusually adverse weather conditions that affected our results in recent years, we believe that
the corrective measures and strategic initiatives we implemented in 2018our focused business strategy, including our insurance subsidiaries disciplined underwriting practices, have positioned us well for
20192022 and beyond.
The property and casualty insurance industry is highly cyclical, and individual lines of business experience their own cycles within the overall property and casualty insurance industry cycle. Premium rate levels relate to the availability of insurance coverage, which varies according to the level of surplus in the insurance industry and other factors. The level of surplus in the industry varies with returns on capital and regulatory barriers to the withdrawal of surplus. Increases in surplus have generally been accompanied by increased price competition among property and casualty insurers. If our insurance subsidiaries were to find it necessary to reduce premiums or limit premium increases due to competitive pressures on pricing, our insurance subsidiaries could experience a reduction in profit margins and revenues, an increase in ratios of losses and expenses to premiums and, therefore, lower profitability. The cyclicality of the insurance market and its potential impact on our results is difficult to predict with any significant reliability.
Because our insurance subsidiaries do not prepare GAAP financial statements, we evaluate the performance of our
personalcommercial lines and
commercialpersonal lines segments utilizing statutory accounting practices (“SAP”), which include financial measures that reflect the growth trends and underwriting results of our insurance subsidiaries.
-42-
We use the following financial data to monitor and evaluate our operating results:
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| (in thousands) | | 2018 | | | 2017 | | | 2016 | |
Net premiums written: | | | | | | | | | | | | |
Personal lines: | | | | | | | | | | | | |
Automobile | | $ | 249,275 | | | $ | 255,297 | | | $ | 229,789 | |
Homeowners | | | 123,782 | | | | 125,054 | | | | 122,811 | |
Other | | | 21,064 | | | | 19,672 | | | | 19,057 | |
| | | | | | | | | | | | |
Total personal lines | | | 394,121 | | | | 400,023 | | | | 371,657 | |
| | | | | | | | | | | | |
Commercial lines: | | | | | | | | | | | | |
Automobile | | | 108,123 | | | | 99,333 | | | | 87,849 | |
Workers’ compensation | | | 109,022 | | | | 109,884 | | | | 108,349 | |
Commercial multi-peril | | | 117,509 | | | | 110,313 | | | | 104,728 | |
Other | | | 15,241 | | | | 9,586 | | | | 9,451 | |
| | | | | | | | | | | | |
Total commercial lines | | | 349,895 | | | | 329,116 | | | | 310,377 | |
| | | | | | | | | | | | |
Total net premiums written | | $ | 744,016 | | | $ | 729,139 | | | $ | 682,034 | |
| | | | | | | | | | | | |
Components of combined ratio: | | | | | | | | | | | | |
Loss ratio | | | 77.8 | % | | | 69.4 | % | | | 64.5 | % |
Expense ratio | | | 31.6 | | | | 32.9 | | | | 33.0 | |
Dividend ratio | | | 0.7 | | | | 0.7 | | | | 0.6 | |
| | | | | | | | | | | | |
Combined ratio | | | 110.1 | % | | | 103.0 | % | | | 98.1 | % |
| | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | |
Premiums earned: | | | | | | | | | | | | |
Personal lines | | $ | 403,367 | | | $ | 384,124 | | | $ | 361,128 | |
Commercial lines | | | 337,924 | | | | 318,391 | | | | 295,077 | |
| | | | | | | | | | | | |
Total premiums earned | | | 741,291 | | | | 702,515 | | | | 656,205 | |
Net investment income | | | 26,908 | | | | 23,527 | | | | 22,633 | |
Investment (losses) gains | | | (4,802 | ) | | | 5,705 | | | | 2,526 | |
Equity in earnings of DFSC | | | 2,694 | | | | 1,622 | | | | 1,086 | |
Other | | | 5,737 | | | | 5,658 | | | | 5,973 | |
| | | | | | | | | | | | |
Total revenues | | $ | 771,828 | | | $ | 739,027 | | | $ | 688,423 | |
| | | | | | | | | | | | |
The loss ratio and, consequently, the combined ratio for 2018 reflected the impact of weather-related losses that exceeded our historical norms. In addition, losses incurred in 2018 reflected substantial increases in reserves related to changes in actuarial assumptions that resulted in higher projections of the ultimate cost of our insurance subsidiaries’ losses for claims that occurred in 2018 and prior years. We also primarily attribute our insurance subsidiaries’ underwriting losses and our net loss for 2018 to those factors.
-43-
| | | Year Ended December 31, | |
| (in thousands) | | 2021 | | | 2020 | | | 2019 | |
| | | | | | | | | | |
| Net premiums written: | | | | | | | | | |
| Commercial lines: | | | | | | | | | |
| Automobile | | $ | 161,947 | | | $ | 135,294 | | | $ | 122,142 | |
| Workers’ compensation | | | 113,256 | | | | 109,960 | | | | 113,684 | |
| Commercial multi-peril | | | 188,242 | | | | 147,993 | | | | 138,750 | |
| Other | | | 38,340 | | | | 32,739 | | | | 30,303 | |
| Total commercial lines | | | 501,785 | | | | 425,986 | | | | 404,879 | |
| Personal lines: | | | | | | | | | | | | |
| Automobile | | | 170,578 | | | | 184,602 | | | | 210,507 | |
| Homeowners | | | 109,974 | | | | 111,886 | | | | 117,118 | |
| Other | | | 21,930 | | | | 19,666 | | | | 20,097 | |
| Total personal lines | | | 302,482 | | | | 316,154 | | | | 347,722 | |
| Total net premiums written | | $ | 804,267 | | | $ | 742,140 | | | $ | 752,601 | |
| | | | | | | | | | | | | |
| Components of combined ratio: | | | | | | | | | | | | |
| Loss ratio | | | 67.1 | % | | | 62.0 | % | | | 67.0 | % |
| Expense ratio | | | 33.3 | | | | 33.0 | | | | 31.3 | |
| Dividend ratio | | | 0.6 | | | | 1.0 | | | | 1.2 | |
| Combined ratio | | | 101.0 | % | | | 96.0 | % | | | 99.5 | % |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | |
| Net premiums earned: | | | | | | | | | | | | |
| Commercial lines | | $ | 468,433 | | | $ | 412,877 | | | $ | 385,465 | |
| Personal lines | | | 307,582 | | | | 329,163 | | | | 370,613 | |
| Total net premiums earned | | | 776,015 | | | | 742,040 | | | | 756,078 | |
| Net investment income | | | 31,126 | | | | 29,504 | | | | 29,515 | |
| Investment gains | | | 6,477 | | | | 2,778 | | | | 21,985 | |
| Equity in earnings of DFSC | | | — | | | | — | | | | 295 | |
| Other | | | 2,848 | | | | 3,497 | | | | 4,578 | |
| Total revenues | | $ | 816,466 | | | $ | 777,819 | | | $ | 812,451 | |
| | | Year Ended December 31, | |
| (in thousands) | | 2021 | | | 2020 | | | 2019 | |
| | | | | | | | | | |
| Components of net income: | | | | | | | | | |
| Underwriting (loss) income: | | | | | | | | | |
| Commercial lines | | $ | (35,174 | ) | | $ | (858 | ) | | $ | 8,404 | |
| Personal lines | | | 17,235 | | | | 31,764 | | | | (1,617 | ) |
| SAP underwriting (loss) income | | | (17,939 | ) | | | 30,906 | | | | 6,787 | |
| GAAP adjustments | | | 9,945 | | | | (959 | ) | | | (3,079 | ) |
| GAAP underwriting (loss) income | | | (7,994 | ) | | | 29,947 | | | | 3,708 | |
| Net investment income | | | 31,126 | | | | 29,504 | | | | 29,515 | |
| Investment gains | | | 6,477 | | | | 2,778 | | | | 21,985 | |
| Equity in earnings of DFSC | | | — | | | | — | | | | 295 | |
| Other | | | 730 | | | | 1,043 | | | | 1,578 | |
| Income before income tax expense | | | 30,339 | | | | 63,272 | | | | 57,081 | |
| Income tax expense | | | 5,085 | | | | 10,457 | | | | 9,929 | |
| Net income | | $ | 25,254 | | | $ | 52,815 | | | $ | 47,152 | |
We prepare our consolidated financial statements on the basis of GAAP. Our insurance subsidiaries also prepare financial statements based on 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. As a result, investors should exercise caution when comparing our
non-GAAP financial measures to the
non-GAAP financial measures other companies use. The SAP financial measures we utilize are net premiums written and statutory combined ratio.
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
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2018 | | | 2017 | | | 2016 | |
Net premiums earned | | $ | 741,290,873 | | | $ | 702,514,755 | | | $ | 656,204,797 | |
Change in net unearned premiums | | | 2,724,931 | | | | 26,624,163 | | | | 25,829,042 | |
| | | | | | | | | | | | |
Net premiums written | | $ | 744,015,804 | | | $ | 729,138,918 | | | $ | 682,033,839 | |
| | | | | | | | | | | | |
2019:
| | | Year Ended December 31, | |
| | | 2021 | | | 2020 | | | 2019 | |
| | | | | | | | | | |
| Net premiums earned | | $ | 776,015,201 | | | $ | 742,040,339 | | | $ | 756,078,400 | |
| Change in net unearned premiums | | | 28,251,308 | | | | 99,554 | | | | (3,477,111 | ) |
| Net premiums written | | $ | 804,266,509 | | | $ | 742,139,893 | | | $ | 752,601,289 | |
The
decreaseincrease in the change in net unearned premiums for
20182021 compared to
20172020 and 2019 primarily reflects
lower growththe inclusion of the business of the Mountain States Insurance Group in
net premiums written during 2018, which we attribute primarily to net attritionthe underwriting pool beginning with policies effective in
our personal lines segment that resulted from increased pricing on renewal policies and underwriting measures our insurance subsidiaries implemented to slow new policy growth.-44-
2021.
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.
The following table presents comparative details with respect to our GAAP and statutory combined ratios for the years ended December 31,
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2018 | | | 2017 | | | 2016 | |
GAAP Combined Ratios (Total Lines) | | | | | | | | | | | | |
Loss ratio(non-weather) | | | 69.0 | % | | | 61.1 | % | | | 58.8 | % |
Loss ratio (weather-related) | | | 8.8 | | | | 8.3 | | | | 5.7 | |
Expense ratio | | | 31.6 | | | | 32.9 | | | | 33.0 | |
Dividend ratio | | | 0.7 | | | | 0.7 | | | | 0.6 | |
| | | | | | | | | | | | |
Combined ratio | | | 110.1 | % | | | 103.0 | % | | | 98.1 | % |
| | | | | | | | | | | | |
| | | |
Statutory Combined Ratios | | | | | | | | | | | | |
Commercial lines: | | | | | | | | | | | | |
Automobile | | | 133.3 | % | | | 115.0 | % | | | 110.8 | % |
Workers’ compensation | | | 86.6 | | | | 79.0 | | | | 83.8 | |
Commercial multi-peril | | | 98.1 | | | | 96.7 | | | | 87.7 | |
Other | | | 54.6 | | | | 10.2 | | | | 18.3 | |
Total commercial lines | | | 103.8 | | | | 93.6 | | | | 90.7 | |
Personal lines: | | | | | | | | | | | | |
Automobile | | | 117.4 | | | | 109.3 | | | | 106.7 | |
Homeowners | | | 110.5 | | | | 109.9 | | | | 95.5 | |
Other | | | 96.4 | | | | 90.8 | | | | 86.3 | |
Total personal lines | | | 114.1 | | | | 108.5 | | | | 101.8 | |
Total commercial and personal lines | | | 109.4 | | | | 101.7 | | | | 96.8 | |
-45-
2019:| | | Year Ended December 31, | |
| | | 2021 | | | 2020 | | | 2019 | |
| GAAP Combined Ratios (Total Lines) | | | | | | | | | |
| Loss ratio (non-weather) | | | 61.3 | % | | | 55.1 | % | | | 60.9 | % |
| Loss ratio (weather-related) | | | 5.8 | | | | 6.9 | | | | 6.1 | |
| Expense ratio | | | 33.3 | | | | 33.0 | | | | 31.3 | |
| Dividend ratio | | | 0.6 | | | | 1.0 | | | | 1.2 | |
| Combined ratio | | | 101.0 | % | | | 96.0 | % | | | 99.5 | % |
| | | | | | | | | | | | | |
| Statutory Combined Ratios | | | | | | | | | | | | |
| Commercial lines: | | | | | | | | | | | | |
| Automobile | | | 108.6 | % | | | 112.7 | % | | | 117.4 | % |
| Workers’ compensation | | | 94.6 | | | | 86.3 | | | | 78.5 | |
| Commercial multi-peril | | | 114.1 | | | | 98.4 | | | | 93.7 | |
| Other | | | 77.5 | | | | 74.0 | | | | 72.6 | |
| Total commercial lines | | | 104.9 | | | | 97.8 | | | | 95.0 | |
| Personal lines: | | | | | | | | | | | | |
| Automobile | | | 94.4 | | | | 91.3 | | | | 105.7 | |
| Homeowners | | | 102.9 | | | | 97.2 | | | | 101.2 | |
| Other | | | 49.3 | | | | 74.9 | | | | 73.2 | |
| Total personal lines | | | 94.4 | | | | 92.4 | | | | 102.6 | |
| Total commercial and personal lines | | | 100.8 | | | | 95.4 | | | | 98.7 | |
YEAR ENDED DECEMBER 31,
20182021 COMPARED TO YEAR ENDED DECEMBER 31,
20172020
Our insurance subsidiaries’ net premiums earned increased to
$741.3 $776.0million for
2018,2021, an increase of
$38.8$34.0 million, or
5.5%4.6%,
over 2017,compared to 2020, primarily reflecting
increasesthe inclusion of the business of the Mountain States Insurance Group in
net premiums written during 2017the underwriting pool beginning with policies effective in 2021, as well solid premium retention and
2018.renewal premium increases. Our insurance subsidiaries earn premiums and recognize them as income over the terms of the policies they issue. Such terms are generally 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 twelve-month period compared to the same period one year earlier.
Our insurance subsidiaries’
20182021 net premiums written increased
2.0%8.4% to
$744.0$804.3 million, compared to
$729.1$742.1 million for
2017. We attribute the increase primarily to the impact of premium rate increases and an increase in the writing of new accounts in commercial lines of business.2020. Commercial lines net premiums written increased
$20.8$75.8 million, or
6.3%17.8%, for
20182021 compared to
2017. The2020. We attribute the increase
wasin commercial lines net premiums written primarily
attributable to
premium rate increases and increased writingsthe inclusion of
new accountsthe business of the Mountain States Insurance Group in the
commercial automobileunderwriting pool beginning with policies effective in 2021, as well as solid premium retention and
commercial multi-peril lines of business.renewal premium increases. Personal lines net premiums written decreased
$5.9$13.7 million, or
1.5%4.3%, for
20182021 compared to
2017.2020. We attribute the decrease in personal lines
net premiums written primarily to net attrition
that resulted from increased pricing on renewal policies and underwritingas a result of measures our insurance subsidiaries
have implemented to
slow new policy growth.improve underwriting profitability, partially offset by the impact of premium rate increases.
For
2018,2021, our net investment income increased to
$26.9$31.1 million,
an increase of $3.4compared to $29.5 million
or 14.4%, over 2017. We attribute the increasefor 2020, due primarily to
an increase inhigher average invested
assets.assets for 2021 compared to 2020.
Net Investment
(Losses) Gains
Our net investment
(losses) gains
in 2018for 2021 and
20172020 were
($4.8 million)$6.5 million and
$5.7$2.8 million, respectively. The net investment
lossesgains for
20182021 and 2020 were primarily related to
a decreaseincreases in
the market value of the equity securities we held at December 31, 2018. We adopted new accounting guidance effective January 1, 2018 that requires us to measure equity investments at fair value and recognize changes in fair value in our results of operations. The net investment gains for 2017 resulted primarily from strategic sales of equity securities within our investment portfolio and unrealized gains within
a limited partnership that invests inour equity
securities.securities portfolio. We did not recognize any impairment losses during
20182021 or
2017.Equity in Earnings of DFSC
Our equity in the earnings of DFSC in 2018 and 2017 was $2.7 million and $1.6 million, respectively. We attribute the increase in DFSC’s earnings primarily to higher net interest income related to loan portfolio growth that DFSC achieved during 2018.
2020.
Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was
77.8% in 2018,67.1% for 2021, compared to
69.4% in 2017.62.0% for 2020. Our insurance subsidiaries’ commercial lines loss ratio increased to
72.9% in 2018,68.6% for 2021, compared to
62.0% in 2017.63.9% for 2020. This increase resulted primarily from the
commercial automobileworkers’ compensation loss ratio increasing to
101.9% in 2018,57.7% for 2021, compared to
80.3% in 2017,51.1% for 2020, and the commercial multi-peril loss ratio increasing to
67.0% in 2018,76.9% for 2021, compared to
64.6% in 2017.65.9% for 2020. The personal lines loss ratio
was 81.8% in 2018increased to 64.8% for 2021, compared to
75.5%59.5% for 2020. The personal automobile loss ratio increased to 65.6% for 2021, compared to 60.1% for 2020, primarily due to an increase in
2017.automobile claim frequency as driving activity generally returned to pre-pandemic levels. The homeowners loss ratio increased to 69.6% for 2021, compared to 61.8% for 2020. Our insurance subsidiaries experienced
unfavorablefavorable loss reserve development of approximately
$35.6$31.2 million,
or 4.0percentage points of the loss ratio, during
20182021 in their reserves for prior accident years, compared to
approximately $6.6 million during 2017. The unfavorablefavorable loss reserve development
of approximately $12.9 million, or 1.7 percentage points of the loss ratio, during 2020. The favorable loss reserve development in 2021 resulted primarily from
higher-than-expected severitylower-than-expected loss emergence in the
commercial multiple peril, personal automobile,
workers’ compensation and commercial automobile lines of business
offset by lower-than-expected severity infor accident years prior to 2021. Weather-related losses of $45.3 million, or 5.8 percentage points of the
workers’ compensationloss ratio, for 2021 decreased from $51.4 million, or 6.9 percentage points of the loss ratio, for 2020, with the decrease primarily impacting the commercial multi-peril line of business.
-46-
Large fire losses, which we define as individual fire losses in excess of $50,000, were $45.6 million, or 5.9 percentage points of the loss ratio, for 2021, compared to $22.8 million, or 3.1 percentage points of the loss ratio, for 2020. The significant increase was related to a higher incidence of both commercial property and home fires in 2021 compared to 2020.
Our insurance subsidiaries’ expense ratio, which is the ratio of policy acquisition and other underwriting expenses to premiums earned, was 31.6% in 2018,33.3% for 2021, compared to 32.9%33.0% for 2020. We attribute the modest increase to higher technology system-related expenses for 2021 compared to 2020, offset somewhat by lower commercial growth incentive costs for our agents and decreased underwriting-based incentive costs for our agents and employees for 2021 compared to 2020. The increase in 2017.technology systems-related expenses for 2021 was primarily due to an increased allocation of costs from Donegal Mutual to our insurance subsidiaries following the successful implementation of the second phase of our ongoing systems modernization project in August 2021.
Policyholder Dividends
Our insurance subsidiaries pay policyholder dividends primarily on workers' compensation policies on a sliding scale based on the profitability of a given policy. We attribute the decrease
in dividends incurred for 2021 compared to
lower underwriting-based incentive2020 to a modest decline in the profitability of the workers' compensation
in 2018.line of business over the respective periods to which the dividends applied.
Our insurance subsidiaries’ combined ratio was
110.1%101.0% and
103.0% in 201896.0% for 2021 and
2017,2020, respectively. The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of workers’ compensation policy dividends incurred to premiums earned. We attribute the increase in our combined ratio primarily to the increase in
ourthe loss ratio.
Our interest expense
in 2018 increasedfor 2021 decreased to
$2.3 million,$895,605, compared to
$1.6$1.2 million
in 2017.for 2020. We attribute the
increasedecrease to
higher interest rates in effectlower average borrowings under our lines of credit during
20182021 compared to
2017.2020.
Our income tax
benefitexpense was
$15.5$5.1 million
in 2018,for 2021, compared to
$10.5 million for 2020. Our effective tax rate for 2021 was16.8%, compared to 16.5% for 2020. Our income tax expense
of $5.0for 2020 included a $1.6 million
in 2017. Our 2018 income tax benefit
reflects our anticipation of an estimated carryback of our taxable loss in 2018 to prior tax years. Our 2017 income tax expense reflected additional tax expense of $4.8 million in 2017 related to the
revaluationcarryback of
our2018 net
deferredoperating losses to past tax
assets pursuant toyears with higher statutory income tax rates than are currently in effect, as allowed under the
Tax CutsCoronavirus Aid, Relief and
JobsEconomic Security Act
(the “TCJA”).that was enacted in March 2020.
Net
(Loss) Income and
(Loss) Earnings Per Share
Our net
loss in 2018income for 2021 was
$32.8$25.3 million, or
$1.18 per share of Class A common stock and $1.09 per share of Class B common stock, compared to net income of $7.1 million, or $0.26$0.83 per share of Class A common stock on a diluted basis and
$0.22$0.74 per share of Class B common stock,
in 2017.compared to net income for 2020 of $52.8 million, or $1.83 per share of Class A common stock on a diluted basis and $1.65 per share of Class B common stock. We had
22.825.8 million and
22.624.6 million Class A shares outstanding at December 31,
20182021 and
2017,2020, respectively. We had 5.6 million Class B shares outstanding for both periods. There are no outstanding securities that dilute our shares of Class B common stock.
Our stockholders’ equity
decreasedincreased by
$49.8$13.3 million
in 2018during 2021 as a result of our net
loss,income, offset somewhat by a reduction of net unrealized
lossesgains within our
available-for-sale fixed maturity
investments and dividends we declared to our stockholders during the year.investments. Our book value per share decreased to
$14.05$16.95 at December 31,
2018,2021, compared to
$15.95$17.13 a year
earlier.earlier, primarily as a result of an increase in the number of Class A shares outstanding during the year.
YEAR ENDED DECEMBER 31,
20172020 COMPARED TO YEAR ENDED DECEMBER 31,
20162019
Our insurance subsidiaries’ net premiums earned
increaseddecreased to
$702.5$742.0 million for
2017, an increase2020, a decrease of
$46.3$14.1 million, or
7.1%1.9%,
over 2016,compared to 2019, primarily reflecting
increasesdecreases in
netpersonal lines premiums written during
20162019 and
2017.2020. Our insurance subsidiaries earn premiums and recognize them as income over the terms of the policies they issue. Such terms are generally 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 twelve-month period compared to the same period one year earlier.
Our insurance subsidiaries’
20172020 net premiums written
increased 6.9%decreased 1.4% to
$729.1$742.1 million, compared to
$682.0$752.6 million for
2016.2019. We attribute the
increasedecrease primarily to
net attrition in our personal lines segment that resulted from increased pricing on renewal policies and underwriting measures our insurance subsidiaries implemented to slow new policy growth and improve profitability, offset somewhat by the impact of premium rate increases and an increase in the writing of new accounts in
both personal and commercial lines of
insurance.business. Commercial lines net premiums written increased
$18.7$21.1 million, or
6.0%5.2%, for
20172020 compared to
2016. The increase was primarily attributable to premium rate increases and increased writings of new accounts in the commercial automobile, commercial multi-peril and workers’ compensation lines of business.2019. Personal lines net premiums written
increased $28.4decreased $31.6 million, or
7.6%9.1%, for
20172020 compared to
2016. We attribute the increase in personal lines primarily to an increase in new business and premium rate increases our insurance subsidiaries implemented throughout 2016 and 2017.-47-
2019.
For
2017,2020, our net investment income
increased to $23.5was unchanged at $29.5 million,
an increase of $894,574, or 4.0%, over 2016. We attribute the increase primarily toas an increase in average invested
assets.Installment Payment Fees
Our insurance subsidiaries’ installment fees decreased primarily asassets offset a result of their customers’ increased usage of payment plans that have lower installment payment fees during 2017.
modest decrease in the average investment yield.
Our net investment gains
in 2017for 2020 and
20162019 were
$5.7$2.8 million and
$2.5$22.0 million, respectively. The net investment gains for
2017 resulted2020 were primarily
from strategic sales of equity securities within our investment portfolio andrelated to an increase in unrealized gains within
a limited partnership that invests inour equity
securities.securities portfolio. The net investment gains
in 2016 resultedfor 2019 included $12.7 million from
normal turnoverthe sale of DFSC and $8.9 million related to unrealized gains within our
investmentequity securities portfolio. We did not recognize any impairment losses during
20172020 or
2016.Equity in Earnings of DFSC
Our equity in the earnings of DFSC in 2017 and 2016 was $1.6 million and $1.1 million, respectively. We attribute the increase in DFSC’s earnings primarily to higher net interest income related to loan portfolio growth that DFSC achieved during 2017.
2019.
Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was
69.4% in 2017,62.0% for 2020, compared to
64.5% in 2016.67.0% for 2019. Our insurance
subsidiaries��subsidiaries’ commercial lines loss ratio increased to
62.0% in 2017,63.9% for 2020, compared to
59.6% in 2016.63.0% for 2019. This increase resulted primarily from the
commercial automobileworkers’ compensation loss ratio increasing to
80.3% in 2017,51.1% for 2020, compared to
78.7% in 2016,44.6% for 2019, and the commercial multi-peril loss ratio increasing to
64.6% in 2017,65.9% for 2020, compared to
54.4% in 2016.63.1% for 2019. The personal lines loss ratio
was 75.5% in 2017decreased to 59.5% for 2020, compared to
68.5%71.1% for 2019. The personal automobile loss ratio decreased to 60.1% for 2020, compared to 76.1% for 2019, primarily as a result of lower claim frequency due to reduced driving activity and traffic density and various underwriting adjustments our insurance subsidiaries implemented in
2016.recent years. The homeowners loss ratio decreased to 61.8% for 2020, compared to 67.1% for 2019, primarily as a result of decreased weather-related losses that we attribute to our exit from several weather-prone markets in 2019. Our insurance subsidiaries experienced
unfavorablefavorable loss reserve development of approximately
$6.6$12.9 million,
or 1.7 percentage points of the loss ratio, during
20172020 in their reserves for prior accident years, compared to
approximately $3.0 million during 2016. The unfavorablefavorable loss reserve development
of approximately $12.9 million, or 1.7 percentage points of the loss ratio, during 2019. The favorable loss reserve development in 2020 resulted primarily from
higher-than-expected severity in the commercial multiple peril, personal automobile liability and commercial automobile lines of business, offset by lower-than-expected severity in the workers’ compensation
and personal automobile lines of business, partially offset by higher-than-expected severity in the commercial automobile and commercial multi-peril lines of business, for accident years prior to 2020. Weather-related losses of $51.4 million, or 6.9 percentage points of the loss ratio, for 2020 increased from $46.1 million, or 6.1 percentage points of the loss ratio, for 2019, with the increase primarily impacting the commercial multi-peril line of business.
Our insurance subsidiaries’ expense ratio, which is the ratio of policy acquisition and other underwriting expenses to premiums earned, was 32.9% in 2017,33.0% for 2020, compared to 33.0%31.3% for 2019. We attribute the modest increase to higher commercial growth incentive costs for our agents, higher underwriting-based incentive compensation for our agents and employees and higher technology-related expenses for 2020 compared to 2019. The increase in 2016.technology systems-related expenses for 2020 was primarily due to an increased allocation of costs from Donegal Mutual to our insurance subsidiaries following the successful implementation of the first phase of our ongoing systems modernization project in February 2020.
Policyholder Dividends
Our insurance subsidiaries pay policyholder dividends primarily on workers' compensation policies on a sliding scale based on the profitability of a given policy. We attribute the decrease
in dividends incurred for 2020 compared to
lower underwriting-based incentive2019 to a modest decline in the profitability of the workers' compensation
in 2017.line of business over the respective periods to which the dividends applied.
Our insurance subsidiaries’ combined ratio was
103.0%96.0% and
98.1% in 201799.5% for 2020 and
2016,2019, respectively. The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of workers’ compensation policy dividends incurred to premiums earned. We attribute the
increasedecrease in our combined ratio primarily to the
increasedecrease in our loss ratio.
Our interest expense
in 2017for 2020 decreased
to $1.2 million, compared to $1.6 million
compared to $1.7 million in 2016.for 2019. We attribute the decrease to lower
averageinterest rates on our borrowings
under our lines of credit during
20172020 compared to
2016.-48-
2019.
Our income tax expense was
$5.0$10.5 million
in 2017,for 2020, compared to
$10.5$9.9 million
in 2016.for 2019. Our effective tax rate for
20172020 was
41.3%16.5%, compared to
25.5%17.4% for
2016. The increase in our 2017 effective tax rate was primarily due to additional2019. Our income tax expense
of $4.8for 2020 included a $1.6 million
income tax benefit related to the
revaluationcarryback of
our2018 net
deferredoperating losses to past tax
assets pursuant toyears with higher statutory income tax rates than are currently in effect, as allowed under the
Tax CutsCoronavirus Aid, Relief and
JobsEconomic Security Act
(the “TCJA”). Excluding the impact of the TCJA, our effective tax rate for 2017that was
2.0% due totax-exempt interest income representing a greater proportion of income beforeenacted in March 2020. Our income tax expense
in 2017 comparedfor 2019 included Pennsylvania state income taxes of $825,000 that were related to
2016.the gain we realized on the sale of DFSC.
Net Income and Earnings Per Share
Our net income
in 2017for 2020 was
$7.1$52.8 million, or
$.26$1.83 per share of Class A common stock on a diluted basis and
$.22$1.65 per share of Class B common stock, compared to
$30.8net income for 2019 of $47.2 million, or
$1.16$1.67 per share of Class A common stock on a diluted basis and
$1.06$1.51 per share of Class B common
stock, in 2016.stock. We had
22.624.6 million and
21.523.2 million Class A shares outstanding at December 31,
20172020 and
2016,2019, respectively. We had 5.6 million Class B shares outstanding for both periods. There are no outstanding securities that dilute our shares of Class B common stock.
Book Value Per Share
and Return on Equity
Our stockholders’ equity increased by
$10.1$66.8 million
in 2017.during 2020 as a result of our net income and net unrealized gains within our available-for-sale fixed maturity investments. Our book value per share
decreasedincreased to
$15.95$17.13 at December 31,
2017,2020, compared to
$16.21$15.67 a year earlier.
Our return on average equity was 1.6% for 2017, compared to 7.3% for 2016.
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 generated from our insurance subsidiaries’ underwriting results, investment income and maturing investments.
We have historically generated sufficient net positive cash flow from our operations to fund our commitments and build 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
2018, 20172021, 2020 and
20162019 were
$63.8 $76.7million,
$81.0$101.1 million and
$60.0$76.4 million, respectively.
In July 2018, we renewed our existing credit agreement with Manufacturers and Traders Trust Company (“M&T”) relating to a $60.0 million unsecured, revolving line of credit.
At December 31,
2018,2021, we had
$25.0 million inno outstanding borrowings
under our line of credit with M&T and had the ability to borrow
an additional $35.0up to $20.0 million at interest rates equal to
M&T’s current prime rate or the then-current LIBOR rate plus
2.25%2.00%. At December 31,
2018, the interest rate on our outstanding borrowings was 4.77%. The credit agreement required our compliance with certain covenants. These covenants included minimum levels of our net worth, leverage ratio, statutory surplus and the A.M. Best ratings of our insurance subsidiaries. We did not comply with the minimum net worth and minimum interest coverage ratio covenants at December 31, 2018. We terminated this credit agreement and entered into a new credit agreement with M&T in March 2019. The new credit agreement relates to a $30.0 million unsecured, revolving line of credit. We transferred our $25.0 million outstanding borrowings to this new line of credit and have the ability to borrow an additional $5.0 million at interest rates equal to M&T’s current prime rate or the then-current LIBOR rate plus 2.25%. The interest rate on our outstanding borrowings is adjustable quarterly. We pay a fee of 0.15% per annum on the loan commitment amount regardless of usage. The new credit agreement requires our compliance with certain covenants. These covenants include minimum levels of our net worth, leverage ratio, statutory surplus and the A.M. Best ratings of our insurance subsidiaries. In addition,2021, Atlantic States
has guaranteed our payment obligations under the new credit agreement. We compliedhad $35.0 million in outstanding advances with
all of the requirements of the new credit agreement as of the filing date of this Form10-K Report.Atlantic States is a member of the FHLB of Pittsburgh. Through its membership,Pittsburgh that carry a fixed interest rate of 1.74%. In March 2020, Atlantic States has the ability to issueissued $50.0 million of debt to the FHLB of Pittsburgh in exchange for a cash advances.advance in the same amount for contingent liquidity funding in light of uncertainty surrounding the economic impact of the COVID-19 pandemic. Atlantic States had $35.0repaid this advance when it became due in March 2021. In September 2021, upon receipt of approval from the Michigan Department of Insurance and Financial Services, MICO repaid in full the $5.0 million surplus note held previously by Donegal Mutual, along with accrued interest of $178,082. We discuss in outstanding advances at December 31, 2018. The interest rate on the advances was 2.32% at December 31, 2018.
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The following table shows expected payments forNote 9 – Borrowings our significant contractual obligations at December 31, 2018:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Total | | | Less than 1
year | | | 1-3 years | | | 4-5 years | | | After 5
years | |
Net liability for unpaid losses and loss expenses of our insurance subsidiaries | | $ | 475,398 | | | $ | 221,400 | | | $ | 221,128 | | | $ | 16,868 | | | $ | 16,002 | |
Subordinated debentures | | | 5,000 | | | | — | | | | — | | | | — | | | | 5,000 | |
Borrowings under lines of credit | | | 60,000 | | | | 35,000 | | | | 25,000 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total contractual obligations | | $ | 540,398 | | | $ | 256,400 | | | $ | 246,128 | | | $ | 16,868 | | | $ | 21,002 | |
| | | | | | | | | | | | | | | | | | | | |
We estimatedestimate of the timing of the amounts payable for the net liabilityborrowings under our lines of credit based on their contractual maturities.
We estimate the timing of claim payments associated with the liabilities for
unpaid losses and loss expenses of our insurance subsidiaries based on historical experience and expectations of future payment patterns.
We have shownAmounts Atlantic States assumes pursuant to the
liability net of reinsurance recoverable on unpaid losses and loss expenses to reflect expected future cash flows related to such liability. Assumed amounts from the underwriting poolpooling agreement with Donegal Mutual represent a substantial portion of our insurance subsidiaries’ gross
liabilityliabilities for
unpaid losses and loss expenses, and
ceded amounts
Atlantic States cedes pursuant to the
underwriting poolpooling agreement represent a substantial portion of our insurance subsidiaries’ reinsurance recoverable on unpaid losses and loss expenses. We include cash
settlementssettlement of Atlantic States’ assumed
liabilityliabilities from the pool in
our monthly settlements of pooled
activity. In these monthly settlements,activity, as we net amounts ceded to and assumed from the pool.
Although Donegal Mutual and
Atlantic Stateswe do not anticipate any
further changes in the pool participation levels in the foreseeable
future. However,future, any such change would be prospective in nature and therefore would not impact the timing of expected payments
by Atlantic States for
Atlantic States’ proportionate liability forits percentage share of pooled losses occurring in periods prior to the effective date of such change.
We estimated the timing of the amounts for the borrowings under our lines of credit based on their contractual maturities that we discuss in Note 9—Borrowings. Our borrowings under our lines of credit carry interest rates that vary as discussed in Note 9—Borrowings. Based upon the interest rates in effect at December 31, 2018, our annual interest cost associated with our borrowings under our lines of credit is approximately $2.2 million. For every 1% change in the interest rate associated with our borrowings under our lines of credit, the effect on our annual interest cost would be approximately $600,000.
The cash dividends we declared to our stockholders totaled
$15.8 $19.6million,
$15.0$17.3 million and
$14.2$16.2 million in
2018, 20172021, 2020 and
2016,2019, respectively. 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. Our insurance subsidiaries are required by law to maintain certain 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,
2018.2021. Amounts available for distribution to us as
ordinary dividends from our insurance subsidiaries without prior approval of insurance regulatory authorities in
20192022 are
$19.4approximately $27.9 million from Atlantic States,
$4.5$6.9 million from Southern,
$2.0 million from Le Mars, $1.7$4.8 million from Peninsula
$1.7 million from Sheboygan and
$5.6$7.7 million from MICO, or a total of approximately
$34.9$47.3 million.
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At December 31,
20182021 and
2017,2020, our investment portfolio of primarily investment-grade bonds, common stock, short-term investments and cash totaled
$1.1$1.3 billion,
representing 59.2% and
$1.0 billion, respectively, representing 59.1% and 60.1%61.3%, respectively, of our total assets. See
“Business—“Business - Investments” for more information.
| | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2018 | | | 2017 | |
| (dollars in thousands) | | Amount | | | Percent of
Total | | | Amount | | | Percent of
Total | |
Fixed maturities: | | | | | | | | | | | | | | | | |
Total held to maturity | | $ | 402,799 | | | | 39.1 | % | | $ | 366,655 | | | | 36.4 | % |
Total available for sale | | | 526,558 | | | | 51.1 | | | | 538,946 | | | | 53.6 | |
| | | | | | | | | | | | | | | | |
Total fixed maturities | | | 929,357 | | | | 90.2 | | | | 905,601 | | | | 90.0 | |
Equity securities | | | 43,667 | | | | 4.2 | | | | 50,445 | | | | 5.0 | |
Investment in affiliate | | | 41,026 | | | | 4.0 | | | | 38,774 | | | | 3.9 | |
Short-term investments | | | 16,749 | | | | 1.6 | | | | 11,050 | | | | 1.1 | |
| | | | | | | | | | | | | | | | |
Total investments | | $ | 1,030,799 | | | | 100.0 | % | | $ | 1,005,870 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2021 | | | 2020 | |
| (dollars in thousands) | | Amount | | | | | | Amount | | | | |
| Fixed maturities: | | | | | | | | | | | | |
| Total held to maturity | | $ | 668,105 | | | | 52.3 | % | | $ | 586,609 | | | | 48.0 | % |
| Total available for sale | | | 532,629 | | | | 41.7 | | | | 555,136 | | | | 45.5 | |
| Total fixed maturities | | | 1,200,734 | | | | 94.0 | | | | 1,141,745 | | | | 93.5 | |
| Equity securities | | | 63,420 | | | | 5.0 | | | | 58,556 | | | | 4.8 | |
| Short-term investments | | | 12,692 | | | | 1.0 | | | | 20,901 | | | | 1.7 | |
| Total investments | | $ | 1,276,846 | | | | 100.0 | % | | $ | 1,221,202 | | | | 100.0 | % |
The carrying value of our fixed maturity investments represented
90.2%94.0% and
90.0%93.5% of our total invested assets at December 31,
20182021 and
2017,2020, respectively.
Our fixed maturity investments consisted of high-quality marketable bonds, of which
100.0% and 99.8% were rated at investment-grade levels at December 31,
20182021 and
2017.2020, respectively.
At December 31,
2018,2021, the net unrealized
lossgain on our
available-for-sale fixed maturity investments, net of deferred taxes, amounted to
$6.8$7.4 million, compared to a net unrealized gain of
$420,053$15.9 million at December 31,
2017.2020.
Our insurance subsidiaries establish their property and casualty insurance premium rates before they know the amount of losses and loss settlement expenses or the extent to which inflation may impact such expenses. Consequently, our insurance subsidiaries attempt, in establishing rates, to anticipate the potential future impact of inflation. Our insurance subsidiaries account for inflation in the reserving function through analysis of costs and trends and reviews of historical reserving results.
Impact of Changing Climate Conditions
Insured losses from severe weather events could significantly impact the underwriting results of our insurance subsidiaries. Losses from catastrophic events are a function of both the extent of our insurance subsidiaries’ exposures, the frequency and severity of the events themselves and the level of reinsurance coverage our insurance subsidiaries purchase. The increased frequency and severity of weather-related catastrophes and other losses, such as from wildfires and flooding, incurred by the industry in recent years may be indicative of changing weather patterns due to climate change. Should those patterns continue to emerge, increased weather-related catastrophes in the states in which our insurance subsidiaries operate would lead to higher overall losses that they may be unable to offset through pricing actions.
Our insurance subsidiaries seek to reduce their exposure to catastrophe losses through their underwriting strategies and their purchase of catastrophe reinsurance. While the emerging science regarding climate change and its connection to extreme weather events continues to be studied, climate change, to the extent it produces rising temperatures and changes in weather patterns, could affect the frequency and severity of weather events and other losses and thus impact the affordability and availability of catastrophe reinsurance coverage for our insurance subsidiaries. Our insurance subsidiaries’ ability to appropriately manage catastrophe risk depends partially on catastrophe models, which rely on historical data that might not be representative of the frequency and severity of future events. Such models might also be unable to anticipate the uncertain impact of changing climate conditions that tend to occur gradually over time. Because the policies of our insurance subsidiaries renew not less frequently than annually, our insurance subsidiaries have the ability to respond to the impact of changing climate conditions through adjustments to their underwriting standards, pricing, and policy terms and conditions, subject to applicable regulatory approvals.
Changing climate conditions could lead to new or revised regulations with which our insurance subsidiaries would have to comply. Such regulations could impact the ability of our insurance subsidiaries to manage their exposures in areas impacted by increased weather activity, require our insurance companies to alter the terms and conditions of their policies or impact the ability of our insurance subsidiaries to obtain sufficient pricing increases to offset higher loss activity.
Impact of New Accounting Standards
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued guidance that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. While this guidance replaced most existing GAAP revenue recognition guidance, the scope of the guidance excludes insurance contracts. The new standard was effective on January 1, 2018. The standard permits the use of either the retrospective or the cumulative effect transition method. Because the accounting for insurance contracts is outside of the scope of this standard, the adoption of this guidance did not have a significant impact on our financial position, results of operations or cash flows.In January 2016, the FASB issued guidance that generally requires entities to measure equity investments at fair value and recognize changes in fair value in their results of operations. This guidance also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring entities to perform a qualitative assessment to identify impairment. The FASB issued other disclosure and presentation improvements related to financial instruments within the guidance. The guidance was effective for annual and interim reporting periods beginning after December 15, 2017. As a result of the adoption of this guidance on January 1, 2018, we transferred $4.9 million of net unrealized gains from accumulated other comprehensive income (“AOCI”) to retained earnings. We recognized $1.2 million of gains and $4.4 million of losses on equity securities held at December 31, 2018 in net investment losses for the year ended December 31, 2018.
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In February 2016, the FASB issued guidance that requires lessees to recognize leases, including operating leases, on the lessee’s balance sheet, unless a lease is considered a short-term lease. This guidance also requires entities to make new judgments to identify leases. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018 and permits early adoption. Our adoption of this guidance in 2019 will not have a significant impact on our financial position, results of operations or cash flows.
In JuneSeptember 2016, the FASB issued guidance that amends previous guidance on the impairment of financial instruments by adding an impairment model that requires an entity to recognize expected credit losses as an allowance rather than impairments as credit losses are incurred. The intent of this guidance is to reduce complexity and result in a more timely recognition of expected credit losses. TheIn November 2019, the FASB issued guidance isthat delays the effective date for “smaller reporting companies,” as defined in Item 10(f)(1) of Regulation S-K, to annual and interim reporting periods beginning after December 15, 2022 from December 15, 2019. We are a smaller reporting company and are in the process of evaluating the impact of the adoption of this guidance on our financial position, results of operations and cash flows.
In
January 2017,December 2019, the FASB issued guidance that simplifies
the measurement of goodwill by modifying the goodwill impairment test previous guidance required.accounting for income taxes. The guidance
requireseliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an
entity to perform its annual or interim
goodwill impairment test by comparingperiod and the
fair valuerecognition of
a reporting unit with its carrying amount and recognize impairmentdeferred tax liabilities for
the amount by which the reporting unit’s carrying amount exceeds its fair value.outside basis differences. The guidance
iswas effective
January 1, 2021, using the retrospective method or modified retrospective method for
annualcertain changes and
interim reporting periods beginning after December 15, 2019the prospective method for all other changes, and permits early adoption.
We do not expect theOur adoption of this guidance
to have a significant impact on
our financial position, results of operations or cash flows.In February 2018, the FASB issued updated guidance that allows entities to reclassify the stranded tax effects in AOCI resulting from the Tax Cuts and Jobs Act of 2017 (the “TCJA”) from AOCI to retained earnings. Current guidance requires entities to report the effect of a change in tax laws or tax rates on deferred tax balances in income from continuing operations in the accounting period that includes the period of enactment, even if the entities originally charged or credited related income tax effects directly to AOCI. If an entity elects to reclassify the stranded tax effects, the guidance requires the reclassification to include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, related to items in AOCI at the date of the enactment of TCJA. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018 and permits early adoption. We adopted this guidance effective on the December 22, 2017 date of the enactment of the TCJA. The adoption of this guidanceJanuary 1, 2021 did not have a significant impact on our financial position, results of operations or cash flows.
In August 2018, the FASB issued guidance that modifies disclosure requirements related to fair value measurements. The guidance removes the requirements to disclose the amounts
Off-Balance Sheet Arrangements
As of
December 31, 2021 and
reasons for, transfers between Level 1 and Level 22020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of
the fair value hierarchy. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019 and permits early adoption. We do not expect the adoption of this guidance to have a significant impact on our financial position, results of operations or cash flows.Regulation S-K.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
We are exposed to the impact of interest rate changes, to changes in fair values of investments and to credit risk.
In the normal course of business, we employ established policies and procedures to manage our exposure to changes in interest rates, fluctuations in the fair market value of our debt and equity securities and credit risk. We seek to mitigate these risks by various actions we describe below.
Our exposure to market risk for a change in interest rates is concentrated in our investment portfolio. We monitor this exposure through periodic reviews of our asset and liability positions. We regularly monitor estimates of cash flows and the impact of interest rate fluctuations relating to our investment portfolio. Generally, we do not hedge our exposure to interest rate risk because we have the capacity to, and do, hold fixed-maturity investments to maturity.
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Principal cash flows and related weighted-average interest rates by stated maturity dates for the financial instruments we held at December 31,
20182021 that are sensitive to interest rates are as follows:
| | | | | | | | |
| (in thousands) | | Principal
Cash Flows | | | Weighted-
Average
Interest Rate | |
Fixed-maturity and short-term investments: | | | | | | | | |
2019 | | $ | 56,728 | | | | 3.07 | % |
2020 | | | 35,122 | | | | 2.63 | |
2021 | | | 43,744 | | | | 3.37 | |
2022 | | | 45,865 | | | | 2.99 | |
2023 | | | 45,096 | | | | 2.93 | |
Thereafter | | | 723,111 | | | | 3.49 | |
| | | | | | | | |
Total | | $ | 949,666 | | | | | |
| | | | | | | | |
Fair value | | $ | 948,345 | | | | | |
| | | | | | | | |
Debt: | | | | | | | | |
2019 | | $ | 35,000 | | | | 2.32 | % |
2020 | | | 25,000 | | | | 4.77 | |
Thereafter | | | 5,000 | | | | 5.00 | |
| | | | | | | | |
Total | | $ | 65,000 | | | | | |
| | | | | | | | |
Fair value | | $ | 65,000 | | | | | |
| | | | | | | | |
| (in thousands) | | Principal Cash Flows | | | Weighted- Average Interest Rate | |
| Fixed-maturity and short-term investments: | | | | | | |
| 2022 | | $ | 62,545 | | | | 2.56 | % |
| 2023 | | | 42,283 | | | | 3.23 | |
| 2024 | | | 49,683 | | | | 4.11 | |
| 2025 | | | 54,054 | | | | 3.86 | |
| 2026 | | | 64,492 | | | | 3.52 | |
| Thereafter | | | 920,020 | | | | 3.01 | |
| Total | | $ | 1,193,077 | | | | | |
| Fair value | | $ | 1,242,722 | | | | | |
| Debt: | | | | | | | | |
| 2024 | | $ | 35,000 | | | | 1.74 | % |
| Total | | $ | 35,000 | | | | | |
| Fair value | | $ | 35,000 | | | | | |
Actual cash flows from investments may differ from those depicted above as a result of calls and prepayments.
Our portfolio of equity securities, which we carry on our consolidated balance sheets at estimated fair value, has exposure to price risk, which is the risk of potential loss in estimated fair value resulting from an adverse change in prices. Our objective is to mitigate this risk and to earn competitive relative returns by investing in a diverse portfolio of high-quality, liquid securities.
Our objective is to earn competitive returns by investing in a diversified portfolio of securities. Our portfolio of fixed maturity securities and, to a lesser extent, short-term investments is subject to credit risk. We define this risk as the potential loss in fair value resulting from adverse changes in the borrower’s ability to repay the debt. We manage this risk by performing an analysis of prospective investments and through regular reviews of our portfolio by our investment personnel. We also limit the amount of our total investment portfolio that we invest in any one security.
Our insurance subsidiaries provide property and liability insurance coverages through independent insurance agencies located throughout their operating areas. Our insurance subsidiaries bill the majority of this business directly to the insured, although our insurance subsidiaries bill a portion of their commercial business through their agents, to whom they 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 Atlantic States cedes to Donegal Mutual. Our insurance subsidiaries maintain reinsurance agreements with Donegal Mutual and with a number of other major unaffiliated authorized reinsurers.
Through November 30, 2010, MICO and West Bend Mutual Insurance Company (“West Bend”) were parties to quota-share reinsurance agreements whereby MICO ceded 75% of its business to West Bend. MICO and West Bend terminated the reinsurance agreement in effect at November 30, 2010 on arun-off basis. West Bend’s obligations related to all past reinsurance agreements with MICO remain in effect for all policies with effective dates prior to December 1, 2010. West Bend and MICO entered into a trust agreement on December 1, 2010. Under the terms of the trust agreement, West Bend placed into trust, for the sole benefit of MICO, assets with a fair value equal to the amount of unearned premiums and unpaid losses and loss expenses, reduced by any net premium balances not yet paid by MICO, that West Bend had assumed pursuant to such reinsurance agreements at November 30, 2010. West Bend terminated the trust agreement in 2018 as permitted under the terms of the trust agreement when the obligations of West Bend under the trust agreement were equal to or less than $5.0 million.
-53-
| Item 8. | Financial Statements and Supplementary Data. |
| | | | |
Index to Consolidated Financial Statements and Schedule | |
| | |
| |
| 64
|
| | 55 | |
| |
| 65
|
| | 56 | |
| |
| 66
|
| | 57 | |
| |
| 67
|
| | 58 | |
| |
| 68 |
| | 59 | |
| |
| 106
|
| | 96 | |
Schedule: | |
Schedule:
| | | | |
| |
| | | 104 | 115 |
-54-
Consolidated Balance Sheets
| | | | | | | | |
| | | December 31, | |
| | | 2018 | | | 2017 | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Fixed maturities | | | | | | | | |
Held to maturity, at amortized cost (fair value $405,038,296 and $380,450,428) | | $ | 402,798,518 | | | $ | 366,655,077 | |
Available for sale, at fair value (amortized cost $535,112,451 and $538,414,337) | | | 526,558,304 | | | | 538,946,050 | |
Equity securities, at fair value | | | 43,667,009 | | | | 50,445,243 | |
Investment in Donegal Financial Services Corporation | | | 41,025,975 | | | | 38,773,420 | |
Short-term investments, at cost, which approximates fair value | | | 16,748,760 | | | | 11,049,915 | |
| | | | | | | | |
Total investments | | | 1,030,798,566 | | | | 1,005,869,705 | |
Cash | | | 52,594,461 | | | | 37,833,435 | |
Accrued investment income | | | 6,561,199 | | | | 6,553,121 | |
Premiums receivable | | | 156,702,250 | | | | 160,406,432 | |
Reinsurance receivable | | | 343,369,065 | | | | 298,342,563 | |
Deferred policy acquisition costs | | | 60,615,127 | | | | 60,289,860 | |
Deferred tax asset, net | | | 13,069,755 | | | | 7,128,843 | |
Prepaid reinsurance premiums | | | 135,379,777 | | | | 135,032,641 | |
Property and equipment, net | | | 4,690,704 | | | | 7,280,415 | |
Accounts receivable - securities | | | 261,829 | | | | 180,525 | |
Federal income taxes recoverable | | | 19,032,604 | | | | 10,935,105 | |
Goodwill | | | 5,625,354 | | | | 5,625,354 | |
Other intangible assets | | | 958,010 | | | | 958,010 | |
Other | | | 2,419,566 | | | | 1,483,769 | |
| | | | | | | | |
Total assets | | $ | 1,832,078,267 | | | $ | 1,737,919,778 | |
| | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
Liabilities | | | | | | | | |
Losses and loss expenses | | $ | 814,665,224 | | | $ | 676,671,727 | |
Unearned premiums | | | 506,528,606 | | | | 503,456,541 | |
Accrued expenses | | | 25,442,146 | | | | 28,033,776 | |
Reinsurance balances payable | | | 3,882,193 | | | | 4,116,159 | |
Borrowings under lines of credit | | | 60,000,000 | | | | 59,000,000 | |
Cash dividends declared to stockholders | | | 3,948,484 | | | | 3,841,820 | |
Subordinated debentures | | | 5,000,000 | | | | 5,000,000 | |
Accounts payable - securities | | | 1,003,810 | | | | — | |
Due to affiliate | | | 10,874,540 | | | | 7,314,368 | |
Other | | | 1,863,363 | | | | 1,789,283 | |
| | | | | | | | |
Total liabilities | | | 1,433,208,366 | | | | 1,289,223,674 | |
| | | | | | | | |
Stockholders’ Equity | | | | | | | | |
Preferred stock, $.01 par value, authorized 2,000,000 shares; none issued | | | — | | | | — | |
Class A common stock, $.01 par value, authorized 40,000,000 shares, issued 25,819,341 and 25,564,481 shares and outstanding 22,816,753 and 22,561,893 shares | | | 258,194 | | | | 255,645 | |
Class B common stock, $.01 par value, authorized 10,000,000 shares, issued 5,649,240 shares and outstanding 5,576,775 shares | | | 56,492 | | | | 56,492 | |
Additionalpaid-in capital | | | 261,258,423 | | | | 255,401,558 | |
Accumulated other comprehensive loss | | | (14,228,059 | ) | | | (2,684,275 | ) |
Retained earnings | | | 192,751,208 | | | | 236,893,041 | |
Treasury stock, at cost | | | (41,226,357 | ) | | | (41,226,357 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 398,869,901 | | | | 448,696,104 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 1,832,078,267 | | | $ | 1,737,919,778 | |
| | | | | | | | |
| | | December 31, | |
| | | 2021
| | | 2020
| |
| Assets | | | | | | |
| Investments | | | | | | |
| Fixed maturities | | | | | | |
Held to maturity, at amortized cost (fair value $697,400,964 and $632,640,821) | | $ | 668,104,568 | | | $ | 586,609,439 | |
Available for sale, at fair value (amortized cost $523,293,046 and $534,958,100) | | | 532,629,015 | | | | 555,136,017 | |
| Equity securities, at fair value | | | 63,419,973 | | | | 58,556,173 | |
| Short-term investments, at cost, which approximates fair value | | | 12,692,341 | | | | 20,900,155 | |
| Total investments | | | 1,276,845,897 | | | | 1,221,201,784 | |
| Cash | | | 57,709,375 | | | | 103,094,236 | |
| Accrued investment income | | | 8,214,971 | | | | 7,936,879 | |
| Premiums receivable | | | 168,862,580 | | | | 169,596,332 | |
| Reinsurance receivable | | | 455,411,009 | | | | 408,908,850 | |
| Deferred policy acquisition costs | | | 68,028,373 | | | | 59,156,958 | |
| Deferred tax asset, net | | | 6,685,619 | | | | 5,683,113 | |
| Prepaid reinsurance premiums | | | 176,935,842 | | | | 169,418,333 | |
| Property and equipment, net | | | 2,956,930 | | | | 4,390,377 | |
| Accounts receivable - securities | | | 2,252 | | | | 67,676 | |
| Federal income taxes recoverable | | | 5,290,938 | | | | 3,089,369 | |
| Receivable from Michigan Catastrophic Claims Association | | | 18,112,800 | | | | 0 | |
| Due from affiliate | | | 1,922,717 | | | | 0 | |
| Goodwill | | | 5,625,354 | | | | 5,625,354 | |
| Other intangible assets | | | 958,010 | | | | 958,010 | |
| Other | | | 1,612,732 | | | | 1,393,053 | |
| Total assets | | $ | 2,255,175,399 | | | $ | 2,160,520,324 | |
| | | | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | | | |
| Liabilities | | | | | | | | |
| Losses and loss expenses | | $ | 1,077,620,301 | | | $ | 962,007,437 | |
| Unearned premiums | | | 572,958,422 | | | | 537,189,598 | |
| Accrued expenses | | | 4,028,659 | | | | 29,115,198 | |
| Reinsurance balances payable | | | 3,946,105 | | | | 3,233,523 | |
| Borrowings under lines of credit | | | 35,000,000 | | | | 85,000,000 | |
| Cash dividends declared to stockholders | | | 4,915,268 | | | | 4,436,301 | |
| Cash refunds due to Michigan policyholders | | | 18,112,800 | | | | 0 | |
| Subordinated debentures | | | 0 | | | | 5,000,000 | |
| Due to affiliate | | | 0 | | | | 10,293,495 | |
| Other | | | 7,557,757 | | | | 6,470,652 | |
| Total liabilities | | | 1,724,139,312 | | | | 1,642,746,204 | |
| Stockholders’ Equity | | | | | | | | |
Preferred stock, $0.01 par value, authorized 2,000,000 shares; NaN issued | | | 0 | | | | 0 | |
Class A common stock, $0.01 par value, authorized 50,000,000 shares, issued 28,756,203 and 27,651,774 shares and outstanding 25,753,615 and 24,649,186 shares | | | 287,562 | | | | 276,518 | |
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 | | | 304,889,481 | | | | 289,149,567 | |
| Accumulated other comprehensive income | | | 3,283,551 | | | | 11,130,612 | |
| Retained earnings | | | 263,745,358 | | | | 258,387,288 | |
| Treasury stock, at cost | | | (41,226,357 | ) | | | (41,226,357 | ) |
| Total stockholders’ equity | | | 531,036,087 | | | | 517,774,120 | |
| Total liabilities and stockholders’ equity | | $ | 2,255,175,399 | | | $ | 2,160,520,324 | |
See accompanying notes to consolidated financial statements.
-55-
Consolidated Statements of
(Loss) Income and Comprehensive
(Loss) Income
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2018 | | | 2017 | | | 2016 | |
Statements of (Loss) Income | | | | | | | | | | | | |
Revenues | | | | | | | | | | | | |
Net premiums earned (includes affiliated reinsurance of $198,580,547, $190,924,704 and $184,656,732 - see note 3) | | $ | 741,290,873 | | | $ | 702,514,755 | | | $ | 656,204,797 | |
Investment income, net of investment expenses | | | 26,907,656 | | | | 23,527,304 | | | | 22,632,730 | |
Installment payment fees | | | 5,256,721 | | | | 5,157,163 | | | | 5,302,896 | |
Lease income | | | 480,617 | | | | 500,455 | | | | 670,865 | |
Net investment (losses) gains (includes ($499,244), $5,705,255 and $2,525,575 accumulated other comprehensive income reclassification) | | | (4,801,509 | ) | | | 5,705,255 | | | | 2,525,575 | |
Equity in earnings of Donegal Financial Services Corporation | | | 2,693,962 | | | | 1,621,605 | | | | 1,086,157 | |
| | | | | | | | | | | | |
Total revenues | | | 771,828,320 | | | | 739,026,537 | | | | 688,423,020 | |
| | | | | | | | | | | | |
Expenses | | | | | | | | | | | | |
Net losses and loss expenses (includes affiliated reinsurance of $140,113,591, $114,865,113 and $102,124,332 - see note 3) | | | 576,458,420 | | | | 487,268,054 | | | | 423,315,903 | |
Amortization of deferred policy acquisition costs | | | 120,964,000 | | | | 115,065,000 | | | | 107,876,000 | |
Other underwriting expenses | | | 113,270,131 | | | | 116,538,431 | | | | 108,458,742 | |
Policyholder dividends | | | 5,353,023 | | | | 5,014,624 | | | | 4,373,377 | |
Interest | | | 2,302,082 | | | | 1,593,437 | | | | 1,657,647 | |
Other, net | | | 1,717,513 | | | | 1,432,529 | | | | 1,412,944 | |
| | | | | | | | | | | | |
Total expenses | | | 820,065,169 | | | | 726,912,075 | | | | 647,094,613 | |
| | | | | | | | | | | | |
(Loss) income before income tax (benefit) expense | | | (48,236,849 | ) | | | 12,114,462 | | | | 41,328,407 | |
Income tax (benefit) expense (includes ($104,841), $1,939,787 and $883,951 income tax (benefit) expense from reclassification items) | | | (15,476,509 | ) | | | 4,998,362 | | | | 10,527,270 | |
| | | | | | | | | | | | |
Net (loss) income | | $ | (32,760,340 | ) | | $ | 7,116,100 | | | $ | 30,801,137 | |
| | | | | | | | | | | | |
Basic (loss) earnings per common share: | | | | | | | | | | | | |
Class A common stock | | $ | (1.18 | ) | | $ | 0.27 | | | $ | 1.19 | |
| | | | | | | | | | | | |
Class B common stock | | $ | (1.09 | ) | | $ | 0.22 | | | $ | 1.06 | |
| | | | | | | | | | | | |
Diluted (loss) earnings per common share: | | | | | | | | | | | | |
Class A common stock | | $ | (1.18 | ) | | $ | 0.26 | | | $ | 1.16 | |
| | | | | | | | | | | | |
Class B common stock | | $ | (1.09 | ) | | $ | 0.22 | | | $ | 1.06 | |
| | | | | | | | | | | | |
Statements of Comprehensive (Loss) Income | | | | | | | | | | | | |
Net (loss) income | | $ | (32,760,340 | ) | | $ | 7,116,100 | | | $ | 30,801,137 | |
| | | | | | | | | | | | |
Other comprehensive (loss) income, net of tax | | | | | | | | | | | | |
Unrealized (loss) gain on securities: | | | | | | | | | | | | |
Unrealized holding (loss) gain arising during the period, net of income tax (benefit) expense of ($1,865,948), $1,964,385 and ($746,518) | | | (7,019,532 | ) | | | 3,811,151 | | | | (1,386,391 | ) |
Reclassification adjustment for losses (gains) included in net (loss) income, net of income tax (benefit) expense of ($104,841), $1,939,787 and $883,951 | | | 394,403 | | | | (3,765,468 | ) | | | (1,641,624 | ) |
| | | | | | | | | | | | |
Other comprehensive (loss) income | | | (6,625,129 | ) | | | 45,683 | | | | (3,028,015 | ) |
| | | | | | | | | | | | |
Comprehensive (loss) income | | $ | (39,385,469 | ) | | $ | 7,161,783 | | | $ | 27,773,122 | |
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2021
| | | 2020
| | | 2019
| |
| Statements of Income | | | | | | | | | |
| Revenues | | | | | | | | | |
Net premiums earned (includes affiliated reinsurance of $212,591,341, $192,861,276 and $204,708,630 - see note 3) | | $ | 776,015,201 | | | $ | 742,040,339 | | | $ | 756,078,400 | |
| Investment income, net of investment expenses | | | 31,125,631 | | | | 29,504,466 | | | | 29,514,955 | |
| Installment payment fees | | | 2,416,873 | | | | 3,063,097 | | | | 4,134,749 | |
| Lease income | | | 430,800 | | | | 434,089 | | | | 443,750 | |
Net investment gains (includes $382,602, $572,106 and $147,236 accumulated other comprehensive income reclassification) | | | 6,477,286 | | | | 2,777,919 | | | | 21,984,617 | |
| Equity in earnings of Donegal Financial Services Corporation | | | 0 | | | | 0 | | | | 295,000 | |
| Total revenues | | | 816,465,791 | | | | 777,819,910 | | | | 812,451,471 | |
| Expenses | | | | | | | | | | | | |
Net losses and loss expenses (includes affiliated reinsurance of $131,367,599, $87,374,791 and $103,218,679 - see note 3) | | | 520,709,542 | | | | 459,764,293 | | | | 506,387,664 | |
| Amortization of deferred policy acquisition costs | | | 128,733,000 | | | | 119,072,000 | | | | 122,443,000 | |
| Other underwriting expenses | | | 129,367,893 | | | | 125,862,651 | | | | 114,561,741 | |
| Policyholder dividends | | | 5,198,515 | | | | 7,394,310 | | | | 8,978,406 | |
| Interest | | | 895,605 | | | | 1,196,406 | | | | 1,579,299 | |
| Other, net | | | 1,222,728 | | | | 1,257,747 | | | | 1,420,331 | |
| Total expenses | | | 786,127,283 | | | | 714,547,407 | | | | 755,370,441 | |
| Income before income tax expense | | | 30,338,508 | | | | 63,272,503 | | | | 57,081,030 | |
Income tax expense (includes $80,346, $120,142 and $30,920 income tax expense from reclassification items) | | | 5,084,334 | | | | 10,457,251 | | | | 9,929,286 | |
| Net income | | $ | 25,254,174 | | | $ | 52,815,252 | | | $ | 47,151,744 | |
| Basic earnings per common share: | | | | | | | | | | | | |
| Class A common stock | | $ | 0.83 | | | $ | 1.84 | | | $ | 1.68 | |
| Class B common stock | | $ | 0.74 | | | $ | 1.65 | | | $ | 1.51 | |
| Diluted earnings per common share: | | | | | | | | | | | | |
| Class A common stock | | $ | 0.83 | | | $ | 1.83 | | | $ | 1.67 | |
| Class B common stock | | $ | 0.74 | | | $ | 1.65 | | | $ | 1.51 | |
| Statements of Comprehensive Income | | | | | | | | | | | | |
| Net income | | $ | 25,254,174 | | | $ | 52,815,252 | | | $ | 47,151,744 | |
| Other comprehensive (loss) income, net of tax | | | | | | | | | | | | |
| Unrealized (loss) gain on securities: | | | | | | | | | | | | |
Unrealized holding (loss) gain arising during the period, net of income tax (benefit) expense of ($2,008,078), $2,944,892 and $3,947,082 | | | (7,544,805 | ) | | | 11,078,406 | | | | 14,848,545 | |
Reclassification adjustment for gains included in net income, net of income tax expense of $80,346, $120,142 and $30,920 | | | (302,256 | ) | | | (451,964 | ) | | | (116,316 | ) |
| Other comprehensive (loss) income | | | (7,847,061 | ) | | | 10,626,442 | | | | 14,732,229 | |
| Comprehensive income | | $ | 17,407,113 | | | $ | 63,441,694 | | | $ | 61,883,973 | |
See accompanying notes to consolidated financial statements.
-56-
Consolidated Statements of Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | Additional
Paid-In
Capital | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Retained
Earnings | | | Treasury
Stock | | | Total
Stockholders’
Equity | |
| | | Class A
Shares | | | Class B
Shares | | | Class A
Amount | | | Class B
Amount | |
Balance, January 1, 2016 | | | 23,501,805 | | | | 5,649,240 | | | $ | 235,018 | | | $ | 56,492 | | | $ | 219,525,301 | | | $ | 773,744 | | | $ | 229,024,370 | | | $ | (41,226,357 | ) | | $ | 408,388,568 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock (stock compensation plans) | | | 149,105 | | | | | | | | 1,491 | | | | | | | | 2,118,471 | | | | | | | | | | | | | | | | 2,119,962 | |
Stock-based compensation | | | 832,467 | | | | | | | | 8,325 | | | | | | | | 14,522,217 | | | | | | | | | | | | | | | | 14,530,542 | |
Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 30,801,137 | | | | | | | | 30,801,137 | |
Cash dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | (14,196,874 | ) | | | | | | | (14,196,874 | ) |
Grant of stock options | | | | | | | | | | | | | | | | | | | 685,720 | | | | | | | | (685,720 | ) | | | | | | | — | |
Other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | (3,028,015 | ) | | | | | | | | | | | (3,028,015 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2016 | | | 24,483,377 | | | | 5,649,240 | | | $ | 244,834 | | | $ | 56,492 | | | $ | 236,851,709 | | | $ | (2,254,271 | ) | | $ | 244,942,913 | | | $ | (41,226,357 | ) | | $ | 438,615,320 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock (stock compensation plans) | | | 157,085 | | | | | | | | 1,571 | | | | | | | | 2,486,762 | | | | | | | | | | | | | | | | 2,488,333 | |
Stock-based compensation | | | 924,019 | | | | | | | | 9,240 | | | | | | | | 15,462,479 | | | | | | | | | | | | | | | | 15,471,719 | |
Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,116,100 | | | | | | | | 7,116,100 | |
Cash dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | (15,041,051 | ) | | | | | | | (15,041,051 | ) |
Grant of stock options | | | | | | | | | | | | | | | | | | | 600,608 | | | | | | | | (600,608 | ) | | | | | | | — | |
Reclassification of tax effects | | | | | | | | | | | | | | | | | | | | | | | (475,687 | ) | | | 475,687 | | | | | | | | — | |
Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 45,683 | | | | | | | | | | | | 45,683 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2017 | | | 25,564,481 | | | | 5,649,240 | | | $ | 255,645 | | | $ | 56,492 | | | $ | 255,401,558 | | | $ | (2,684,275 | ) | | $ | 236,893,041 | | | $ | (41,226,357 | ) | | $ | 448,696,104 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock (stock compensation plans) | | | 174,899 | | | | | | | | 1,749 | | | | | | | | 2,469,220 | | | | | | | | | | | | | | | | 2,470,969 | |
Stock-based compensation | | | 79,961 | | | | | | | | 800 | | | | | | | | 2,853,111 | | | | | | | | | | | | | | | | 2,853,911 | |
Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | (32,760,340 | ) | | | | | | | (32,760,340 | ) |
Cash dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | (15,765,614 | ) | | | | | | | (15,765,614 | ) |
Grant of stock options | | | | | | | | | | | | | | | | | | | 534,534 | | | | | | | | (534,534 | ) | | | | | | | — | |
Reclassification of equity unrealized gains | | | | | | | | | | | | | | | | | | | | | | | (4,918,655 | ) | | | 4,918,655 | | | | | | | | — | |
Other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | (6,625,129 | ) | | | | | | | | | | | (6,625,129 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2018 | | | 25,819,341 | | | | 5,649,240 | | | $ | 258,194 | | | $ | 56,492 | | | $ | 261,258,423 | | | $ | (14,228,059 | ) | | $ | 192,751,208 | | | $ | (41,226,357 | ) | | $ | 398,869,901 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | |
| | | | | | | | | | | | | |
| | | Class A Shares | | | Class B Shares | | | Class A Amount | | | Class B Amount | | | Additional Paid-In Capital | | | Accumulated Other Comprehensive (Loss) Income | | | Retained Earnings | | | Treasury Stock | | | Total Stockholders’ Equity | |
Balance, January 1, 2019 | | | 25,819,341 | | | | 5,649,240 | | | $ | 258,194 | | | $ | 56,492 | | | $ | 261,258,423 | | | $ | (14,228,059 | ) | | $ | 192,751,208 | | | $ | (41,226,357 | ) | | $ | 398,869,901 | |
| Issuance of common stock (stock compensation plans) | | | 167,096 | | | | | | | | 1,671 | | | | | | | | 2,225,527 | | | | | | | | | | | | | | | | 2,227,198 | |
| Stock-based compensation | | | 217,498 | | | | | | | | 2,175 | | | | | | | | 4,251,665 | | | | | | | | | | | | | | | | 4,253,840 | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 47,151,744 | | | | | | | | 47,151,744 | |
| Cash dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | (16,219,393 | ) | | | | | | | (16,219,393 | ) |
| Grant of stock options | | | | | | | | | | | | | | | | | | | 415,986 | | | | | | | | (415,986 | ) | | | | | | | 0 | |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 14,732,229 | | | | | | | | | | | | 14,732,229 | |
Balance, December 31, 2019 | | | 26,203,935 | | | | 5,649,240 | | | $ | 262,040 | | | $ | 56,492 | | | $ | 268,151,601 | | | $ | 504,170 | | | $ | 223,267,573 | | | $ | (41,226,357 | ) | | $ | 451,015,519 | |
| Issuance of common stock (stock compensation plans) | | | 153,233 | | | | | | | | 1,532 | | | | | | | | 2,057,504 | | | | | | | | | | | | | | | | 2,059,036 | |
| Stock-based compensation | | | 1,294,606 | | | | | | | | 12,946 | | | | | | | | 18,582,085 | | | | | | | | | | | | | | | | 18,595,031 | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 52,815,252 | | | | | | | | 52,815,252 | |
| Cash dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | (17,337,160 | ) | | | | | | | (17,337,160 | ) |
| Grant of stock options | | | | | | | | | | | | | | | | | | | 358,377 | | | | | | | | (358,377 | ) | | | | | | | 0 | |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 10,626,442 | | | | | | | | | | | | 10,626,442 | |
Balance, December 31, 2020 | | | 27,651,774 | | | | 5,649,240 | | | $ | 276,518 | | | $ | 56,492 | | | $ | 289,149,567 | | | $ | 11,130,612 | | | $ | 258,387,288 | | | $ | (41,226,357 | ) | | $ | 517,774,120 | |
| Issuance of common stock (stock compensation plans) | | | 157,783 | | | | | | | | 1,578 | | | | | | | | 2,161,142 | | | | | | | | | | | | | | | | 2,162,720 | |
| Stock-based compensation | | | 946,646 | | | | | | | | 9,466 | | | | | | | | 13,260,855 | | | | | | | | | | | | | | | | 13,270,321 | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 25,254,174 | | | | | | | | 25,254,174 | |
| Cash dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | (19,578,187 | ) | | | | | | | (19,578,187 | ) |
| Grant of stock options | | | | | | | | | | | | | | | | | | | 317,917 | | | | | | | | (317,917 | ) | | | | | | | 0 | |
| Other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | (7,847,061 | ) | | | | | | | | | | | (7,847,061 | ) |
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 | |
See accompanying notes to consolidated financial statements.
-57-
Consolidated Statements of Cash Flows
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2018 | | | 2017 | | | 2016 | |
Cash Flows from Operating Activities: | | | | | | | | | | | | |
Net (loss) income | | $ | (32,760,340 | ) | | $ | 7,116,100 | | | $ | 30,801,137 | |
| | | | | | | | | | | | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation, amortization and othernon-cash items | | | 6,609,632 | | | | 6,109,869 | | | | 6,587,282 | |
Net investment losses (gains) | | | 4,801,509 | | | | (5,705,255 | ) | | | (2,525,575 | ) |
Equity in earnings of Donegal Financial Services Corporation | | | (2,693,962 | ) | | | (1,621,605 | ) | | | (1,086,157 | ) |
Changes in Assets and Liabilities: | | | | | | | | | | | | |
Losses and loss expenses | | | 137,993,497 | | | | 70,007,137 | | | | 28,459,481 | |
Unearned premiums | | | 3,072,065 | | | | 37,401,313 | | | | 36,562,025 | |
Accrued expenses | | | (2,591,630 | ) | | | (212,915 | ) | | | 5,786,216 | |
Premiums receivable | | | 3,704,182 | | | | (1,016,765 | ) | | | (18,122,256 | ) |
Deferred policy acquisition costs | | | (325,267 | ) | | | (3,980,664 | ) | | | (4,200,808 | ) |
Deferred income taxes | | | (4,179,805 | ) | | | 11,889,970 | | | | 2,030,865 | |
Reinsurance receivable | | | (45,026,502 | ) | | | (35,314,555 | ) | | | (3,299,895 | ) |
Accrued investment income | | | (8,078 | ) | | | (257,608 | ) | | | (304,316 | ) |
Amounts due to affiliate | | | 3,560,172 | | | | 16,519,278 | | | | (12,762,087 | ) |
Reinsurance balances payable | | | (233,966 | ) | | | (253,369 | ) | | | 889,122 | |
Prepaid reinsurance premiums | | | (347,136 | ) | | | (10,777,146 | ) | | | (10,732,990 | ) |
Current income taxes | | | (8,097,499 | ) | | | (9,826,855 | ) | | | 379,406 | |
Other, net | | | 299,262 | | | | (113,482 | ) | | | (22,628 | ) |
Dividends received from Donegal Financial Services Corporation | | | — | | | | 1,036,750 | | | | 1,591,300 | |
| | | | | | | | | | | | |
Net adjustments | | | 96,536,474 | | | | 73,884,098 | | | | 29,228,985 | |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 63,776,134 | | | | 81,000,198 | | | | 60,030,122 | |
| | | | | | | | | | | | |
Cash Flows from Investing Activities: | | | | | | | | | | | | |
Purchases of fixed maturities: | | | | | | | | | | | | |
Held to maturity | | | (48,969,776 | ) | | | (51,049,152 | ) | | | (44,907,210 | ) |
Available for sale | | | (116,961,667 | ) | | | (138,675,907 | ) | | | (161,873,868 | ) |
Purchases of equity securities | | | (11,303,361 | ) | | | (17,033,093 | ) | | | (15,222,724 | ) |
Sales of fixed maturities: | | | | | | | | | | | | |
Available for sale | | | 13,202,367 | | | | 10,081,785 | | | | 55,731,299 | |
Maturity of fixed maturities: | | | | | | | | | | | | |
Held to maturity | | | 13,184,665 | | | | 20,577,326 | | | | 19,488,644 | |
Available for sale | | | 105,266,805 | | | | 99,544,479 | | | | 82,586,588 | |
Sales of equity securities | | | 13,779,330 | | | | 20,880,814 | | | | 9,201,657 | |
Net purchases of property and equipment | | | (105,525 | ) | | | (1,090,726 | ) | | | (384,207 | ) |
Net (purchases) sales of short-term investments | | | (5,698,845 | ) | | | (1,678,908 | ) | | | 4,061,475 | |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (37,606,007 | ) | | | (58,443,382 | ) | | | (51,318,346 | ) |
| | | | | | | | | | | | |
Cash Flows from Financing Activities: | | | | | | | | | | | | |
Issuance of common stock | | | 3,249,849 | | | | 15,511,457 | | | | 13,822,228 | |
Cash dividends paid | | | (15,658,950 | ) | | | (14,822,052 | ) | | | (14,085,934 | ) |
Payments on lines of credit | | | — | | | | (10,000,000 | ) | | | (12,000,000 | ) |
Borrowings under lines of credit | | | 1,000,000 | | | | — | | | | — | |
| | | | | | | | | | | | |
Net cash used in financing activities | | | (11,409,101 | ) | | | (9,310,595 | ) | | | (12,263,706 | ) |
| | | | | | | | | | | | |
Net increase (decrease) in cash | | | 14,761,026 | | | | 13,246,221 | | | | (3,551,930 | ) |
Cash at beginning of year | | | 37,833,435 | | | | 24,587,214 | | | | 28,139,144 | |
| | | | | | | | | | | | |
Cash at end of year | | $ | 52,594,461 | | | $ | 37,833,435 | | | $ | 24,587,214 | |
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2021
| | | 2020
| | | 2019
| |
| Cash Flows from Operating Activities: | | | | | | | | | |
| Net income | | $ | 25,254,174 | | | $ | 52,815,252 | | | $ | 47,151,744 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation, amortization and other non-cash items | | | 5,837,809 | | | | 6,721,621 | | | | 5,573,074 | |
| Net investment gains | | | (6,477,286 | ) | | | (2,777,919 | ) | | | (21,984,617 | ) |
| Equity in earnings of Donegal Financial Services Corporation | | | 0 | | | | 0 | | | | (295,000 | ) |
| Changes in Assets and Liabilities: | | | | | | | | | | | | |
| Losses and loss expenses | | | 115,612,864 | | | | 92,333,588 | | | | 55,008,625 | |
| Unearned premiums | | | 35,768,824 | | | | 27,042,113 | | | | 3,618,879 | |
| Accrued expenses | | | (25,086,539 | ) | | | 661,454 | | | | 3,011,598 | |
| Premiums receivable | | | 733,752 | | | | (3,863,383 | ) | | | (9,030,699 | ) |
| Deferred policy acquisition costs | | | (8,871,415 | ) | | | 127,901 | | | | 1,330,268 | |
| Deferred income taxes | | | 1,095,306 | | | | 6,448 | | | | 649,928 | |
| Reinsurance receivable | | | (46,502,159 | ) | | | (41,887,382 | ) | | | (23,652,403 | ) |
| Accrued investment income | | | (278,092 | ) | | | (870,850 | ) | | | (504,830 | ) |
| Amounts due to affiliate | | | (12,216,212 | ) | | | 224,324 | | | | (805,369 | ) |
| Reinsurance balances payable | | | 712,582 | | | | 1,117,439 | | | | (1,766,109 | ) |
| Prepaid reinsurance premiums | | | (7,517,509 | ) | | | (26,942,566 | ) | | | (7,095,990 | ) |
| Current income taxes | | | (2,201,569 | ) | | | (3,174,200 | ) | | | 19,117,435 | |
| Other, net | | | 867,438 | | | | (399,440 | ) | | | 6,033,243 | |
| Net adjustments | | | 51,477,794 | | | | 48,319,148 | | | | 29,208,033 | |
| Net cash provided by operating activities | | | 76,731,968 | | | | 101,134,400 | | | | 76,359,777 | |
| Cash Flows from Investing Activities: | | | | | | | | | | | | |
| Purchases of fixed maturities: | | | | | | | | | | | | |
| Held to maturity | | | (125,630,220 | ) | | | (157,048,527 | ) | | | (96,724,391 | ) |
| Available for sale | | | (163,593,018 | ) | | | (176,500,255 | ) | | | (165,989,508 | ) |
| Purchases of equity securities | | | (25,354,790 | ) | | | (6,964,092 | ) | | | (20,722,416 | ) |
| Sales of fixed maturities: | | | | | | | | | | | | |
| Available for sale | | | 6,281,963 | | | | 22,172,930 | | | | 19,527,658 | |
| Maturity of fixed maturities: | | | | | | | | | | | | |
| Held to maturity | | | 44,211,076 | | | | 47,448,424 | | | | 24,460,749 | |
| Available for sale | | | 165,867,395 | | | | 172,084,542 | | | | 119,113,273 | |
| Sales of equity securities | | | 26,585,663 | | | | 6,091,288 | | | | 40,465,748 | |
| Net sales (purchases) of property and equipment | | | 1,224,806 | | | | (89,702 | ) | | | (149,603 | ) |
| Sale of investment in Donegal Financial Services Corporation | | | 0 | | | | 0 | | | | 33,922,773 | |
| Net sales (purchases) of short-term investments | | | 8,207,814 | | | | (6,869,933 | ) | | | 2,718,538 | |
| Net cash used in investing activities | | | (62,199,311 | ) | | | (99,675,325 | ) | | | (43,377,179 | ) |
| Cash Flows from Financing Activities: | | | | | | | | | | | | |
| Issuance of common stock | | | 14,181,702 | | | | 19,292,324 | | | | 4,834,514 | |
| Cash dividends paid | | | (19,099,220 | ) | | | (16,976,093 | ) | | | (16,092,643 | ) |
| Payments on subordinated debentures | | | (5,000,000 | ) | | | 0 | | | | 0 | |
| Payments on lines of credit | | | (50,000,000 | ) | | | 0 | | | | (25,000,000 | ) |
| Borrowings under lines of credit | | | 0 | | | | 50,000,000 | | | | 0 | |
| Net cash (used in) provided by financing activities | | | (59,917,518 | ) | | | 52,316,231 | | | | (36,258,129 | ) |
| Net (decrease) increase in cash | | | (45,384,861 | ) | | | 53,775,306 | | | | (3,275,531 | ) |
| Cash at beginning of year | | | 103,094,236 | | | | 49,318,930 | | | | 52,594,461 | |
| Cash at end of year | | $ | 57,709,375 | | | $ | 103,094,236 | | | $ | 49,318,930 | |
See accompanying notes to consolidated financial statements.
-58-
Notes to Consolidated Financial Statements
1—
1 - Summary of Significant Accounting Policies
Organization and Business
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”), Le Mars Insurance Company (“Le Mars”), the Peninsula Insurance Group (“Peninsula”), which consists of Peninsula Indemnity Company and The Peninsula Insurance Company Sheboygan Falls Insurance Company (“Sheboygan”) and Michigan Insurance Company (“MICO”), and affiliates write personal and commercial lines of property and casualty coverages exclusively through a network of independent insurance agents in certainMid-Atlantic, Midwestern, New England, Southern and SouthernSouthwestern states.
At December 31,
2018,2021 we
also owned 48.2% of the outstanding stock of Donegal Financial Services Corporation (“DFSC”), a grandfathered unitary savings and loan holding company that owns Union Community Bank (“UCB”), a state savings bank. UCB has 13 banking offices, substantially all of which are located in Lancaster County, Pennsylvania. Donegal Mutual owned the remaining 51.8% of the outstanding stock of DFSC. In June 2018, we and Donegal Mutual entered into an agreement to sell DFSC to Northwest Bancshares, Inc. (“Northwest”). We refer you to Note 22—Subsequent Event for information regarding the consummation of the sale of DFSC in March 2019.We have fourhad 3 segments: our investment function, our personal lines of insurance, our commercial lines of insurance and our investment in DFSC. The personal lines products of our insurance subsidiaries consist primarily of homeowners and private passenger automobile policies.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 December 31,
2018,2021, Donegal Mutual held approximately
43%41% of our outstanding Class A common stock and approximately 84% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately
72%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, 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 two companiesunderwriting pool, their insurance business and each company receives an allocated percentagethe underwriting pool, acting through Donegal Mutual, then allocates 80% of the pooled business.business to Atlantic States. Thus, Donegal Mutual and Atlantic States has an 80% share of the underwriting results of the pooled business andin proportion to their respective participation in the underwriting pool.
In addition, Donegal Mutual has a 20% share100% 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.
Donegal Mutual completed the merger of
Mountain States Mutual Casualty Company, or Mountain States, with and into Donegal Mutual effective May 25, 2017. Donegal Mutual was the surviving company in the merger, and Mountain States’ insurance subsidiaries, Mountain States Indemnity Company and Mountain States Commercial Insurance Company (collectively, the “Mountain States insurance subsidiaries”), became insurance subsidiaries of Donegal Mutual upon completion of the merger. Upon completion of the merger, Donegal Mutual assumed all of the policy obligations of Mountain States and began to market its products together with the Mountain States insurance subsidiaries as the Mountain States Insurance Group in 4 Southwestern states. Donegal Mutual also entered into a 100% quota-share reinsurance agreement with the Mountain States insurance subsidiaries on the merger date. Beginning with policies effective in 2021, Donegal Mutual began to place the business of the Mountain States Insurance Group into the underwriting pool. As a result, our consolidated financial results through December 31, 2020 excluded the results of the
pooled business.Mountain States Insurance Group operations in those Southwestern states.
We and Donegal Mutual sold Donegal Financial Services Corporation (“DFSC”) to Northwest Bancshares, Inc. (“Northwest”) on March 8, 2019, resulting in proceeds valued at approximately $85.8 million in a combination of cash and Northwest common stock. DFSC was a grandfathered unitary savings and loan holding company that owned Union Community Bank, a state savings bank. Immediately prior to the closing of the merger, DFSC paid a dividend of approximately $29.2 million to us and Donegal Mutual. As the owner of 48.2% of DFSC’s common stock, we received a dividend payment from DFSC of approximately $14.1 million and consideration from Northwest that included a combination of cash in the amount of $20.5 million and Northwest common stock with a fair value at the closing date of $20.9 million. We recorded a gain of $12.7 million from the sale of DFSC in our results of operations during 2019. We sold the Northwest common stock that we received as part of the consideration during 2019. This transaction represented the culmination of a banking strategy that began with the formation of DFSC in 2000.
Effective December 1, 2019, our insurance subsidiaries Le Mars Insurance Company (“Le Mars”) and Sheboygan Falls Insurance Company (“Sheboygan Falls”) merged with and into Atlantic States Insurance Company (the “Mergers”). As a result of the Mergers, the separate corporate existences of Le Mars and Sheboygan Falls ceased and Atlantic States Insurance Company (“Atlantic States”) continued as the surviving insurance company. Atlantic States placed the business of Le Mars and Sheboygan Falls, as their policies renewed subsequent to the effective date of the Mergers, 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,
asthe underwriting pool homogenizes the risk characteristics of all business
that Donegal Mutual and Atlantic States write
directly are homogenized withindirectly. The business Atlantic States derives from the underwriting pool
Donegal Mutual and Atlantic States share the underwriting results in proportion to their respective participation in the pool. Pooled business represents
the predominanta significant percentage of
the net underwriting activity of both Donegal Mutual and Atlantic States.our total consolidated revenues. We refer to Note
3—3 - Transactions with Affiliates for more information regarding the pooling agreement.
In July 2018, we consolidated the branch office operations of Peninsula into our home office operations to achieve economies of scale and enhance service levels for policyholders of Peninsula. We recorded a restructuring charge for employee termination costs associated with the Peninsula consolidation of approximately $1.9 million. We paid approximately $1.5 million of these costs in 2018 and had an accrual of approximately $390,000 remaining at December 31, 2018. We entered into a definitive purchase agreement for the sale of Peninsula’s branch office in 2018. The sale was completed in January 2019, and we received net proceeds of $1.2 million. We recorded an impairment charge of $1.1 million in other expenses in 2018 related to this real estate transaction and included the $1.2 million fair value of the real estate we held for sale in other assets at December 31, 2018.
-59-
Our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), include our accounts and those of our wholly owned subsidiaries. We have eliminated all significant inter-company accounts and transactions in consolidation. The terms “we,” “us,” “our” or the “Company” as we use them in the notes to our consolidated financial statements refer to the consolidated entity.
In preparing our consolidated financial statements, our management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet and revenues and expenses for the period then ended. Actual results could differ significantly from those estimates.
We make estimates and assumptions that could have a significant effect on amounts and disclosures we report in our consolidated financial statements. The most significant estimates relate to our insurance subsidiaries’ reserves 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 provided. We regularly review our methods for making these estimates as well as the continuing appropriateness of the estimated amounts, and we reflect any adjustment we consider necessary in our current results of operations.
We have made certain reclassifications in our prior period financial statements to conform to the current year presentation.
We classify our debt securities into the following categories:
Held to
Maturity—Maturity - Debt securities that we have the positive intent and ability to hold to maturity; reported at amortized cost.
Available for
Sale—Sale - Debt securities not classified as held to maturity; reported at fair value, with unrealized gains and losses excluded from income and reported as a separate component of stockholders’ equity (net of tax effects).
Short-term investments are carried at amortized cost, which approximates fair value.
We make estimates concerning the valuation of our investments and the recognition of other-than-temporary declines in the value of our investments. For equity securities, we measure investments at fair value and
beginning January 1, 2018, we recognize changes in fair value in our results of operations. With respect to a debt security that is in an unrealized loss position, we first assess if we intend to sell the debt security. 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 an 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. We determine whether a credit loss has occurred by comparing the amortized cost of the debt security to the present value of the cash flows we expect to collect. If we expect a cash flow shortfall, we consider that a credit loss has occurred. If we determine that a credit loss has occurred, we consider the impairment to be other than temporary. We then recognize the amount of the impairment loss related to the credit loss in our results of operations, and we recognize the remaining portion of the impairment loss in our other comprehensive income, net of applicable taxes. 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, company or geographic events that have negatively impacted the value of a security and rating agency downgrades.
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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 investment gains and losses using the specific identification method.
We amortize premiums and discounts for mortgage-backed debt securities using anticipated prepayments.
We account for our investment in affiliate using the equity method of accounting. Under the equity method, we record our investment at cost, with adjustments for our share of the affiliate’s earnings and losses as well as changes in the affiliate’s equity due to unrealized gains and losses.
Fair Values of Financial Instruments
We use the following methods and assumptions in estimating our fair value disclosures:
Investments—
Investments - 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 we could realize 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 for our fixed maturity and equity investments. We generally obtain two prices per security. The 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 determine if the estimates we obtain are representative of fair values based upon the general knowledge of our investment personnel 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 type and recent trading activity. Our investment personnel review documentation with respect to the pricing services’ pricing methodology that they obtain periodically to determine if the primary pricing sources, market inputs and pricing frequency for various security types are reasonable. We refer to Note
5—5 - Fair Value Measurements for more information regarding our methods and assumptions in estimating fair values.
Cash and Short-Term
Investments—Investments - The carrying amounts we report in the balance sheet for these instruments approximate their fair values.
Premiums and Reinsurance Receivables and
Payables—Payables - The carrying amounts we report in the balance sheet for these instruments related to premiums and paid losses and loss expenses approximate their fair values.
Subordinated
Debentures—Debentures - The carrying amounts we report in the balance sheet for these instruments approximate their fair values.
Our insurance subsidiaries recognize insurance premiums as income over the terms of the policies they issue. Our insurance subsidiaries calculate unearned premiums on a daily
pro-rata basis.
We defer our insurance subsidiaries’ policy acquisition costs, consisting primarily of commissions, premium taxes and certain other underwriting costs, reduced by ceding commissions,
that vary with and relaterelated directly to the
productionsuccessful acquisition of
business.new or renewal insurance contracts. We amortize these deferred policy acquisition costs over the period in which our insurance subsidiaries earn the premiums. The method we follow in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss expenses and certain other costs we expect to incur as our insurance subsidiaries earn the premium. Estimates in the calculation of policy acquisition costs have not shown material variability because of uncertainties in applying accounting principles or as a result of sensitivities to changes in key assumptions.
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We report property and equipment at depreciated cost that we compute using the straight-line method based upon estimated useful lives of the assets.
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 2021 due to a number of factors, including supply chain disruption, higher used automobile values, increases in the cost of replacement automobile parts and rising labor rates. These trend changes give rise to greater uncertainty as to the pattern of future loss
settlements on bodily injury claims.settlements. Related uncertainties regarding future trends include
social inflation, availability and cost of building materials, availability of skilled labor, the rate of plaintiff attorney involvement in claims and the cost of medical technologies and
procedures and changes in the utilization of medical procedures. Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded.
Our insurance subsidiaries seek to enhance their underwriting results by carefully selecting the product lines they underwrite. Our insurance subsidiaries’ personal lines products primarily include standard and preferred risks in private passenger automobile and homeowners lines. Our insurance subsidiaries’ commercial lines products primarily include business offices, wholesalers, service providers, contractors, artisans and light manufacturing operations. Our insurance subsidiaries have limited exposure to asbestos and other environmental liabilities. Our insurance subsidiaries write no medical malpractice liability risks.
We currently file a consolidated federal income tax return that includes us and our insurance subsidiaries.
We account for income taxes using the asset and liability method. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at enacted tax rates we expect to be in effect when we realize or settle such amounts.
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Our objective is to earn competitive returns by investing in a diversified portfolio of securities. Our portfolio of fixed maturity securities and, to a lesser extent, short-term investments is subject to credit risk. We define this risk as the potential loss in fair value resulting from adverse changes in the borrower’s ability to repay its debt to us. We manage this risk by performing an analysis of prospective investments and through regular reviews of our portfolio by our investment personnel. We also limit the amount of our total investment portfolio that we invest in any one security.
Our insurance subsidiaries provide property and liability insurance coverages through independent insurance agencies located throughout their operating areas. Our insurance subsidiaries bill the majority of this business directly to their policyholders, although our insurance subsidiaries bill a portion of their commercial business through their agents, to whom they extend credit in the normal course of business.
Our insurance subsidiaries have reinsurance agreements with Donegal Mutual and with a number of major unaffiliated reinsurers.
Reinsurance Accounting and Reporting
Our insurance subsidiaries rely upon reinsurance agreements to limit their maximum net loss from large single risks or risks in concentrated areas and to increase their capacity to write insurance. Reinsurance does not relieve our insurance subsidiaries from liability to their respective policyholders. To the extent that a reinsurer cannot pay losses for which it is liable under the terms of a reinsurance agreement with one or more of our insurance subsidiaries, our insurance subsidiaries retain continued liability for such losses. However, in an effort to reduce the risk of
non-payment, our insurance subsidiaries require all of their reinsurers to have an A.M. Best rating of
A- or better or, with respect to foreign reinsurers, to have a financial condition that, in the opinion of our management, is equivalent to a company with an A.M. Best rating of
A- or better. We refer to Note
10—10 - Reinsurance for more information regarding the reinsurance agreements of our insurance subsidiaries.
We measure all share-based payments to our directors and the directors and employees of our subsidiaries and affiliates, including grants of stock options, using a fair-value-based method and record such expense in our results of operations. In determining the expense we record for stock options we grant to our directors and the 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, expected term, dividend yield and expected volatility.
In
2018, 20172021, 2020 and
2016,2019, we realized
$25,938, $873,515$438,850, $302,901 and
$788,700,$64,765, respectively, in tax benefits upon the exercise of stock options.
We calculate basic earnings per share by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
We have two classes of common stock, which we refer to as Class A common stock and Class B common stock. Our Class A common stock is entitled to the declaration and payment of cash dividends that are at least 10% higher than those we declare and pay on our Class B common stock. Accordingly, we use the
two-class method for the computation of 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 declared and an allocation of remaining undistributed earnings using a participation percentage that reflects the dividend rights of each class.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the underlying fair value of acquired entities. When completing acquisitions, we seek also to identify separately identifiable intangible assets that we have acquired. We assess goodwill and intangible assets with an indefinite useful life for impairment annually. We also assess goodwill and other intangible assets for impairment upon the occurrence of certain events. In making our assessment, we consider a number of factors including operating results, business plans, economic projections, anticipated future cash flows and current market data. Inherent uncertainties exist with respect to these factors and to our judgment in applying them when we make our assessment. Impairment of goodwill and other intangible assets could result from changes in economic and operating conditions in future periods.
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2 - Impact of New Accounting Standards
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued guidance that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. While this guidance replaced most existing GAAP revenue recognition guidance, the scope of the guidance excludes insurance contracts. The new standard was effective on January 1, 2018. The standard permits the use of either the retrospective or the cumulative effect transition method. Because the accounting for insurance contracts is outside of the scope of this standard, the adoption of this guidance did not have a significant impact on our financial position, results of operations or cash flows.In January 2016, the FASB issued guidance that generally requires entities to measure equity investments at fair value and recognize changes in fair value in their results of operations. This guidance also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring entities to perform a qualitative assessment to identify impairment. The FASB issued other disclosure and presentation improvements related to financial instruments within the guidance. The guidance was effective for annual and interim reporting periods beginning after December 15, 2017. As a result of the adoption of this guidance on January 1, 2018, we transferred $4.9 million of net unrealized gains from accumulated other comprehensive income (“AOCI”) to retained earnings. We recognized $1.2 million of gains and $4.4 million of losses on equity securities held at December 31, 2018 in net investment losses for the year ended December 31, 2018.
In February 2016, the FASB issued guidance that requires lessees to recognize leases, including operating leases, on the lessee’s balance sheet, unless a lease is considered a short-term lease. This guidance also requires entities to make new judgments to identify leases. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018 and permits early adoption. Our adoption of this guidance in 2019 will not have a significant impact on our financial position, results of operations or cash flows.
In JuneSeptember 2016, the FASB issued guidance that amends previous guidance on the impairment of financial instruments by adding an impairment model that requires an entity to recognize expected credit losses as an allowance rather than impairments as credit losses are incurred. The intent of this guidance is to reduce complexity and result in a more timely recognition of expected credit losses. TheIn November 2019, the FASB issued guidance isthat delays the effective date for “smaller reporting companies,” as defined in Item 10(f)(1) of Regulation S-K, to annual and interim reporting periods beginning after December 15, 2022 from December 15, 2019. We are a smaller reporting company and are in the process of evaluating the impact of the adoption of this guidance on our financial position, results of operations and cash flows.
In
January 2017,December 2019, the FASB issued guidance that simplifies
the measurement of goodwill by modifying the goodwill impairment test previous guidance required.accounting for income taxes. The guidance
requireseliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an
entity to perform its annual or interim
goodwill impairment test by comparingperiod and the
fair valuerecognition of
a reporting unit with its carrying amount and recognize impairmentdeferred tax liabilities for
the amount by which the reporting unit’s carrying amount exceeds its fair value.outside basis differences. The guidance
iswas effective
January 1, 2021, using the retrospective method or modified retrospective method for
annualcertain changes and
interim reporting periods beginning after December 15, 2019the prospective method for all other changes, and permits early adoption.
We do not expect theOur adoption of this guidance
to have a significant impact on
our financial position, results of operations or cash flows.In February 2018, the FASB issued updated guidance that allows entities to reclassify the stranded tax effects in AOCI resulting from the Tax Cuts and Jobs Act of 2017 (the “TCJA”) from AOCI to retained earnings. Current guidance requires entities to report the effect of a change in tax laws or tax rates on deferred tax balances in income from continuing operations in the accounting period that includes the period of enactment, even if the entities originally charged or credited related income tax effects directly to AOCI. If an entity elects to reclassify the stranded tax effects, the guidance requires the reclassification to include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, related to items in AOCI at the date of the enactment of TCJA. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018 and permits early adoption. We adopted this guidance effective on the December 22, 2017 date of the enactment of the TCJA. The adoption of this guidanceJanuary 1, 2021 did not have a significant impact on our financial position, results of operations or cash flows.
In August 2018, the FASB issued guidance that modifies disclosure requirements related to fair value measurements. The guidance removes the requirements to disclose the amounts of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019 and permits early adoption. We do not expect the adoption of this guidance to have a significant impact on our financial position, results of operations or cash flows.
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3 - Transactions with Affiliates
Our insurance subsidiaries conduct business and have various agreements with Donegal Mutual that we describe in the following subparagraphs:
a. Reinsurance Pooling and Other Reinsurance Arrangements
Atlantic States, our largest insurance subsidiary, and Donegal Mutual have a pooling agreement under which both companies contribute substantially all of their direct written business to the pool and receive an allocated percentage of the pooled underwriting results, excluding certain reinsurance Donegal Mutual assumes from our insurance subsidiaries.
Beginning with policies effective in 2021, Donegal Mutual began to place the business of the Mountain States Insurance Group into the underwriting pool. In addition, Donegal Mutual has a 100% quota-share reinsurance agreement with Southern Mutual Insurance Company, or Southern Mutual, and Donegal Mutual places its assumed business from Southern Mutual into the underwriting pool. 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. The intent of the pooling agreement is to produce more uniform and stable underwriting results from year to year for each pool participant than they would experience individually and to spread the risk of loss between the participants based on each participant’s relative amount of surplus and relative access to capital. Each participant in the pool has at its disposal the capacity of the entire pool, rather than being limited to policy exposures of a size commensurate with its own capital and surplus.
The following amounts represent reinsurance Atlantic States ceded to the pool during
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Premiums earned | | $ | 212,928,238 | | | $ | 200,752,599 | | | $ | 185,444,009 | |
Losses and loss expenses | | | 159,495,489 | | | | 140,015,950 | | | | 115,371,839 | |
Prepaid reinsurance premiums | | | 106,224,424 | | | | 103,991,861 | | | | 95,469,329 | |
Liability for losses and loss expenses | | | 158,081,925 | | | | 136,786,070 | | | | 120,434,535 | |
2019:
| | | 2021
| | | 2020
| | | 2019
| |
| Premiums earned | | $ | 305,729,418 | | | $ | 266,400,636 | | | $ | 218,642,984 | |
| Losses and loss expenses | | | 222,737,225 | | | | 181,205,743 | | | | 173,238,503 | |
| Prepaid reinsurance premiums | | | 152,323,262 | | | | 146,387,565 | | | | 116,189,929 | |
| Liability for losses and loss expenses | | | 274,033,812 | | | | 232,540,607 | | | | 183,326,589 | |
The following amounts represent reinsurance Atlantic States assumed from the pool during
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Premiums earned | | $ | 473,512,781 | | | $ | 451,470,894 | | | $ | 422,985,921 | |
Losses and loss expenses | | | 335,789,280 | | | | 289,503,373 | | | | 240,394,302 | |
Unearned premiums | | | 231,958,181 | | | | 228,988,598 | | | | 214,372,048 | |
Liability for losses and loss expenses | | | 303,546,744 | | | | 252,263,547 | | | | 230,543,393 | |
Until February 1, 2016, Donegal Mutual and Le Mars had a quota-share reinsurance agreement under which Le Mars assumed 100% of the premiums and losses related to certain products Donegal Mutual offered in certain Midwestern states, which provided the availability of complementary products to Le Mars’ commercial accounts. Until October 31, 2012, Donegal Mutual and Southern had a quota-share reinsurance agreement whereby Southern assumed 100% of the premiums and losses related to personal lines products Donegal Mutual offered in Virginia through the use of its automated policy quoting and issuance system. The following amounts represent reinsurance Southern and Le Mars assumed from Donegal Mutual pursuant to the quota-share reinsurance agreements during 2018, 2017 and 2016:
| | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Premiums earned | | $ | — | | | $ | (271 | ) | | $ | (1,512 | ) |
Losses and loss expenses | | | (104,817 | ) | | | (690,268 | ) | | | (378,199 | ) |
Liability for losses and loss expenses | | | 719,573 | | | | 827,193 | | | | 3,222,100 | |
2019:
| | | 2021
| | | 2020
| | | 2019
| |
| Premiums earned | | $ | 573,891,394 | | | $ | 514,172,448 | | | $ | 479,835,362 | |
| Losses and loss expenses | | | 383,455,320 | | | | 309,315,497 | | | | 309,852,141 | |
| Unearned premiums | | | 289,976,879 | | | | 262,004,199 | | | | 237,106,338 | |
| Liability for losses and loss expenses | | | 455,564,733 | | | | 377,530,215 | | | | 322,658,731 | |
Donegal Mutual and MICO
havehad a quota-share reinsurance agreement under which Donegal Mutual
assumesassumed 25% of the premiums and losses related to the business of
MICO.MICO for policies effective through December 31, 2021. Donegal Mutual and MICO terminated this reinsurance agreement on a run-off basis effective January 1, 2022. Donegal Mutual and Peninsula
havehad a quota-share reinsurance agreement under which Donegal Mutual
assumesassumed 100% of the premiums and losses related to the workers’ compensation product line of Peninsula in certain
states. The business Donegal Mutual assumes under the reinsurance agreements is subject to the pooling agreement betweenstates for policies effective through December 31, 2021. Donegal Mutual and
Atlantic States.-65-
Peninsula terminated this reinsurance agreement on a run-off basis effective January 1, 2022. Donegal Mutual places its assumed business from MICO and Peninsula into the underwriting pool.
The following amounts represent reinsurance ceded to Donegal Mutual pursuant to these quota-share reinsurance agreements during
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Premiums earned | | $ | 42,813,929 | | | $ | 42,578,047 | | | $ | 39,917,800 | |
Losses and loss expenses | | | 23,175,456 | | | | 24,978,631 | | | | 21,524,856 | |
Prepaid reinsurance premiums | | | 19,047,084 | | | | 19,827,115 | | | | 19,180,421 | |
Liability for losses and loss expenses | | | 38,434,078 | | | | 36,396,109 | | | | 31,881,756 | |
Through December 31, 2018, Atlantic States, Southern and Le Mars each2019:
| | | 2021
| | | 2020
| | | 2019
| |
| Premiums earned | | $ | 37,996,474 | | | $ | 39,315,398 | | | $ | 42,079,112 | |
| Losses and loss expenses | | | 20,037,608 | | | | 15,471,037 | | | | 19,617,787 | |
| Prepaid reinsurance premiums | | | 18,548,821 | | | | 17,155,909 | | | | 19,217,849 | |
| Liability for losses and loss expenses | | | 36,659,853 | | | | 35,306,627 | | | | 36,597,834 | |
Each of our insurance subsidiaries had a catastrophe reinsurance agreement with Donegal Mutual that provided coverage under any one catastrophic occurrence above a set retention
($2,500,000,of $2,000,000,
and $1,000,000 for Atlantic States, Southern and Le Mars, respectively, for 2018), with a combined retention of $5,000,000 for a catastrophe involving a combination of
theseour insurance subsidiaries, up to the amount Donegal Mutual and our insurance subsidiaries retained under catastrophe reinsurance agreements with unaffiliated reinsurers.
The set retention was $2,000,000, $1,500,000 and $750,000 for Atlantic States, Southern and Le Mars, respectively, for 2017 and 2016. Through December 31, 2018, Donegal Mutual and Southern had an excess of loss reinsurance agreement in which Donegal Mutual assumed up to $500,000 of Southern’s losses in excess of $500,000.
The following amounts represent reinsurance that our insurance subsidiaries ceded to Donegal Mutual pursuant to these reinsurance agreements during
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Premiums earned | | $ | 19,190,067 | | | $ | 17,215,273 | | | $ | 12,965,868 | |
Losses and loss expenses | | | 12,899,927 | | | | 8,953,411 | | | | 995,076 | |
Liability for losses and loss expenses | | | 4,847,176 | | | | 3,399,207 | | | | 3,136,438 | |
2019:
| | | 2021
| | | 2020
| | | 2019
| |
| Premiums earned | | $ | 17,574,161 | | | $ | 15,595,138 | | | $ | 14,404,636 | |
| Losses and loss expenses | | | 9,309,624 | | | | 25,259,527 | | | | 13,769,736 | |
| Liability for losses and loss expenses | | | 1,658,057 | | | | 3,812,339 | | | | 3,149,907 | |
The following amounts represent the effect of affiliated reinsurance transactions on net premiums our insurance subsidiaries earned during
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Assumed | | $ | 473,512,781 | | | $ | 451,470,623 | | | $ | 422,984,409 | |
Ceded | | | (274,932,234 | ) | | | (260,545,919 | ) | | | (238,327,677 | ) |
| | | | | | | | | | | | |
Net | | $ | 198,580,547 | | | $ | 190,924,704 | | | $ | 184,656,732 | |
| | | | | | | | | | | | |
2019:
| | | 2021
| | | 2020
| | | 2019 | |
| Assumed | | $ | 573,891,394 | | | $ | 514,172,448 | | | $ | 479,835,362 | |
| Ceded | | | (361,300,053 | ) | | | (321,311,172 | ) | | | (275,126,732 | ) |
| Net | | $ | 212,591,341 | | | $ | 192,861,276 | | | $ | 204,708,630 | |
The following amounts represent the effect of affiliated reinsurance transactions on net losses and loss expenses our insurance subsidiaries incurred during
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Assumed | | $ | 335,684,463 | | | $ | 288,813,105 | | | $ | 240,016,103 | |
Ceded | | | (195,570,872 | ) | | | (173,947,992 | ) | | | (137,891,771 | ) |
| | | | | | | | | | | | |
Net | | $ | 140,113,591 | | | $ | 114,865,113 | | | $ | 102,124,332 | |
| | | | | | | | | | | | |
2019:
| | | 2021
| | | 2020
| | | 2019
| |
| Assumed | | $ | 383,452,056 | | | $ | 309,311,098 | | | $ | 309,844,705 | |
| Ceded | | | (252,084,457 | ) | | | (221,936,307 | ) | | | (206,626,026 | ) |
| Net | | $ | 131,367,599 | | | $ | 87,374,791 | | | $ | 103,218,679 | |
Donegal Mutual provides facilities, management and other services to us
and our insurance subsidiaries. In addition, Donegal Mutual purchases and maintains the information technology systems that support the business of Donegal Mutual and our insurance subsidiaries. Donegal Mutual allocates certain related expenses to Atlantic States in relation to the relative participation of Atlantic States and Donegal Mutual in the pooling agreement. Our insurance subsidiaries other than Atlantic States reimburse Donegal Mutual for
allocated costs of services Donegal Mutual provides on their
personnelbehalf based on their proportion of the total direct premiums written of the Donegal Insurance Group and other metrics. Donegal Mutual allocates costs
related to its development and
bear theirmaintenance of information technology systems over the estimated useful life of those systems (generally five years) and charges a proportionate share of
information servicesthose costs
to our insurance subsidiaries based on their percentage of the total
net premiums written
premiums of the Donegal Insurance Group.
ChargesAllocated expenses from Donegal Mutual for
these services
totalled $126,153,511, $124,999,770it provided to our insurance subsidiaries totaled $186,568,897, $153,941,121 and
$122,428,117$134,143,158 for
2018, 20172021, 2020 and
2016,2019, respectively.
To enhance process efficiencies, Donegal Mutual paid certain expenses directly in 2021 that our insurance subsidiaries paid directly in 2020, resulting in higher allocations of expenses from Donegal Mutual to our insurance subsidiaries and lower direct expense payments by our insurance subsidiaries in 2021 compared to 2020.
Donegal Mutual is currently in the midst of a multi-year effort to modernize certain of its key technology infrastructure and application systems. Donegal Mutual placed the first and second releases of new systems into service in 2020 and 2021, respectively. Donegal Mutual allocated $5.1 million and $2.8 million of related costs to our insurance subsidiaries in 2021 and 2020, respectively. Donegal Mutual will allocate to our insurance subsidiaries their proportionate share of the remaining $34.3 million of its costs for the first and second releases over the next five years. Donegal Mutual incurred an additional $3.4 million of deferred costs related to releases under development that were not yet ready for their intended use at December 31, 2021.
Our management believes that the allocation methods Donegal Mutual utilizes are reasonable. In addition, Donegal Mutual and we maintain a coordinating committee that consists of two members of our board of directors, neither of whom is a member of Donegal Mutual’s board of directors, and two members of Donegal Mutual’s board of directors, neither of whom is a member of our board of directors. The purpose of the coordinating committee is to maintain a process for an ongoing evaluation of the fairness of the terms of all transactions between Donegal Mutual and our insurance subsidiaries.
We include in our consolidated balance sheet the net amount of intercompany balances due to or from Donegal Mutual. During 2021, Donegal Mutual and our insurance subsidiaries aligned the timing of monthly settlements of various intercompany balances, including affiliated reinsurance transactions, expenses Donegal Mutual allocates to our insurance subsidiaries, premiums Donegal Mutual collects on behalf of our insurance subsidiaries, and losses and loss expenses Donegal Mutual pays on behalf of our insurance subsidiaries.
We lease office equipment
and automobiles with terms ranging from 3 to 10 years to Donegal Mutual under a
10-year lease agreement dated January 1, 2011.
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The amortized cost and estimated fair values of our fixed maturities at December 31,
20182021 and
20172020 are as follows:
| | | | | | | | | | | | | | | | |
| | | 2018 | |
| Held to Maturity | | Amortized Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Estimated Fair
Value | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 76,222,306 | | | $ | 174,904 | | | $ | 1,086,613 | | | $ | 75,310,597 | |
Obligations of states and political subdivisions | | | 159,292,158 | | | | 8,236,804 | | | | 704,104 | | | | 166,824,858 | |
Corporate securities | | | 127,010,071 | | | | 396,197 | | | | 4,391,451 | | | | 123,014,817 | |
Mortgage-backed securities | | | 40,273,983 | | | | 64,318 | | | | 450,277 | | | | 39,888,024 | |
| | | | | | | | | | | | | | | | |
Totals | | $ | 402,798,518 | | | $ | 8,872,223 | | | $ | 6,632,445 | | | $ | 405,038,296 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | 2018 | |
| Available for Sale | | Amortized Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Estimated Fair
Value | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 45,188,053 | | | $ | 25,241 | | | $ | 1,003,365 | | | $ | 44,209,929 | |
Obligations of states and political subdivisions | | | 73,760,836 | | | | 1,762,127 | | | | 306,994 | | | | 75,215,969 | |
Corporate securities | | | 140,688,937 | | | | 203,393 | | | | 3,059,185 | | | | 137,833,145 | |
Mortgage-backed securities | | | 275,474,625 | | | | 148,967 | | | | 6,324,331 | | | | 269,299,261 | |
| | | | | | | | | | | | | | | | |
Totals | | $ | 535,112,451 | | | $ | 2,139,728 | | | $ | 10,693,875 | | | $ | 526,558,304 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | 2017 | |
| Held to Maturity | | Amortized Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Estimated Fair
Value | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 71,736,445 | | | $ | 804,012 | | | $ | 546,868 | | | $ | 71,993,589 | |
Obligations of states and political subdivisions | | | 137,581,155 | | | | 11,161,650 | | | | 112,193 | | | | 148,630,612 | |
Corporate securities | | | 108,024,776 | | | | 2,860,255 | | | | 730,843 | | | | 110,154,188 | |
Mortgage-backed securities | | | 49,312,701 | | | | 515,976 | | | | 156,638 | | | | 49,672,039 | |
| | | | | | | | | | | | | | | | |
Totals | | $ | 366,655,077 | | | $ | 15,341,893 | | | $ | 1,546,542 | | | $ | 380,450,428 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | 2017 | |
| Available for Sale | | Amortized Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Estimated Fair
Value | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 44,759,456 | | | $ | 20,377 | | | $ | 730,409 | | | $ | 44,049,424 | |
Obligations of states and political subdivisions | | | 128,478,000 | | | | 3,941,610 | | | | 302,440 | | | | 132,117,170 | |
Corporate securities | | | 105,254,120 | | | | 1,010,744 | | | | 525,445 | | | | 105,739,419 | |
Mortgage-backed securities | | | 259,922,761 | | | | 444,603 | | | | 3,327,327 | | | | 257,040,037 | |
| | | | | | | | | | | | | | | | |
Totals | | $ | 538,414,337 | | | $ | 5,417,334 | | | $ | 4,885,621 | | | $ | 538,946,050 | |
| | | | | | | | | | | | | | | | |
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| | | 2021
| |
| Held to Maturity | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 89,267,988 | | | $ | 1,922,976 | | | $ | 1,015,040 | | | $ | 90,175,924 | |
| Obligations of states and political subdivisions | | | 371,435,776 | | | | 17,856,745 | | | | 948,113 | | | | 388,344,408 | |
| Corporate securities | | | 191,147,051 | | | | 11,576,693 | | | | 772,809 | | | | 201,950,935 | |
| Mortgage-backed securities | | | 16,253,753 | | | | 675,944 | | | | 0 | | | | 16,929,697 | |
| Totals | | $ | 668,104,568 | | | $ | 32,032,358 | | | $ | 2,735,962 | | | $ | 697,400,964 | |
| | | 2021
| |
| Available for Sale | | Amortized Cost | | | Gross
Unrealized Gains | | | Gross
Unrealized Losses | | | Estimated Fair Value | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 32,501,080 | | | $ | 144,377 | | | $ | 460,831 | | | $ | 32,184,626 | |
| Obligations of states and political subdivisions | | | 55,458,687 | | | | 2,002,035 | | | | 82,631 | | | | 57,378,091 | |
| Corporate securities | | | 215,668,644 | | | | 6,817,036 | | | | 874,405 | | | | 221,611,275 | |
| Mortgage-backed securities | | | 219,664,635 | | | | 3,000,806 | | | | 1,210,418 | | | | 221,455,023 | |
| Totals | | $ | 523,293,046 | | | $ | 11,964,254 | | | $ | 2,628,285 | | | $ | 532,629,015 | |
| | | 2020
| |
| Held to Maturity | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 77,435,268 | | | $ | 3,983,890 | | | $ | 223,564 | | | $ | 81,195,594 | |
| Obligations of states and political subdivisions | | | 312,319,238 | | | | 23,211,483 | | | | 142,750 | | | | 335,387,971 | |
| Corporate securities | | | 173,269,560 | | | | 18,172,244 | | | | 205,761 | | | | 191,236,043 | |
| Mortgage-backed securities | | | 23,585,373 | | | | 1,235,840 | | | | 0 | | | | 24,821,213 | |
| Totals | | $ | 586,609,439 | | | $ | 46,603,457 | | | $ | 572,075 | | | $ | 632,640,821 | |
| | | 2020
| |
| Available for Sale | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 47,511,872 | | | $ | 423,855 | | | $ | 121,015 | | | $ | 47,814,712 | |
| Obligations of states and political subdivisions | | | 66,286,667 | | | | 2,690,335 | | | | 11,765 | | | | 68,965,237 | |
| Corporate securities | | | 202,396,309 | | | | 10,496,218 | | | | 184,464 | | | | 212,708,063 | |
| Mortgage-backed securities | | | 218,763,252 | | | | 6,901,676 | | | | 16,923 | | | | 225,648,005 | |
| Totals | | $ | 534,958,100 | | | $ | 20,512,084 | | | $ | 334,167 | | | $ | 555,136,017 | |
At December 31,
2018,2021, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of
$157.7 $284.9million and an amortized cost of
$152.2$272.7 million. Our holdings also included special revenue bonds with an aggregate fair value of
$84.3$160.8 million and an amortized cost of
$80.9$154.2 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,
2018.2021. Education bonds and water and sewer utility bonds represented
49%48% and
29%35%, respectively, of our total investments in special revenue bonds based on their carrying values at December 31,
2018.2021. Many of the issuers of the special revenue bonds we held at December 31,
20182021 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.
At December 31,
2017,2020, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of
$190.7 $263.6million and an amortized cost of
$181.4$247.5 million. Our holdings also included special revenue bonds with an aggregate fair value of
$90.0$140.8 million and an amortized cost of
$84.7$131.1 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,
2017.2020. Education bonds and water and sewer utility bonds represented
53%44% and
26%39%, respectively, of our total investments in special revenue bonds based on their carrying values at December 31,
2017.2020. Many of the issuers of the special revenue bonds we held at December 31,
20172020 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
lossincome 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
will amortizeare 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.
During 2018, weWe recorded amortization of
$897,073, $1.4 million and $1.2 million in other comprehensive
loss.income in 2021, 2020 and 2019, respectively. At December 31,
20182021 and
2017,2020, net unrealized losses of
$8.6$5.2 million and
$9.8$6.1 million, respectively, remained within accumulated other comprehensive
loss.income.
We set forth below the amortized cost and estimated fair value of fixed maturities at December 31,
20182021 by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | | | | | |
| | | Amortized Cost | | | Estimated Fair
Value | |
Held to maturity | | | | | | | | |
Due in one year or less | | $ | 7,058,908 | | | $ | 7,050,979 | |
Due after one year through five years | | | 71,760,946 | | | | 72,293,032 | |
Due after five years through ten years | | | 138,736,485 | | | | 137,974,815 | |
Due after ten years | | | 144,968,196 | | | | 147,831,446 | |
Mortgage-backed securities | | | 40,273,983 | | | | 39,888,024 | |
| | | | | | | | |
Total held to maturity | | $ | 402,798,518 | | | $ | 405,038,296 | |
| | | | | | | | |
Available for sale | | | | | | | | |
Due in one year or less | | $ | 32,119,775 | | | $ | 32,223,407 | |
Due after one year through five years | | | 88,814,531 | | | | 87,999,196 | |
Due after five years through ten years | | | 119,447,672 | | | | 117,530,095 | |
Due after ten years | | | 19,255,848 | | | | 19,506,345 | |
Mortgage-backed securities | | | 275,474,625 | | | | 269,299,261 | |
| | | | | | | | |
Total available for sale | | $ | 535,112,451 | | | $ | 526,558,304 | |
| | | | | | | | |
| | | Amortized Cost | | | Estimated Fair Value | |
| Held to maturity | | | | | | |
| Due in one year or less | | $ | 29,359,965 | | | $ | 30,170,296 | |
| Due after one year through five years | | | 84,797,619 | | | | 89,011,185 | |
| Due after five years through ten years | | | 229,972,129 | | | | 238,657,219 | |
| Due after ten years | | | 307,721,102 | | | | 322,632,567 | |
| Mortgage-backed securities | | | 16,253,753 | | | | 16,929,697 | |
| Total held to maturity | | $ | 668,104,568 | | | $ | 697,400,964 | |
| Available for sale | | | | | | | | |
| Due in one year or less | | $ | 19,157,465 | | | $ | 19,411,213 | |
| Due after one year through five years | | | 124,209,793 | | | | 128,340,492 | |
| Due after five years through ten years | | | 130,046,327 | | | | 132,293,644 | |
| Due after ten years | | | 30,214,826 | | | | 31,128,643 | |
| Mortgage-backed securities | | | 219,664,635 | | | | 221,455,023 | |
| Total available for sale | | $ | 523,293,046 | | | $ | 532,629,015 | |
The cost and estimated fair values of our equity securities at December 31,
20182021 were as follows:
| | | | | | | | | | | | | | | | |
| | | Cost | | | Gross Gains | | | Gross Losses | | | Estimated
Fair Value | |
| | | (in thousands) | |
Equity securities | | $ | 40,942,716 | | | $ | 4,817,917 | | | $ | 2,093,624 | | | $ | 43,667,009 | |
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| | | Cost | | | Gross Gains | | | Gross Losses | | | Estimated Fair Value | |
| | | | |
| Equity securities | | $ | 43,262,577 | | | $ | 20,413,667 | | | $ | 256,271 | | | $ | 63,419,973 | |
The cost and estimated fair values of our equity securities at December 31,
20172020 were as follows:
| | | | | | | | | | | | | | | | |
| | | Cost | | | Gross Gains | | | Gross
Losses | | | Estimated
Fair Value | |
| | | (in thousands) | |
Equity securities | | $ | 44,219,097 | | | $ | 6,505,287 | | | $ | 279,141 | | | $ | 50,445,243 | |
| | | Cost | | | Gross Gains | | | Gross Losses | | | Estimated Fair Value | |
| | | | |
| Equity securities | | $ | 42,409,750 | | | $ | 17,103,055 | | | $ | 956,632 | | | $ | 58,556,173 | |
The amortized cost of fixed maturities on deposit with various regulatory authorities at December 31,
20182021 and
20172020 amounted to
$8,795,334 $8,852,886and
$9,646,390,$9,114,791, respectively.
Our investment in DFSC represented our 48.2% investment in the amount of $41,025,975 and $38,773,420 at December 31, 2018 and 2017, respectively.
We
accounted for our investment in DFSC using the equity method of accounting. Under this method, we recorded our investment at cost, with adjustments for our share of DFSC’s earnings and losses as well as changes in DFSC’s equity due to its unrealized gains and losses. We and Donegal Mutual sold DFSC in March 2019. We refer you to Note 22—Subsequent Event for information regarding the sale of DFSC.We include our share of DFSC’s net income in our results of operations. We have compiled the following summary financial information for DFSC at December 31, 2018 and 2017 from the financial statements of DFSC.
| | | | | | | | |
| | | December 31, | |
| Balance sheets: | | 2018 | | | 2017 | |
Total assets | | $ | 553,190,379 | | | $ | 567,935,408 | |
| | | | | | | | |
Total liabilities | | $ | 468,187,592 | | | $ | 487,603,999 | |
Stockholders’ equity | | | 85,002,787 | | | | 80,331,409 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 553,190,379 | | | $ | 567,935,408 | |
| | | | | | | | |
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| Income statements: | | 2018 | | | 2017 | | | 2016 | |
Net income | | $ | 5,457,636 | | | $ | 3,362,861 | | | $ | 2,252,456 | |
| | | | | | | | | | | | |
Other comprehensive (loss) income in our statements of comprehensive (loss) income includes net unrealized (losses) gains of ($387,037), $112,053 and ($103,331) for 2018, 2017 and 2016, respectively, representing our share of DFSC’s unrealized investment gains or losses.
We received a distribution from DFSC of $1.0 million during 2017. Based on the nature of the activities that generated the distribution, we made an accounting policy election to classify the distribution as a return on our investment in DFSC.
We derivederived net investment income, consisting primarily of interest and dividends, from the following sources:
| | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Fixed maturities | | $ | 27,733,555 | | | $ | 26,143,924 | | | $ | 25,066,582 | |
Equity securities | | | 1,264,120 | | | | 999,335 | | | | 1,187,814 | |
Short-term investments | | | 795,522 | | | | 407,580 | | | | 115,763 | |
Other | | | 29,450 | | | | 33,316 | | | | 108,003 | |
| | | | | | | | | | | | |
Investment income | | | 29,822,647 | | | | 27,584,155 | | | | 26,478,162 | |
Investment expenses | | | (2,914,991 | ) | | | (4,056,851 | ) | | | (3,845,432 | ) |
| | | | | | | | | | | | |
Net investment income | | $ | 26,907,656 | | | $ | 23,527,304 | | | $ | 22,632,730 | |
| | | | | | | | | | | | |
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| | | 2021
| | | 2020
| | | 2019
| |
| Fixed maturities | | $ | 32,343,878 | | | $ | 30,750,231 | | | $ | 29,969,774 | |
| Equity securities | | | 1,437,948 | | | | 1,386,343 | | | | 1,268,056 | |
| Short-term investments | | | 321,117 | | | | 427,392 | | | | 1,243,104 | |
| Other | | | 29,250 | | | | 29,250 | | | | 29,251 | |
| Investment income | | | 34,132,193 | | | | 32,593,216 | | | | 32,510,185 | |
| Investment expenses | | | (3,006,562 | ) | | | (3,088,750 | ) | | | (2,995,230 | ) |
| Net investment income | | $ | 31,125,631 | | | $ | 29,504,466 | | | $ | 29,514,955 | |
We present below gross gains and losses from investments
including those we classified as held to maturity, and the change in the difference between fair value and cost of investments:
| | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Gross gains: | | | | | | | | | | | | |
Fixed maturities | | $ | 131,660 | | | $ | 168,855 | | | $ | 2,161,108 | |
Equity securities | | | 1,890,762 | | | | 6,197,253 | | | | 1,378,548 | |
| | | | | | | | | | | | |
| | | 2,022,422 | | | | 6,366,108 | | | | 3,539,656 | |
| | | | | | | | | | | | |
Gross losses: | | | | | | | | | | | | |
Fixed maturities | | | 630,904 | | | | 98,723 | | | | 281,131 | |
Equity securities | | | 6,193,027 | | | | 562,130 | | | | 732,950 | |
| | | | | | | | | | | | |
| | | 6,823,931 | | | | 660,853 | | | | 1,014,081 | |
| | | | | | | | | | | | |
Net (losses) gains | | $ | (4,801,509 | ) | | $ | 5,705,255 | | | $ | 2,525,575 | |
| | | | | | | | | | | | |
Change in difference between fair value and cost of investments: | | | | | | | | | | | | |
Fixed maturities | | $ | (20,641,433 | ) | | $ | 2,335,578 | | | $ | (12,932,470 | ) |
Equity securities | | | (3,501,853 | ) | | | 1,569,999 | | | | 3,160,356 | |
| | | | | | | | | | | | |
Totals | | $ | (24,143,286 | ) | | $ | 3,905,577 | | | $ | (9,772,114 | ) |
| | | | | | | | | | | | |
We recognized $1.2 million of gains and $4.4 million of losses on equity securities held at December 31, 2018 in net investment losses for 2018.
| | | 2021
| | | 2020
| | | 2019
| |
| Gross realized gains: | | | | | | | | | |
| Fixed maturities | | $ | 676,724 | | | $ | 818,350 | | | $ | 470,983 | |
| Equity securities | | | 1,430,465 | | | | 106,075 | | | | 1,546,598 | |
| Investment in affiliate | | | 0 | | | | 0 | | | | 12,662,147 | |
| | | | 2,107,189 | | | | 924,425 | | | | 14,679,728 | |
| Gross realized losses: | | | | | | | | | | | | |
| Fixed maturities | | | 294,126 | | | | 246,243 | | | | 323,746 | |
| Equity securities | | | 462,335 | | | | 3,555,304 | | | | 1,270,301 | |
| | | | 756,461 | | | | 3,801,547 | | | | 1,594,047 | |
| Net realized gains (losses) | | | 1,350,728 | | | | (2,877,122 | ) | | | 13,085,681 | |
| Gross unrealized gains on equity securities | | | 5,627,949 | | | | 8,426,806 | | | | 8,924,687 | |
| Gross unrealized losses on equity securities | | | (501,391 | ) | | | (2,771,765 | ) | | | (25,751 | ) |
| Net investment gains | | $ | 6,477,286 | | | $ | 2,777,919 | | | $ | 21,984,617 | |
| | | | | | | | | | | | | |
| Change in difference between fair value and cost of investments: | | | | | | | | | | | | |
| Fixed maturities | | $ | (27,576,934 | ) | | $ | 33,876,212 | | | $ | 38,647,456 | |
| Equity securities | | | 4,010,973 | | | | 4,088,003 | | | | 9,334,127 | |
| Totals | | $ | (23,565,961 | ) | | $ | 37,964,215 | | | $ | 47,981,583 | |
We held fixed maturities with unrealized losses representing declines that we considered temporary at December 31,
20182021 as follows:
| | | | | | | | | | | | | | | | |
| | | Less than 12 months | | | 12 months or longer | |
| | | Fair Value | | | Unrealized
Losses | | | Fair Value | | | Unrealized
Losses | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 26,342,398 | | | $ | 165,774 | | | $ | 54,900,027 | | | $ | 1,924,204 | |
Obligations of states and political subdivisions | | | 28,321,962 | | | | 477,357 | | | | 21,559,520 | | | | 533,741 | |
Corporate securities | | | 149,269,854 | | | | 4,482,870 | | | | 59,396,885 | | | | 2,967,766 | |
Mortgage-backed securities | | | 82,593,454 | | | | 912,616 | | | | 181,379,875 | | | | 5,861,992 | |
| | | | | | | | | | | | | | | | |
Totals | | $ | 286,527,668 | | | $ | 6,038,617 | | | $ | 317,236,307 | | | $ | 11,287,703 | |
| | | | | | | | | | | | | | | | |
| | | Less than 12 months | | | 12 months or longer | |
| | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 27,691,051 | | | $ | 412,055 | | | $ | 28,426,248 | | | $ | 1,063,816 | |
| Obligations of states and political subdivisions | | | 56,654,480 | | | | 899,139 | | | | 7,090,499 | | | | 131,605 | |
| Corporate securities | | | 92,736,747 | | | | 1,609,931 | | | | 1,462,717 | | | | 37,283 | |
| Mortgage-backed securities | | | 90,006,234 | | | | 1,128,197 | | | | 2,361,232 | | | | 82,221 | |
| Totals | | $ | 267,088,512 | | | $ | 4,049,322 | | | $ | 39,340,696 | | | $ | 1,314,925 | |
We held fixed maturities
and equity securities with unrealized losses representing declines that we considered temporary at December 31,
20172020 as follows:
| | | | | | | | | | | | | | | | |
| | | Less than 12 months | | | 12 months or longer | |
| | | Fair Value | | | Unrealized
Losses | | | Fair Value | | | Unrealized
Losses | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 24,024,445 | | | $ | 286,518 | | | $ | 33,987,229 | | | $ | 990,759 | |
Obligations of states and political subdivisions | | | 10,223,383 | | | | 120,076 | | | | 14,127,415 | | | | 294,557 | |
Corporate securities | | | 35,203,959 | | | | 253,241 | | | | 31,560,591 | | | | 1,003,047 | |
Mortgage-backed securities | | | 100,533,516 | | | | 817,315 | | | | 124,061,502 | | | | 2,666,650 | |
Equity securities | | | 4,291,875 | | | | 279,141 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Totals | | $ | 174,277,178 | | | $ | 1,756,291 | | | $ | 203,736,737 | | | $ | 4,955,013 | |
| | | | | | | | | | | | | | | | |
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| | | Less than 12 months | | | 12 months or longer | |
| | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 29,144,224 | | | $ | 344,579 | | | $ | 0 | | | $ | 0 | |
| Obligations of states and political subdivisions | | | 9,361,435 | | | | 154,515 | | | | 0 | | | | 0 | |
| Corporate securities | | | 26,142,933 | | | | 114,606 | | | | 8,229,646 | | | | 275,619 | |
| Mortgage-backed securities | | | 3,091,272 | | | | 15,425 | | | | 236,560 | | | | 1,498 | |
| Totals | | $ | 67,739,864 | | | $ | 629,125 | | | $ | 8,466,206 | | | $ | 277,117 | |
We make estimates concerning the valuation of our investments and the recognition of other-than-temporary declines in the value of our investments. For equity securities, we measure investments at fair value, and
beginning January 1, 2018, we recognize changes in fair value in our results of operations. With respect to a debt security that is in an unrealized loss position, we first assess if we intend to sell the debt security. 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 an 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. We determine whether a credit loss has occurred by comparing the amortized cost of the debt security to the present value of the cash flows we expect to collect. If we expect a cash flow shortfall, we consider that a credit loss has occurred. If we determine that a credit loss has occurred, we consider the impairment to be other than temporary. We then recognize the amount of the impairment loss related to the credit loss in our results of operations, and we recognize the remaining portion of the impairment loss in our other comprehensive income, net of applicable taxes. 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, company or geographic events that have negatively impacted the value of a security and rating agency downgrades. We held
509150 debt securities that were in an unrealized loss position at December 31,
2018.2021. Based upon our analysis of general market conditions and underlying factors impacting these debt securities, we considered these declines in value to be temporary.
We did
not0t recognize any impairment losses in
2018, 20172021, 2020 or
2016.2019. We had
no0 sales or transfers from our held to maturity portfolio in
2018, 20172021, 2020 or
2016.2019. We had
no0 derivative instruments or hedging activities during
2018, 20172021, 2020 or
2016.5—2019.
5 - Fair Value Measurements
We account for financial assets using a framework that establishes a hierarchy that ranks the quality and reliability of inputs, or assumptions, used 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.
| 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. 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 we could realize 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. The 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 determine if the estimates we obtain are representative of fair values based upon the general knowledge of the market of our investment personnel, 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 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 type and recent trading activity. Our investment personnel review documentation with respect to the pricing services’ pricing methodology that they obtain periodically to determine if the primary pricing sources, market inputs and pricing frequency for various security types are reasonable. At December 31,
2018,2021, we received two estimates per security from the pricing services, and we priced substantially all of our Level 1 and Level 2 investments using those prices. In our review of the estimates the pricing services provided at December 31,
2018,2021, we did not identify any material discrepancies, and we did not make any adjustments to the estimates the pricing services provided.
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We present our cash and short-term investments at estimated fair value. The carrying values in our balance sheet for premium receivables,
and reinsurance receivables
and payables for premiums andrelated to paid losses and loss expenses
and reinsurance balances payable approximate their fair values. The carrying amounts reported in the balance sheet for our subordinated debentures and 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 December 31,
20182021 and
2017.2020.
The following table presents our fair value measurements for our investments in
available-for-sale fixed maturity and equity securities at December 31,
2018: | | | | | | | | | | | | | | | | |
| | | 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) | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 44,209,929 | | | $ | — | | | $ | 44,209,929 | | | $ | — | |
Obligations of states and political subdivisions | | | 75,215,969 | | | | — | | | | 75,215,969 | | | | — | |
Corporate securities | | | 137,833,145 | | | | — | | | | 137,833,145 | | | | — | |
Mortgage-backed securities | | | 269,299,261 | | | | — | | | | 269,299,261 | | | | — | |
Equity securities | | | 30,674,835 | | | | 28,351,110 | | | | 2,323,725 | | | | — | |
| | | | | | | | | | | | | | | | |
Total investments in the fair value hierarchy | | | 557,233,139 | | | | 28,351,110 | | | | 528,882,029 | | | | — | |
| | | | | | | | | | | | | | | | |
Investment measured at net asset value | | | 12,992,174 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Totals | | $ | 570,225,313 | | | $ | 28,351,110 | | | $ | 528,882,029 | | | $ | — | |
| | | | | | | | | | | | | | | | |
2021:
| | | 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) | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 32,184,626 | | | $ | 0 | | | $ | 32,184,626 | | | $ | 0 | |
| Obligations of states and political subdivisions | | | 57,378,091 | | | | 0 | | | | 57,378,091 | | | | 0 | |
| Corporate securities | | | 221,611,275 | | | | 0 | | | | 221,611,275 | | | | 0 | |
| Mortgage-backed securities | | | 221,455,023 | | | | 0 | | | | 221,455,023 | | | | 0 | |
| Equity securities | | | 63,419,973 | | | | 61,130,385 | | | | 2,289,588 | | | | 0 | |
| Total investments in the fair value hierarchy | | $ | 596,048,988 | | | $ | 61,130,385 | | | $ | 534,918,603 | | | $ | 0 | |
The following table presents our fair value measurements for our investments in
available-for-sale fixed maturity and equity securities at December 31,
2017: | | | | | | | | | | | | | | | | |
| | | 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) | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 44,049,424 | | | $ | — | | | $ | 44,049,424 | | | $ | — | |
Obligations of states and political subdivisions | | | 132,117,170 | | | | — | | | | 132,117,170 | | | | — | |
Corporate securities | | | 105,739,419 | | | | — | | | | 105,739,419 | | | | — | |
Mortgage-backed securities | | | 257,040,037 | | | | — | | | | 257,040,037 | | | | — | |
Equity securities | | | 36,736,121 | | | | 36,736,121 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total investments in the fair value hierarchy | | | 575,682,171 | | | | 36,736,121 | | | | 538,946,050 | | | | — | |
| | | | | | | | | | | | | | | | |
Investment measured at net asset value | | | 13,709,122 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Totals | | $ | 589,391,293 | | | $ | 36,736,121 | | | $ | 538,946,050 | | | $ | — | |
| | | | | | | | | | | | | | | | |
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2020:
| | | 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) | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 47,814,712 | | | $ | 0 | | | $ | 47,814,712 | | | $ | 0 | |
| Obligations of states and political subdivisions | | | 68,965,237 | | | | 0 | | | | 68,965,237 | | | | 0 | |
| Corporate securities | | | 212,708,063 | | | | 0 | | | | 212,708,063 | | | | 0 | |
| Mortgage-backed securities | | | 225,648,005 | | | | 0 | | | | 225,648,005 | | | | 0 | |
| Equity securities | | | 58,556,173 | | | | 54,152,085 | | | | 4,404,088 | | | | 0 | |
| Total investments in the fair value hierarchy | | $ | 613,692,190 | | | $ | 54,152,085 | | | $ | 559,540,105 | | | $ | 0 | |
6 - Deferred Policy Acquisition Costs
Changes in our insurance subsidiaries’ deferred policy acquisition costs are as follows:
| | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Balance, January 1 | | $ | 60,289,860 | | | $ | 56,309,196 | | | $ | 52,108,388 | |
Acquisition costs deferred | | | 121,289,267 | | | | 119,045,664 | | | | 112,076,808 | |
Amortization charged to earnings | | | (120,964,000 | ) | | | (115,065,000 | ) | | | (107,876,000 | ) |
| | | | | | | | | | | | |
Balance, December 31 | | $ | 60,615,127 | | | $ | 60,289,860 | | | $ | 56,309,196 | |
| | | | | | | | | | | | |
7—
| | | 2021
| | | 2020
| | | 2019
| |
| Balance, January 1 | | $ | 59,156,958 | | | $ | 59,284,859 | | | $ | 60,615,127 | |
| Acquisition costs deferred | | | 137,604,415 | | | | 118,944,099 | | | | 121,112,732 | |
| Amortization charged to earnings | | | (128,733,000 | ) | | | (119,072,000 | ) | | | (122,443,000 | ) |
| Balance, December 31 | | $ | 68,028,373 | | | $ | 59,156,958 | | | $ | 59,284,859 | |
7 - Property and Equipment
Property and equipment at December 31,
20182021 and
20172020 consisted of the following:
| | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | Estimated Useful
Life | |
Office equipment | | $ | 10,049,884 | | | $ | 9,918,045 | | | | 3-15 years | |
Automobiles | | | 448,015 | | | | 779,357 | | | | 5 years | |
Real estate | | | 4,977,813 | | | | 7,971,590 | | | | 5-50 years | |
Software | | | 2,843,782 | | | | 2,794,864 | | | | 5 years | |
| | | | | | | | | | | | |
| | | 18,319,494 | | | | 21,463,856 | | | | | |
Accumulated depreciation | | | (13,628,790 | ) | | | (14,183,441 | ) | | | | |
| | | | | | | | | | | | |
| | $ | 4,690,704 | | | $ | 7,280,415 | | | | | |
| | | | | | | | | | | | |
| | | 2021
| | | 2020
| | Estimated Useful Life | |
| Office equipment | | $ | 8,382,877 | | | $ | 8,809,344 | | 3-15 years | |
| Automobiles | | | 322,703 | | | | 301,119 | | 5 years
| |
| Real estate | | | 2,575,207 | | | | 4,921,056 | | 5-50 years | |
| Software | | | 1,386,936 | | | | 2,065,927 | | 5 years
| |
| | | | 12,667,723 | | | | 16,097,446 | | | |
| Accumulated depreciation | | | (9,710,793 | ) | | | (11,707,069 | ) | | |
| | | $ | 2,956,930 | | | $ | 4,390,377 | | | |
Depreciation expense for
2018, 20172021, 2020 and
20162019 amounted to
$479,550, $478,800$208,641, $257,397 and
$742,861,$282,235, respectively.
8— The reduction in real estate held at December 31, 2021 reflects the sale of several branch office facilities during 2021.
8 - Liability for Losses and Loss Expenses
The establishment of an appropriate liability for losses and loss expenses is an inherently uncertain process, and we can provide no assurance that our insurance subsidiaries’ ultimate liability 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 estimates have exceeded their actual liabilities. Changes in our insurance subsidiaries’ estimate of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received since the prior reporting date.
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We summarize activity in our insurance subsidiaries’ liability for losses and loss expenses as follows:
| | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Balance at January 1 | | $ | 676,671,727 | | | $ | 606,664,590 | | | $ | 578,205,109 | |
Less reinsurance recoverable | | | (293,271,257 | ) | | | (259,147,147 | ) | | | (256,150,860 | ) |
| | | | | | | | | | | | |
Net balance at January 1 | | | 383,400,470 | | | | 347,517,443 | | | | 322,054,249 | |
| | | | | | | | | | | | |
Incurred related to: | | | | | | | | | | | | |
Current year | | | 540,826,810 | | | | 480,646,641 | | | | 420,327,164 | |
Prior years | | | 35,631,610 | | | | 6,621,413 | | | | 2,988,739 | |
| | | | | | | | | | | | |
Total incurred | | | 576,458,420 | | | | 487,268,054 | | | | 423,315,903 | |
| | | | | | | | | | | | |
Paid related to: | | | | | | | | | | | | |
Current year | | | 308,578,285 | | | | 288,379,600 | | | | 248,106,788 | |
Prior years | | | 175,882,906 | | | | 163,005,427 | | | | 149,745,921 | |
| | | | | | | | | | | | |
Total paid | | | 484,461,191 | | | | 451,385,027 | | | | 397,852,709 | |
| | | | | | | | | | | | |
Net balance at December 31 | | | 475,397,699 | | | | 383,400,470 | | | | 347,517,443 | |
Plus reinsurance recoverable | | | 339,267,525 | | | | 293,271,257 | | | | 259,147,147 | |
| | | | | | | | | | | | |
Balance at December 31 | | $ | 814,665,224 | | | $ | 676,671,727 | | | $ | 606,664,590 | |
| | | | | | | | | | | | |
| | | 2021
| | | 2020
| | | 2019
| |
| Balance at January 1 | | $ | 962,007,437 | | | $ | 869,673,849 | | | $ | 814,665,224 | |
| Less reinsurance recoverable | | | (404,818,480 | ) | | | (362,768,427 | ) | | | (339,267,525 | ) |
| Net balance at January 1 | | | 557,188,957 | | | | 506,905,422 | | | | 475,397,699 | |
| Incurred related to: | | | | | | | | | | | | |
| Current year | | | 551,917,571 | | | | 472,709,060 | | | | 519,319,941 | |
| Prior years | | | (31,208,029 | ) | | | (12,944,767 | ) | | | (12,932,277 | ) |
| Total incurred | | | 520,709,542 | | | | 459,764,293 | | | | 506,387,664 | |
| Paid related to: | | | | | | | | | | | | |
| Current year | | | 269,316,762 | | | | 236,984,291 | | | | 278,923,614 | |
| Prior years | | | 182,222,742 | | | | 172,496,467 | | | | 195,956,327 | |
| Total paid | | | 451,539,504 | | | | 409,480,758 | | | | 474,879,941 | |
| Net balance at December 31 | | | 626,358,995 | | | | 557,188,957 | | | | 506,905,422 | |
| Plus reinsurance recoverable | | | 451,261,306 | | | | 404,818,480 | | | | 362,768,427 | |
| Balance at December 31 | | $ | 1,077,620,301 | | | $ | 962,007,437 | | | $ | 869,673,849 | |
Our insurance subsidiaries recognized
an increasea decrease in their liability for losses and loss expenses of prior years of
$35.6$31.2 million,
$6.6$12.9 million and
$3.0$12.9 million in
2018, 20172021, 2020 and
2016,2019, 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
20182021 development represented
9.3%5.6% of the December 31,
20172020 net carried reserves and resulted primarily from
higher-than-expected severitylower-than-expected loss emergence in the
commercial multiple peril, personal automobile,
workers’ compensation and commercial automobile lines of business
offset by lower-than-expected severity in the workers’ compensation line of business, in accident years prior to 2018. The majority of the 2018 development related to increases in the liability for losses and loss expenses of prior years for Atlantic States, Southern and Peninsula. During 2018, our insurance subsidiaries received new information on previously-reported commercial automobile and personal automobile claims that led our insurance subsidiaries to conclude that their prior actuarial assumptions did not fully anticipate recent changes in severity and reporting trends. Our insurance subsidiaries have encountered increasing difficulties in projecting the ultimate severity of automobile losses over recent accident years, which our insurance subsidiaries attribute to worsening litigation trends and an increased delay in the reporting to our insurance subsidiaries of information with respect to the severity of claims. As a result, our insurance subsidiaries’ actuaries increased their projections of the ultimate cost of our insurance subsidiaries’ prior-year personal automobile and commercial automobile losses, and our insurance subsidiaries added $17.7 million to their reserves for personal automobile and $20.8 million to their reserves for commercial automobile for accident years prior to
2018. The 2017 development represented 1.9% of the December 31, 2016 net carried reserves and resulted primarily from higher-than-expected severity in the commercial multiple peril, personal automobile and commercial automobile lines of business, offset by lower-than-expected severity in the workers’ compensation line of business, in accident years prior to 2017.2021. The majority of the
20172021 development related to
increasesdecreases in the liability for losses and loss expenses of prior years for Atlantic States and
Peninsula.MICO. The
20162020 development represented
0.9%2.6% of the December 31,
20152019 net carried reserves and resulted primarily from
higher-than-expected severity in the commercial multiple peril and commercial automobileliability lines of business, offset by lower-than-expected severity in the workers’ compensation
lineand personal automobile lines of business,
partially offset by higher-than-expected severity in
the commercial automobile and commercial multi-peril lines of business, for accident years prior to
2016.2020. The majority of the
20162020 development related to
increasesdecreases in the liability for losses and loss expenses of prior years for Atlantic States and
Southern.MICO. The 2019 development represented 2.7% of the December 31, 2018 net carried reserves and resulted primarily from lower-than-expected severity in the workers’ compensation line of business, partially offset by higher-than-expected severity in the commercial automobile and commercial multi-peril lines of business, for accident years prior to 2019. The majority of the 2019 development related to decreases in the liability 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 our insurance subsidiaries’ material lines of business 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, our insurance subsidiaries’ IBNR reserves 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
2018.-74-
2021.
The actuaries for our insurance subsidiaries generally prepare an initial estimate for ultimate losses and loss expenses for the current accident year by multiplying earned premium by an
“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, 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.method from which the actuaries select loss development factor assumptions. The actuaries base their selection of a point estimate on a judgmental weighting of 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 or 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 accurately predict loss frequency 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. For purposes of the claim development tables we present below, our insurance subsidiaries count claims on policies they issue even if they eventually close such claims without making a loss payment. Claims our insurance subsidiaries close without making a loss payment typically generate loss expenses. The methods our insurance subsidiaries have used to summarize claim counts have not changed significantly over the time periods we report in the tables below.
The following tables present information about incurred and paid claims development as of December 31,
2018,2021, net of reinsurance, as well as cumulative claim frequency and the total of IBNR reserves plus expected development on reported claims that our insurance subsidiaries included within their net incurred claims amounts. The tables include unaudited information about incurred and paid claims development for the years ended December 31,
20092012 through
2017,2020, which we present as supplementary information.
We present amounts retrospectively for MICO, which we acquired in December 2010, for all accident years prior to 2010.-75-
| Personal Automobile | | | | | At December 31, 2021 | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | | | | | | | |
| Accident Year | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Total IBNR Plus Expected Development on Reported Claims | | | Cumulative Number of Reported Claims | |
| | | Unaudited | | | | | | | | | | |
| (dollars and reported claims in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2012 | | $ | 130,415 | | | $ | 133,201 | | | $ | 135,592 | | | $ | 136,493 | | | $ | 136,552 | | | $ | 136,463 | | | $ | 136,141 | | | $ | 136,677 | | | $ | 136,648 | | | $ | 136,542 | | | $ | 98 | | | | 69 | |
| 2013 | | | | | | | 124,965 | | | | 130,737 | | | | 131,594 | | | | 132,643 | | | | 132,604 | | | | 132,934 | | | | 132,853 | | | | 132,690 | | | | 132,787 | | | | 106 | | | | 66 | |
| 2014 | | | | | | | | | | | 124,426 | | | | 124,806 | | | | 124,210 | | | | 126,200 | | | | 126,779 | | | | 126,734 | | | | 126,861 | | | | 126,977 | | | | 131 | | | | 71 | |
| 2015 | | | | | | | | | | | | | | | 137,569 | | | | 139,333 | | | | 139,181 | | | | 142,493 | | | | 142,408 | | | | 142,073 | | | | 142,010 | | | | 293 | | | | 70 | |
| 2016 | | | | | | | | | | | | | | | | | | | 150,216 | | | | 153,937 | | | | 157,516 | | | | 157,943 | | | | 156,935 | | | | 156,436 | | | | 728 | | | | 73 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | 166,690 | | | | 127,728 | | | | 175,939 | | | | 174,784 | | | | 173,730 | | | | 1,328 | | | | 79 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | 186,580 | | | | 183,358 | | | | 181,558 | | | | 180,787 | | | | 3,069 | | | | 81 | |
| 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 161,056 | | | | 157,689 | | | | 156,300 | | | | 5,151 | | | | 68 | |
| 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 111,483 | | | | 103,585 | | | | 7,372 | | | | 43 | |
| 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 119,364 | | | | 20,654 | | | | 45 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | $ | 1,428,518 | | | | | | | | | |
| Personal Automobile | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31, | |
| Accident Year | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | |
| | | Unaudited | | | | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2012 | | $ | 87,517 | | | $ | 111,941 | | | $ | 124,652 | | | $ | 130,862 | | | $ | 133,428 | | | $ | 134,581 | | | $ | 135,132 | | | $ | 136,137 | | | $ | 136,165 | | | $ | 136,186 | |
| 2013 | | | | | | | 84,241 | | | | 109,051 | | | | 120,118 | | | | 125,946 | | | | 130,026 | | | | 131,326 | | | | 131,642 | | | | 132,215 | | | | 132,300 | |
| 2014 | | | | | | | | | | | 85,377 | | | | 104,736 | | | | 114,893 | | | | 120,491 | | | | 123,815 | | | | 124,926 | | | | 125,619 | | | | 125,762 | |
| 2015 | | | | | | | | | | | | | | | 93,611 | | | | 116,303 | | | | 128,395 | | | | 135,027 | | | | 139,121 | | | | 140,028 | | | | 140,892 | |
| 2016 | | | | | | | | | | | | | | | | | | | 102,433 | | | | 129,507 | | | | 143,321 | | | | 151,159 | | | | 153,521 | | | | 154,769 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | 111,964 | | | | 142,372 | | | | 159,879 | | | | 166,099 | | | | 169,190 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | 115,585 | | | | 150,175 | | | | 163,036 | | | | 169,651 | |
| 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 103,101 | | | | 127,187 | | | | 141,004 | |
| 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 66,084 | | | | 81,783 | |
| 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 76,477 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | 1,328,014 | |
| | | | | | | | | | | All outstanding liabilities before 2012, net of reinsurance | | | | 925 | |
| | | | | | | | | | | Liabilities for claims and claims adjustment expenses, net of reinsurance | | | $ | 101,429 | |
| Homeowners | | | | | At December 31, 2021 | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | | | | | | | |
| Accident Year | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Total IBNR Plus Expected Development on Reported Claims | | | Cumulative Number of Reported Claims | |
| | | Unaudited | | | | | | | | | | |
| (dollars and reported claims in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2012 | | $ | 53,962 | | | $ | 54,794 | | | $ | 54,468 | | | $ | 54,351 | | | $ | 54,281 | | | $ | 54,381 | | | $ | 54,523 | | | $ | 54,537 | | | $ | 54,548 | | | $ | 54,556 | | | $ | 0 | | | | 18 | |
| 2013 | | | | | | | 50,887 | | | | 51,121 | | | | 51,122 | | | | 50,874 | | | | 50,988 | | | | 50,971 | | | | 51,008 | | | | 51,064 | | | | 51,053 | | | | 0 | | | | 13 | |
| 2014 | | | | | | | | | | | 56,916 | | | | 58,378 | | | | 57,680 | | | | 57,332 | | | | 57,288 | | | | 57,402 | | | | 57,367 | | | | 57,371 | | | | 0 | | | | 16 | |
| 2015 | | | | | | | | | | | | | | | 63,359 | | | | 63,925 | | | | 63,053 | | | | 63,071 | | | | 63,099 | | | | 62,993 | | | | 63,043 | | | | 19 | | | | 13 | |
| 2016 | | | | | | | | | | | | | | | | | | | 62,443 | | | | 64,064 | | | | 63,735 | | | | 63,355 | | | | 63,279 | | | | 63,409 | | | | 12 | | | | 12 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | 79,283 | | | | 79,911 | | | | 79,305 | | | | 79,247 | | | | 79,065 | | | | 144 | | | | 17 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | 81,965 | | | | 83,385 | | | | 82,905 | | | | 82,566 | | | | 538 | | | | 18 | |
| 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 73,294 | | | | 73,554 | | | | 73,234 | | | | 912 | | | | 16 | |
| 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 61,633 | | | | 62,718 | | | | 1,567 | | | | 13 | |
| 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 67,677 | | | | 6,208 | | | | 11 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | $ | 654,692 | | | | | | | | | |
| Homeowners | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | |
| Accident Year | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | |
| | | Unaudited | | | | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2012 | | $ | 46,566 | | | $ | 53,619 | | | $ | 54,028 | | | $ | 54,298 | | | $ | 54,317 | | | $ | 54,356 | | | $ | 54,557 | | | $ | 54,557 | | | $ | 54,553 | | | $ | 54,560 | |
| 2013 | | | | | | | 40,949 | | | | 49,410 | | | | 50,210 | | | | 50,478 | | | | 51,043 | | | | 50,902 | | | | 50,967 | | | | 50,965 | | | | 50,955 | |
| 2014 | | | | | | | | | | | 45,823 | | | | 56,255 | | | | 56,990 | | | | 57,195 | | | | 56,995 | | | | 57,243 | | | | 57,336 | | | | 57,339 | |
| 2015 | | | | | | | | | | | | | | | 51,885 | | | | 61,542 | | | | 62,204 | | | | 62,590 | | | | 62,844 | | | | 62,943 | | | | 62,936 | |
| 2016 | | | | | | | | | | | | | | | | | | | 50,125 | | | | 61,145 | | | | 62,760 | | | | 63,144 | | | | 63,162 | | | | 63,217 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | 67,077 | | | | 77,663 | | | | 78,006 | | | | 78,127 | | | | 78,454 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | 70,385 | | | | 79,892 | | | | 80,905 | | | | 81,464 | |
| 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 58,074 | | | | 69,145 | | | | 70,416 | |
| 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 51,226 | | | | 60,348 | |
| 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 52,161 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | 631,850 | |
| | | | | | | | | | | All outstanding liabilities before 2012, net of reinsurance | | | | 118 | |
| | | | | | | | | | | Liabilities for claims and claims adjustment expenses, net of reinsurance | | | $ | 22,960 | |
| Commercial Automobile | | | | | At December 31, 2021 | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | | | | | | | |
| Accident Year | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Total IBNR Plus Expected Development on Reported Claims | | | Cumulative Number of Reported Claims | |
| | | Unaudited | | | | | | | | | | |
| (dollars and reported claims in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2012 | | $ | 26,557 | | | $ | 27,720 | | | $ | 30,606 | | | $ | 31,435 | | | $ | 31,278 | | | $ | 31,648 | | | $ | 31,803 | | | $ | 31,896 | | | $ | 31,930 | | | $ | 31,922 | | | $ | 15 | | | | 8 | |
| 2013 | | | | | | | 32,902 | | | | 33,749 | | | | 34,751 | | | | 35,240 | | | | 36,404 | | | | 36,435 | | | | 36,569 | | | | 36,181 | | | | 36,165 | | | | 53 | | | | 8 | |
| 2014 | | | | | | | | | | | 42,760 | | | | 44,544 | | | | 47,326 | | | | 48,213 | | | | 49,284 | | | | 49,168 | | | | 49,308 | | | | 49,291 | | | | 91 | | | | 11 | |
| 2015 | | | | | | | | | | | | | | | 46,526 | | | | 48,323 | | | | 51,412 | | | | 54,259 | | | | 54,517 | | | | 54,619 | | | | 53,793 | | | | 234 | | | | 12 | |
| 2016 | | | | | | | | | | | | | | | | | | | 54,302 | | | | 57,353 | | | | 65,905 | | | | 67,127 | | | | 66,894 | | | | 66,085 | | | | 338 | | | | 13 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | 61,484 | | | | 67,927 | | | | 67,697 | | | | 67,249 | | | | 65,310 | | | | 895 | | | | 13 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | 79,307 | | | | 81,396 | | | | 82,313 | | | | 83,043 | | | | 2,306 | | | | 15 | |
| 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 88,864 | | | | 91,245 | | | | 90,290 | | | | 7,365 | | | | 16 | |
| 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 90,367 | | | | 87,766 | | | | 14,996 | | | | 14 | |
| 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 109,824 | | | | 41,282 | | | | 14 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | $ | 673,489 | | | | | | | | | |
| Commercial Automobile | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | |
| Accident Year | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | |
| | | Unaudited | | | | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2012 | | $ | 13,642 | | | $ | 20,240 | | | $ | 23,718 | | | $ | 27,417 | | | $ | 29,873 | | | $ | 30,402 | | | $ | 31,104 | | | $ | 31,228 | | | $ | 31,263 | | | $ | 31,507 | |
| 2013 | | | | | | | 16,306 | | | | 23,557 | | | | 26,879 | | | | 31,053 | | | | 34,083 | | | | 36,004 | | | | 36,106 | | | | 36,092 | | | | 36,087 | |
| 2014 | | | | | | | | | | | 22,707 | | | | 31,089 | | | | 39,436 | | | | 44,374 | | | | 47,290 | | | | 48,418 | | | | 48,603 | | | | 48,714 | |
| 2015 | | | | | | | | | | | | | | | 23,875 | | | | 35,342 | | | | 41,678 | | | | 48,261 | | | | 51,605 | | | | 51,992 | | | | 52,728 | |
| 2016 | | | | | | | | | | | | | | | | | | | 27,033 | | | | 38,237 | | | | 48,837 | | | | 57,237 | | | | 60,485 | | | | 64,421 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | 28,707 | | | | 40,213 | | | | 49,703 | | | | 57,128 | | | | 59,889 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | 33,862 | | | | 47,941 | | | | 57,451 | | | | 69,487 | |
| 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 36,948 | | | | 53,026 | | | | 63,575 | |
| 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 31,884 | | | | 46,459 | |
| 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 39,851 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | 512,718 | |
| | | | | | | | | | | All outstanding liabilities before 2012, net of reinsurance | | | | 46 | |
| | | | | | | | | | | Liabilities for claims and claims adjustment expenses, net of reinsurance | | | $ | 160,817 | |
| Commercial Multi-Peril | | | | | At December 31, 2021 | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | | | | | | | |
| Accident Year | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Total IBNR Plus Expected Development on Reported Claims | | | Cumulative Number of Reported Claims | |
| | | Unaudited | | | | | | | | | | |
| (dollars and reported claims in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2012 | | $ | 29,789 | | | $ | 30,716 | | | $ | 32,449 | | | $ | 34,117 | | | $ | 35,755 | | | $ | 36,214 | | | $ | 36,525 | | | $ | 36,876 | | | $ | 36,662 | | | $ | 36,844 | | | $ | 0 | | | | 6 | |
| 2013 | | | | | | | 35,683 | | | | 35,679 | | | | 37,292 | | | | 37,205 | | | | 37,981 | | | | 37,365 | | | | 37,453 | | | | 37,495 | | | | 37,630 | | | | 0 | | | | 6 | |
| 2014 | | | | | | | | | | | 48,204 | | | | 50,135 | | | | 51,843 | | | | 52,336 | | | | 53,294 | | | | 53,116 | | | | 52,926 | | | | 52,933 | | | | 79 | | | | 7 | |
| 2015 | | | | | | | | | | | | | | | 42,070 | | | | 43,874 | | | | 44,728 | | | | 45,104 | | | | 45,873 | | | | 45,366 | | | | 45,420 | | | | 135 | | | | 6 | |
| 2016 | | | | | | | | | | | | | | | | | | | 43,005 | | | | 46,988 | | | | 48,267 | | | | 48,871 | | | | 48,732 | | | | 48,823 | | | | 373 | | | | 6 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | 56,185 | | | | 56,043 | | | | 56,517 | | | | 54,812 | | | | 55,076 | | | | 674 | | | | 7 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | 66,265 | | | | 66,470 | | | | 67,749 | | | | 67,810 | | | | 3,653 | | | | 7 | |
| 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 71,865 | | | | 73,836 | | | | 76,326 | | | | 8,159 | | | | 7 | |
| 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 83,195 | | | | 79,910 | | | | 15,880 | | | | 8 | |
| 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 116,827 | | | | 37,194 | | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | $ | 617,599 | | | | | | | | | |
| Commercial Multi-Peril | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | |
| Accident Year | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | |
| | | Unaudited | | | | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2012 | | $ | 16,666 | | | $ | 23,384 | | | $ | 26,634 | | | $ | 29,370 | | | $ | 33,327 | | | $ | 35,331 | | | $ | 35,909 | | | $ | 36,329 | | | $ | 36,399 | | | $ | 36,529 | |
| 2013 | | | | | | | 19,875 | | | | 26,216 | | | | 29,159 | | | | 33,614 | | | | 35,104 | | | | 36,321 | | | | 37,333 | | | | 37,436 | | | | 37,488 | |
| 2014 | | | | | | | | | | | 27,920 | | | | 35,520 | | | | 40,936 | | | | 47,021 | | | | 50,017 | | | | 51,615 | | | | 52,103 | | | | 52,252 | |
| 2015 | | | | | | | | | | | | | | | 21,837 | | | | 29,419 | | | | 34,323 | | | | 39,162 | | | | 42,849 | | | | 44,090 | | | | 44,439 | |
| 2016 | | | | | | | | | | | | | | | | | | | 19,660 | | | | 29,402 | | | | 34,612 | | | | 41,193 | | | | 43,435 | | | | 44,944 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | 27,399 | | | | 36,926 | | | | 42,691 | | | | 46,361 | | | | 49,488 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | 30,597 | | | | 42,296 | | | | 48,050 | | | | 54,913 | |
| 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 28,210 | | | | 41,266 | | | | 47,522 | |
| 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 34,729 | | | | 46,193 | |
| 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 46,768 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | 460,536 | |
| | | | | | | | | | | All outstanding liabilities before 2012, net of reinsurance | | | | 531 | |
| | | | | | | | | | | Liabilities for claims and claims adjustment expenses, net of reinsurance | | | $ | 157,594 | |
| Workers’ Compensation | | | | | At December 31, 2021 | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31, | | | | | | | |
| Accident Year | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Total IBNR Plus Expected Development on Reported Claims | | | Cumulative Number of Reported Claims | |
| | | Unaudited | | | | | | | | | | |
| (dollars and reported claims in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2012 | | $ | 39,142 | | | $ | 39,516 | | | $ | 38,827 | | | $ | 37,926 | | | $ | 37,163 | | | $ | 36,468 | | | $ | 35,954 | | | $ | 35,932 | | | $ | 36,014 | | | $ | 36,056 | | | $ | 39 | | | | 5 | |
| 2013 | | | | | | | 46,325 | | | | 47,027 | | | | 44,289 | | | | 42,828 | | | | 42,327 | | | | 42,555 | | | | 42,651 | | | | 42,341 | | | | 42,427 | | | | 70 | | | | 6 | |
| 2014 | | | | | | | | | | | 51,508 | | | | 51,553 | | | | 49,288 | | | | 48,537 | | | | 47,540 | | | | 47,693 | | | | 47,849 | | | | 47,620 | | | | 68 | | | | 6 | |
| 2015 | | | | | | | | | | | | | | | 53,332 | | | | 49,615 | | | | 45,991 | | | | 44,986 | | | | 43,006 | | | | 42,597 | | | | 42,225 | | | | 328 | | | | 5 | |
| 2016 | | | | | | | | | | | | | | | | | | | 58,814 | | | | 49,802 | | | | 47,883 | | | | 44,969 | | | | 44,098 | | | | 43,559 | | | | 532 | | | | 5 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | 60,450 | | | | 56,351 | | | | 52,687 | | | | 51,464 | | | | 49,557 | | | | 1,461 | | | | 5 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | 62,197 | | | | 55,291 | | | | 52,514 | | | | 47,912 | | | | 2,171 | | | | 6 | |
| 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 60,998 | | | | 59,624 | | | | 57,728 | | | | 3,474 | | | | 6 | |
| 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 57,172 | | | | 57,850 | | | | 5,494 | | | | 5 | |
| 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 67,035 | | | | 21,111 | | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | $ | 491,969 | | | | | | | | | |
| Workers’ Compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | |
| Accident Year | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | |
| | | Unaudited | | | | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2012 | | $ | 11,097 | | | $ | 22,963 | | | $ | 28,812 | | | $ | 31,244 | | | $ | 33,196 | | | $ | 34,177 | | | $ | 34,460 | | | $ | 34,622 | | | $ | 34,691 | | | $ | 34,973 | |
| 2013 | | | | | | | 13,052 | | | | 26,043 | | | | 32,783 | | | | 36,351 | | | | 38,877 | | | | 39,617 | | | | 40,361 | | | | 40,827 | | | | 41,209 | |
| 2014 | | | | | | | | | | | 13,932 | | | | 28,513 | | | | 36,284 | | | | 40,393 | | | | 42,465 | | | | 43,866 | | | | 44,403 | | | | 44,671 | |
| 2015 | | | | | | | | | | | | | | | 13,071 | | | | 27,531 | | | | 34,192 | | | | 36,929 | | | | 37,936 | | | | 38,596 | | | | 39,096 | |
| 2016 | | | | | | | | | | | | | | | | | | | 14,709 | | | | 30,344 | | | | 37,178 | | | | 40,570 | | | | 41,208 | | | | 41,543 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | 15,581 | | | | 31,990 | | | | 39,684 | | | | 42,954 | | | | 44,242 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | 17,644 | | | | 31,928 | | | | 37,072 | | | | 41,611 | |
| 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 16,939 | | | | 33,009 | | | | 41,740 | |
| 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 14,591 | | | | 32,817 | |
| 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 20,931 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | 382,833 | |
| | | | | | | | | | | All outstanding liabilities before 2012, net of reinsurance | | | | 4,643 | |
| | | | | | | | | | | Liabilities for claims and claims adjustment expenses, net of reinsurance | | | $ | 113,779 | |
The following table presents a reconciliation of the net incurred and paid claims development tables to the liability for claims and claims adjustment expenses in our consolidated balance sheet:
| | | | |
| | | At December 31, | |
| (in thousands) | | 2018 | |
Net outstanding liabilities: | | | | |
Personal automobile | | $ | 133,957 | |
Homeowners | | | 15,661 | |
Commercial automobile | | | 100,216 | |
Commercial multi-peril | | | 79,814 | |
Workers’ compensation | | | 102,676 | |
Other | | | 9,390 | |
| | | | |
| | | 441,714 | |
| | | | |
Reinsurance recoverable: | | | | |
Personal automobile | | $ | 111,660 | |
Homeowners | | | 10,272 | |
Commercial automobile | | | 61,588 | |
Commercial multi-peril | | | 48,907 | |
Workers’ compensation | | | 82,660 | |
Other | | | 10,634 | |
| | | | |
| | | 325,721 | |
| | | | |
Unallocated loss adjustment expenses | | $ | 47,230 | |
| | | | |
Gross liability for unpaid losses and loss expenses | | $ | 814,665 | |
| | | | |
| | | At December 31, | |
| (in thousands) | | 2021
| |
| Net outstanding liabilities: | | | |
| Personal automobile | | $ | 101,429 | |
| Homeowners | | | 22,960 | |
| Commercial automobile | | | 160,817 | |
| Commercial multi-peril | | | 157,593 | |
Workers’ compensation | | | 113,779 | |
| Other | | | 24,953 | |
| | | | 581,531 | |
| | | | | |
| Reinsurance recoverable: | | | | |
| Personal automobile | | $ | 110,925 | |
| Homeowners | | | 13,200 | |
| Commercial automobile | | | 107,037 | |
| Commercial multi-peril | | | 98,848 | |
Workers’ compensation | | | 92,352 | |
| Other | | | 6,616 | |
| | | | 428,978 | |
| Unallocated loss adjustment expenses | | $ | 67,111 | |
| Gross liability for unpaid losses and loss expenses | | $ | 1,077,620 | |
The following table presents supplementary information about average historical claims duration as of December 31,
2018: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance | |
Years | | 1 | | | 2 | | | 3 | | | 4 | | | 5 | | | 6 | | | 7 | | | 8 | | | 9 | | | 10 | |
Personal automobile | | | 64.6 | % | | | 17.3 | % | | | 8.6 | % | | | 4.6 | % | | | 2.6 | % | | | 0.9 | % | | | 0.3 | % | | | 0.1 | % | | | 0.2 | % | | | — | % |
Homeowners | | | 81.5 | | | | 16.1 | | | | 1.6 | | | | 0.5 | | | | 0.3 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Commercial automobile | | | 44.8 | | | | 18.3 | | | | 13.2 | | | | 10.7 | | | | 6.9 | | | | 2.8 | | | | 1.2 | | | | 0.4 | | | | — | | | | 0.1 | |
Commercial multi-peril | | | 49.1 | | | | 17.4 | | | | 10.0 | | | | 9.9 | | | | 6.1 | | | | 3.3 | | | | 1.4 | | | | 1.0 | | | | 0.2 | | | | 0.6 | |
Workers’ compensation | | | 29.2 | | | | 31.2 | | | | 16.5 | | | | 8.3 | | | | 4.7 | | | | 2.6 | | | | 1.5 | | | | 0.9 | | | | 1.1 | | | | 0.5 | |
9—2021:
| | | Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance | |
| Years | | | 1 | | | | 2 | | | | 3 | | | | 4 | | | | 5 | | | | 6 | | | | 7 | | | | 8 | | | | 9 | | | | 10 | |
| Personal automobile | | | 64.8 | % | | | 16.9 | % | | | 8.6 | % | | | 4.3 | % | | | 2.3 | % | | | 0.8 | % | | | 0.4 | % | | | 0.4 | % | | | 0 | % | | | 0 | % |
| Homeowners | | | 81.5 | | | | 15.0 | | | | 1.3 | | | | 0.5 | | | | 0.3 | | | | 0.1 | | | | 0.2 | | | | 0 | | | | 0 | | | | 0 | |
| Commercial automobile | | | 41.7 | | | | 18.3 | | | | 12.8 | | | | 12.0 | | | | 6.2 | | | | 3.2 | | | | 1.1 | | | | 0.2 | | | | 0 | | | | 0.8 | |
| Commercial multi-peril | | | 45.4 | | | | 16.9 | | | | 9.4 | | | | 10.2 | | | | 6.5 | | | | 3.5 | | | | 1.5 | | | | 0.6 | | | | 0.2 | | | | 0.4 | |
| Workers’ compensation | | | 31.0 | | | | 31.8 | | | | 15.2 | | | | 7.7 | | | | 3.7 | | | | 1.9 | | | | 1.2 | | | | 0.7 | | | | 0.5 | | | | 0.8 | |
In
July 2018,August 2020, we
renewed our existingentered into a credit agreement with Manufacturers and Traders Trust Company (“M&T”)
relatingthat related to a
$60.0$20.0 million unsecured
revolvingdemand line of credit.
The line of credit has no expiration date, no annual fees and no covenants. At December 31,
2018,2021, we had
$25.0 million inno outstanding borrowings
from M&T and had the ability to borrow
an additional $35.0up to $20.0 million at interest rates equal to
M&T’s current prime rate or the then-current LIBOR rate plus
2.25%2.00%.
At December 31, 2018, the interest rate on our outstanding borrowings was 4.77%. The credit agreement required our compliance with certain covenants. These covenants included minimum levels of our net worth, leverage ratio, statutory surplus and the A.M. Best ratings of our insurance subsidiaries. We did not comply with the minimum net worth and minimum interest coverage ratio covenants at December 31, 2018. We terminated this credit agreement and entered into a new credit agreement with M&T in March 2019. The new credit agreement relates to a $30.0 million unsecured,-81-
revolving line of credit. We transferred our $25.0 million outstanding borrowings to this new line of credit and have the ability to borrow an additional $5.0 million at interest rates equal to M&T’s current prime rate or the then-current LIBOR rate plus 2.25%. The interest rate on our outstanding borrowings is adjustable quarterly. We pay a fee of 0.15% per annum on the loan commitment amount regardless of usage. The new credit agreement requires our compliance with certain covenants. These covenants include minimum levels of our net worth, leverage ratio, statutory surplus and the A.M. Best ratings of our insurance subsidiaries. In addition, Atlantic States has guaranteed our payment obligations under the new credit agreement. We complied with all of the requirements of the new credit agreement as of the filing date of this Form10-K Report.
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
hadhas a fixed-rate cash advance of $35.0 million
inthat was outstanding
advances at December 31,
2018.2021. The
cash advance carries a fixed interest rate
onof 1.74% and is due in August 2024. In March 2020, Atlantic States issued $50.0 million of debt to the
advances was2.32% at December 31, 2018. FHLB of Pittsburgh in exchange for a cash advance in the same amount that carried a fixed interest rate of 0.83%. Atlantic States obtained this contingent liquidity funding in light of uncertainty surrounding the economic impact of the COVID-19 pandemic. Atlantic States repaid this advance when it became due in March 2021. The table below presents the amount of FHLB of Pittsburgh stock Atlantic States purchased, collateral pledged and assets related to Atlantic States’ membership in the FHLB of Pittsburgh at December 31, 2018. | | | | |
FHLB stock purchased and owned as part of the agreement | | $ | 1,631,800 | |
Collateral pledged, at par (carrying value $40,248,211) | | | 40,900,431 | |
Borrowing capacity currently available | | | 3,463,689 | |
MICO is a member of the Federal Home Loan Bank (“FHLB”) of Indianapolis. During the second quarter of 2018, MICO terminated its line of credit with the FHLB of Indianapolis.
2021.
| FHLB stock purchased and owned as part of the agreement | | $ | 1,575,600 | |
Collateral pledged, at par (carrying value $43,486,897) | | | 43,074,486 | |
| Borrowing capacity currently available | | | 6,913,889 | |
In
January 2002, West Bend purchased aSeptember 2021, upon receipt of approval from the Michigan Department of Insurance and Financial Services, MICO repaid in full the $5.0 million surplus note
from MICO for $5.0 million to increase MICO’s statutory surplus. On December 1, 2010,held previously by Donegal Mutual,
purchased the surplus note from West Bend at face value. The surplus note carries analong with accrued interest
rate of
5.00%, and any repayment of principal or interest requires prior insurance regulatory approval. Upon receipt of regulatory approval, MICO paid $250,000 in interest to Donegal Mutual during each of 2018, 2017 and 2016.10—$178,082.
Our insurance subsidiaries and Donegal Mutual purchase certainparticipate in a consolidated third-party reinsurance on a combined basis. Through December 31, 2018, Le Mars, MICO, Peninsulaprogram, for which the coverage and Sheboygan also had separate third-party reinsurance programs that provided certain coverage that was commensurate with their relative size and exposures. Ourparameters are common to all of our insurance subsidiaries usedand Donegal Mutual. The program utilizes several different reinsurers, all of which consistent with the requirements of our insurance subsidiaries and Donegal Mutual, hadhave an A.M. Best rating ofA- (Excellent) or better or, with respect to foreign reinsurers, hadhave a financial condition that, in the opinion of our management, wasis equivalent to a company with at least anA- rating from A.M. Best. The following information describes the external reinsurance Donegal Mutual and our insurance subsidiaries andhad in place for 2021:
excess of loss reinsurance, under which Donegal Mutual purchased in 2018, 2017 and 2016 included “excess of loss reinsurance,” under which theirour insurance subsidiaries recovered losses were automatically reinsured, through a series of contracts, over a set retention (generally $1.0 million),of $2.0 million; and “catastrophic
catastrophe reinsurance,” under which theyDonegal Mutual and our insurance subsidiaries recovered through a series of contracts, 100% of an accumulation of many losses resulting from a single event, including natural disasters, over a set retention (generally $5.0 million) and after exceeding an annual aggregate deductible ($5.0of $15.0 million in 2018, $1.0 million in 2017 and $975,000 in 2016 ). For property insurance, our insurance subsidiaries had excess of loss treaties that provide for coverage up to $5.0 million per loss. For liability insurance, our insurance subsidiaries had excess of loss treaties that provide for coverage up to $50.0 million per occurrence. For workers’ compensation insurance, our insurance subsidiaries had excess of loss treaties that provide for coverage up to $10.0 million on any one life. Our insurance subsidiaries and Donegal Mutual had property catastrophe coverage through a series of layered treaties up to aggregate losses of $175.0$185.0 million for any single event. per occurrence.
As many as 2831 reinsurers provided coverage for 20182021 on any one treaty with no reinsurer taking more than 20% of any one treaty.The amount of coverage provided under each of these types of reinsurance depended upon the amount, nature, size and location of the risks being reinsured. Donegal Mutual and our insurance subsidiaries also purchased facultative reinsurance to cover exposures from losses that exceeded the limits provided by the treaty reinsurance Donegal Mutual and our insurance subsidiaries purchased.
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
Statestate of Michigan over a set retention.
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In November 2021, the MCCA approved the return of approximately $3.0 billion of its estimated surplus to its member insurance companies and provided guidance to those companies with respect to the payment of refunds to Michigan policyholders in the first half of 2022. We recorded a receivable from the MCCA and a corresponding payable for cash refunds due to Michigan policyholders in the amount of $18.1 million on our balance sheet as of December 31, 2021.
In addition to the pooling agreement and third-party reinsurance, our insurance subsidiaries had a catastrophe reinsurance agreement with Donegal Mutual, under which each of our insurance subsidiaries recovered 100% of an accumulation of multiple losses resulting from a single event, including natural disasters, over a set retention of $2.0 million up to aggregate losses of $13.0 million per occurrence. The agreement also provided additional coverage for an accumulation of losses from a single event including a combination of our insurance subsidiaries over a combined retention of $5.0 million.
Our insurance subsidiaries and Donegal Mutual also purchased facultative reinsurance to cover certain exposures, including property exposures in excess of the covered limits of their respective treaty reinsurance.
The following amounts represent ceded reinsurance transactions with unaffiliated reinsurers during
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Premiums written | | $ | 50,160,604 | | | $ | 51,241,267 | | | $ | 45,354,233 | |
Premiums earned | | | 51,266,000 | | | | 49,633,348 | | | | 44,318,542 | |
Losses and loss expenses | | | 50,652,202 | | | | 44,575,268 | | | | 18,588,114 | |
Prepaid reinsurance premiums | | | 10,108,269 | | | | 11,213,665 | | | | 9,605,746 | |
Liability for losses and loss expenses | | | 137,904,346 | | | | 116,689,871 | | | | 103,694,418 | |
2019:
| | | 2021
| | | 2020
| | | 2019
| |
| Premiums written | | $ | 38,173,733 | | | $ | 34,165,635 | | | $ | 36,941,997 | |
| Premiums earned | | | 37,984,833 | | | | 35,358,765 | | | | 39,732,282 | |
| Losses and loss expenses | | | 29,999,528 | | | | 9,835,268 | | | | 33,615,819 | |
| Prepaid reinsurance premiums | | | 6,063,759 | | | | 5,874,859 | | | | 7,067,989 | |
| Liability for losses and loss expenses | | | 138,909,584 | | | | 133,158,907 | | | | 139,694,097 | |
The following amounts represent total ceded reinsurance transactions with both affiliated and unaffiliated reinsurers during
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Premiums earned | | $ | 326,198,234 | | | $ | 310,179,267 | | | $ | 282,646,219 | |
Losses and loss expenses | | | 246,223,074 | | | | 218,523,260 | | | | 156,479,885 | |
Prepaid reinsurance premiums | | | 135,379,777 | | | | 135,032,641 | | | | 124,255,495 | |
Liability for losses and loss expenses | | | 339,267,525 | | | | 293,271,257 | | | | 259,147,147 | |
2019:
| | | 2021
| | | 2020
| | | 2019
| |
| Premiums earned | | $ | 399,284,886 | | | $ | 356,669,937 | | | $ | 314,859,014 | |
| Losses and loss expenses | | | 282,083,985 | | | | 231,771,575 | | | | 240,241,845 | |
| Prepaid reinsurance premiums | | | 176,935,842 | | | | 169,418,333 | | | | 142,475,767 | |
| Liability for losses and loss expenses | | | 451,261,306 | | | | 404,818,480 | | | | 362,768,427 | |
The following amounts represent the effect of reinsurance on premiums written for
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Direct | | $ | 594,078,723 | | | $ | 584,007,351 | | | $ | 537,880,237 | |
Assumed | | | 476,482,451 | | | | 466,087,983 | | | | 437,532,812 | |
Ceded | | | (326,545,370 | ) | | | (320,956,412 | ) | | | (293,379,217 | ) |
| | | | | | | | | | | | |
Net premiums written | | $ | 744,015,804 | | | $ | 729,138,922 | | | $ | 682,033,832 | |
| | | | | | | | | | | | |
2019:
| | | 2021
| | | 2020
| | | 2019
| |
| Direct | | $ | 609,204,706 | | | $ | 586,681,839 | | | $ | 589,572,526 | |
| Assumed | | | 601,864,198 | | | | 539,070,557 | | | | 485,233,762 | |
| Ceded | | | (406,802,395 | ) | | | (383,612,503 | ) | | | (322,204,999 | ) |
| Net premiums written | | $ | 804,266,509 | | | $ | 742,139,893 | | | $ | 752,601,289 | |
The following amounts represent the effect of reinsurance on premiums earned for
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Direct | | $ | 593,976,241 | | | $ | 561,178,447 | | | $ | 515,721,745 | |
Assumed | | | 473,512,866 | | | | 451,515,575 | | | | 423,129,271 | |
Ceded | | | (326,198,234 | ) | | | (310,179,267 | ) | | | (282,646,219 | ) |
| | | | | | | | | | | | |
Net premiums earned | | $ | 741,290,873 | | | $ | 702,514,755 | | | $ | 656,204,797 | |
| | | | | | | | | | | | |
Percentage of assumed premiums earned to net premiums earned | | | 63.9 | % | | | 64.3 | % | | | 64.5 | % |
| | | | | | | | | | | | |
11—2019:
| | | 2021
| | | 2020
| | | 2019
| |
| Direct | | $ | 601,408,581 | | | $ | 584,537,580 | | | $ | 591,101,804 | |
| Assumed | | | 573,891,506 | | | | 514,172,696 | | | | 479,835,610 | |
| Ceded | | | (399,284,886 | ) | | | (356,669,937 | ) | | | (314,859,014 | ) |
| Net premiums earned | | $ | 776,015,201 | | | $ | 742,040,339 | | | $ | 756,078,400 | |
| Percentage of assumed premiums earned to net premiums earned | | | 74.0 | % | | | 69.3 | % | | | 63.5 | % |
11 - Income Taxes
On December 22, 2017, TCJA was signed into law. The TCJA contains significant changes to corporate taxation, including the reduction of the corporate income tax rate to 21%, the acceleration of expensing for certain business assets, theone-time transition tax related to the transition of U.S. international tax from a worldwide tax system to a territorial tax system, the repeal of the domestic production deduction, additional limitations on the deductibility of interest expense, the repeal of the corporate alternative minimum tax and expanded limitations on the deductibility of executive compensation.
The key impacts of the TCJA on our financial statements for 2017 were the revaluation of our deferred tax balances to the new corporate tax rate that resulted in additional tax expense of $4.8 million and the reclassification of an alternative minimum tax credit carryforward of $8.5 million from net deferred tax assets to federal income taxes recoverable. We will recover the alternative minimum tax credit carryforward over the next three years.
-83-
Our provision for income tax
(benefit) expense for
2018, 20172021, 2020 and
20162019 consisted of the following:
| | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Current | | $ | (11,296,704 | ) | | $ | (2,139,061 | ) | | $ | 8,496,405 | |
Deferred | | | (4,179,805 | ) | | | 7,137,423 | | | | 2,030,865 | |
| | | | | | | | | | | | |
Federal income tax (benefit) expense | | $ | (15,476,509 | ) | | $ | 4,998,362 | | | $ | 10,527,270 | |
| | | | | | | | | | | | |
| | | 2021
| | | 2020
| | | 2019
| |
| Current federal income tax | | $ | 3,998,431 | | | $ | 10,450,803 | | | $ | 8,454,358 | |
| Deferred federal income tax | | | 1,085,903 | | | | 6,448 | | | | 649,928 | |
| Federal income tax expense | | $ | 5,084,334 | | | $ | 10,457,251 | | | $ | 9,104,286 | |
| Pennsylvania income tax | | | 0 | | | | 0 | | | | 825,000 | |
| Income tax expense | | $ | 5,084,334 | | | $ | 10,457,251 | | | $ | 9,929,286 | |
Our effective tax rate is different from the amount computed at the statutory federal rate of 21%
for 2018 and 35% for 2017 and 2016.. The reasons for such difference and the related tax effects are as follows:
| | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
(Loss) income before income taxes | | $ | (48,236,849 | ) | | $ | 12,114,462 | | | $ | 41,328,407 | |
| | | | | | | | | | | | |
Computed “expected” taxes | | | (10,129,738 | ) | | | 4,240,062 | | | | 14,464,942 | |
Tax-exempt interest | | | (1,521,090 | ) | | | (3,241,530 | ) | | | (3,951,926 | ) |
Proration | | | 405,204 | | | | 518,948 | | | | 629,697 | |
Effect of tax reform | | | — | | | | 4,752,547 | | | | — | |
Dividends received deduction | | | (99,726 | ) | | | (508,409 | ) | | | (691,616 | ) |
Net operating loss carryback | | | (4,210,523 | ) | | | — | | | | — | |
Tax benefit on exercise of options | | | (25,938 | ) | | | (873,515 | ) | | | — | |
Other, net | | | 105,302 | | | | 110,259 | | | | 76,173 | |
| | | | | | | | | | | | |
Federal income tax (benefit) expense | | $ | (15,476,509 | ) | | $ | 4,998,362 | | | $ | 10,527,270 | |
| | | | | | | | | | | | |
The net operating loss carryback of $4.2 million for 2018 relates to our carryback of our 2018 net operating loss to tax years 2016 and 2017 when the statutory federal tax rate was 35%. This carryback is permitted under a special rule within the TCJA that retained for property and casualty insurance companies the availability to carry back net operating losses to two prior tax years and to carry forward net operating losses to 20 future tax years.
| | | 2021
| | | 2020
| | | 2019
| |
| Income before income tax expense | | $ | 30,338,508 | | | $ | 63,272,503 | | | $ | 57,081,030 | |
| Computed “expected” taxes | | | 6,371,087 | | | | 13,287,226 | | | | 11,987,016 | |
| Tax-exempt interest | | | (1,491,154 | ) | | | (1,468,806 | ) | | | (1,325,197 | ) |
| Proration | | | 401,717 | | | | 395,663 | | | | 357,044 | |
| Dividends received deduction | | | (115,713 | ) | | | (113,845 | ) | | | (1,913,238 | ) |
| Net operating loss carryback | | | 0 | | | | (1,640,084 | ) | | | 0 | |
| Tax benefit on exercise of options | | | (438,850 | ) | | | (302,901 | ) | | | (64,765 | ) |
| Other, net | | | 357,247 | | | | 299,998 | | | | 236,676 | |
| Pennsylvania income tax, net of federal benefit | | | 0 | | | | 0 | | | | 651,750 | |
| Income tax expense | | $ | 5,084,334 | | | $ | 10,457,251 | | | $ | 9,929,286 | |
The tax effects of temporary differences that give rise to significant portions of our deferred tax assets and deferred tax liabilities at December 31,
20182021 and
20172020 are as follows:
| | | | | | | | |
| | | 2018 | | | 2017 | |
Deferred tax assets: | | | | | | | | |
Unearned premium | | $ | 15,634,433 | | | $ | 15,511,854 | |
Loss reserves | | | 7,644,415 | | | | 4,164,246 | |
Net operating loss carryforward | | | 3,090,010 | | | | 683,979 | |
Net state operating loss carryforward - DGI Parent | | | 8,070,196 | | | | 7,713,201 | |
Net unrealized losses | | | 3,782,145 | | | | 713,549 | |
Other | | | 2,517,791 | | | | 2,300,595 | |
| | | | | | | | |
Total gross deferred tax assets | | | 40,738,990 | | | | 31,087,424 | |
Less valuation allowance | | | (8,334,663 | ) | | | (7,977,668 | ) |
| | | | | | | | |
Net deferred tax assets | | | 32,404,327 | | | | 23,109,756 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Deferred policy acquisition costs | | | 12,729,176 | | | | 12,660,871 | |
Loss reserve transition adjustment | | | 2,339,068 | | | | — | |
Other | | | 4,266,328 | | | | 3,320,042 | |
| | | | | | | | |
Total gross deferred tax liabilities | | | 19,334,572 | | | | 15,980,913 | |
| | | | | | | | |
Net deferred tax asset | | $ | 13,069,755 | | | $ | 7,128,843 | |
| | | | | | | | |
We recorded
| | | 2021
| | | 2020
| |
| Deferred tax assets: | | | | | | |
| Unearned premium | | $ | 16,674,502 | | | $ | 15,481,602 | |
| Loss reserves | | | 9,568,677 | | | | 8,808,342 | |
| Net operating loss carryforward | | | 25,174 | | | | 104,041 | |
| Net state operating loss carryforward - DGI Parent | | | 7,865,563 | | | | 7,850,334 | |
| Other | | | 1,859,687 | | | | 2,342,967 | |
| Total gross deferred tax assets | | | 35,993,603 | | | | 34,587,286 | |
| Less valuation allowance | | | (7,865,563 | ) | | | (7,850,334 | ) |
| Net deferred tax assets | | | 28,128,040 | | | | 26,736,952 | |
| Deferred tax liabilities: | | | | | | | | |
| Deferred policy acquisition costs | | | 14,285,958 | | | | 12,422,961 | |
| Loss reserve transition adjustment | | | 1,148,529 | | | | 1,440,793 | |
| Other | | | 6,007,934 | | | | 7,190,085 | |
| Total gross deferred tax liabilities | | | 21,442,421 | | | | 21,053,839 | |
| Net deferred tax asset | | $ | 6,685,619 | | | $ | 5,683,113 | |
Our income tax expense for 2020 included a
$1.6 million income tax benefit related to the carryback of 2018 net operating
loss carryforward forlosses to past tax years with higher statutory income tax rates than are currently in effect, as allowed under the
portion of our taxable loss for 2018 exceeded our taxable incomeCoronavirus Aid, Relief and Economic Security Act that was enacted in
2016 and 2017. That net operating loss carryforward will generally begin to expire in 2038 if we do not utilize the carryforward prior to that date. We also recorded a loss reserve transition adjustment in 2018 related to changes the TCJA required with respect to the calculation of loss reserve discounting. Pursuant to the provisions of the TCJA, we will include the loss reserve transition adjustment in our taxable income over eight years beginning in 2018.-84-
March 2020.
We provide a valuation allowance when we believe it is more likely than not that we will not realize some portion of a deferred tax asset. At December 31,
20182021 and
2017,2020, we established a valuation allowance of
$264,467 related to a portion of the net operating loss carryforward of Le Mars that we acquired on January 1, 2004 and a valuation allowance of $8.1$7.9 million
and $7.7 million, respectively, for the net state operating loss carryforward of DGI. We determined that we were not required to establish a valuation allowance for the other net deferred tax assets of
$32.4$28.1 million and
$23.1$26.7 million at December 31,
20182021 and
2017,2020, respectively, since it is more likely than not that we will realize these deferred tax assets through reversals of existing temporary differences, future taxable income and our implementation of
tax-planning strategies.
Tax years
20152016 through
20182021 remained open for examination by tax authorities at December 31,
2018. The net operating loss carryforward2021. Federal income taxes recoverable at December 31, 2021 and 2020 included refunds of
$3.6$2.3 million
of Le Mars will begindue to
expire in 2020 if not utilized and is subjectus for tax years prior to
an annual limitation of approximately $376,000.12—2021.
12 - Stockholders’ Equity
Each share of our Class A common stock outstanding at the time of the declaration of any dividend or other distribution payable in cash upon the shares of our Class B common stock is entitled to a dividend or distribution payable at the same time and to stockholders of record on the same date in an amount at least 10% greater than any dividend declared upon each share of our Class B common stock. In the event of our merger or consolidation with or into another entity, the holders of our Class A common stock and the holders of our Class B common stock are entitled to receive the same per share consideration in such merger or consolidation. In the event of our liquidation, dissolution or
winding-up, any assets available to common stockholders will be distributed
pro-rata to the holders of our Class A common stock and our Class B common stock after payment of all of our obligations.
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 additional 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
not0t purchase any shares of our Class A common stock under this program during
2018, 20172021, 2020 or
2016.2019. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through December 31,
2018.2021.
At December 31,
20182021 and
2017,2020, our treasury stock consisted of 3,002,588 and 72,465 shares of Class A common stock and Class B common stock, respectively.
13—
13 - Stock Compensation Plans
Since 1996, we have maintained an Equity Incentive Plan for Employees. During
2015,2019, we adopted a plan that made a total of 4,500,000 shares of Class A common stock available for issuance to employees of our subsidiaries and affiliates. The plan provides for the granting of awards by our board of directors in the form of stock options, stock appreciation rights, restricted stock or any combination of the above. The plan provides that stock options may become exercisable up to five years from their date of grant, with an option price not less than fair market value on the date preceding the date of grant. We have not granted any stock appreciation rights.
Since 1996, we have maintained an Equity Incentive Plan for Directors. During
2015,2019, we adopted a plan that made 500,000 shares of Class A common stock available for issuance to our directors and the directors of our subsidiaries and affiliates.We may make awards in the form of stock options. The plan also provides for the issuance of 500 shares of restricted stock on the first business day of January in each year to each of our directors and each director of Donegal Mutual who does not serve as one of our directors. We issued
8,50010,000 shares of restricted stock on January
2, 2018 under our director plan. We issued 9,000 shares of restricted stock on January 3, 20174, 2021 under our director plan. We issued 8,500 shares of restricted stock on January
4, 20162, 2020 under our director plan.
We issued 8,500 shares of restricted stock on January 2, 2019 under our prior director plan.
No further shares are available for future option grants for plans in effect prior to 2019.
We measure all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and record such 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
-85-
pricing model are the risk-free interest rate, expected term, dividend yield and expected volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected term used as the assumption in the model. We base the expected term of an option award on our historical experience for similar awards. We determine the dividend yield by dividing the per share dividend by the grant date stock price. We base the expected volatility on the volatility of our stock price over a historical period comparable to the expected term.
The weighted-average grant date fair value of options we granted during
20182021 was
$1.66.$1.21. We calculated this fair value based upon a risk-free interest rate of
2.68%, an expected life of three years, an expected volatility of 22% and an expected dividend yield of 4%.The weighted-average grant date fair value of options we granted during 2017 was $1.81. We calculated this fair value based upon a risk-free interest rate of 2.01%, an expected life of three years, an expected volatility of 19% and an expected dividend yield of 3%.
The weighted-average grant date fair value of options we granted during 2016 was $1.94. We calculated this fair value based upon a risk-free interest rate of 2.23%0.91%, an expected life of three years, an expected volatility of 20% and an expected dividend yield of 3%4%.
The weighted-average grant date fair value of options we granted during 2020 was $1.15. We calculated this fair value based upon a risk-free interest rate of 0.20%, an expected life of three years, an expected volatility of 20% and an expected dividend yield of 4%.
The weighted-average grant date fair value of options we granted during 2019 was $1.15. We calculated this fair value based upon a risk-free interest rate of 1.64%, an expected life of three years, an expected volatility of 17% and an expected dividend yield of 4%.
We charged compensation expense for our stock compensation plans against income before income taxes of
$1.7 million, $2.0$965,701, $1.1 million and
$2.5$1.4 million for the years ended December 31,
2018, 20172021, 2020 and
2016,2019, respectively, with a corresponding income tax benefit of
$354,412, $692,164$202,797, $229,698 and
$864,210.$288,901. At December 31,
20182021 and
2017,2020, our total unrecognized compensation cost related to
non-vested share-based compensation granted under our stock compensation plans was
$2.5$1.5 million and
$2.9$1.6 million, respectively. We expect to recognize this cost over a weighted average period of 1.9 years.
During
2018,2021, we received cash from option exercises under all stock compensation plans of
$1.1$12.3 million. We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of
$25,938$438,850 for
2018.2021. During
2017,2020, we received cash from option exercises under all stock compensation plans of
$13.4$17.5 million. We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of
$873,515$302,901 for
2017.2020. During
2016,2019, we received cash from option exercises under all stock compensation plans of
$11.2$2.9 million. We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of
$788,700$64,765 for
2016. No further shares are available for future option grants for plans in effect prior to 2015.2019.
Information regarding activity in our stock option plans follows:
| | | | | | | | |
| | | Number of
Options | | | Weighted-
Average
Exercise Price
Per Share | |
Outstanding at December 31, 2015 | | | 8,794,952 | | | $ | 14.57 | |
Granted - 2016 | | | 1,417,500 | | | | 16.44 | |
Exercised - 2016 | | | (832,467 | ) | | | 13.44 | |
Forfeited - 2016 | | | (41,337 | ) | | | 14.97 | |
| | | | | | | | |
Outstanding at December 31, 2016 | | | 9,338,648 | | | | 14.95 | |
Granted - 2017 | | | 943,000 | | | | 17.58 | |
Exercised - 2017 | | | (924,019 | ) | | | 14.45 | |
Forfeited - 2017 | | | (93,167 | ) | | | 15.43 | |
| | | | | | | | |
Outstanding at December 31, 2017 | | | 9,264,462 | | | | 15.26 | |
Granted - 2018 | | | 1,063,000 | | | | 13.69 | |
Exercised - 2018 | | | (79,961 | ) | | | 13.74 | |
Forfeited - 2018 | | | (222,639 | ) | | | 16.00 | |
| | | | | | | | |
Outstanding at December 31, 2018 | | | 10,024,862 | | | $ | 15.09 | |
| | | | | | | | |
Exercisable at: | | | | | | | | |
December 31, 2016 | | | 6,347,470 | | | $ | 14.77 | |
| | | | | | | | |
December 31, 2017 | | | 6,946,677 | | | $ | 14.90 | |
| | | | | | | | |
December 31, 2018 | | | 7,936,659 | | | $ | 15.02 | |
| | | | | | | | |
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| | | Number of Options | | | Weighted-Average Exercise Price Per Share | |
| Outstanding at December 31, 2018 | | | 10,024,862 | | | $ | 15.09 | |
| Granted - 2019 | | | 1,045,400 | | | | 14.97 | |
| Exercised - 2019 | | | (217,498 | ) | | | 13.23 | |
| Forfeited - 2019 | | | (416,774 | ) | | | 15.88 | |
| Outstanding at December 31, 2019 | | | 10,435,990 | | | | 15.09 | |
| Granted - 2020 | | | 935,099 | | | | 14.45 | |
| Exercised - 2020 | | | (1,294,606 | ) | | | 13.52 | |
| Forfeited - 2020 | | | (303,908 | ) | | | 15.23 | |
| Expired - 2020 | | | (78,223 | ) | | $ | 13.64 | |
| Outstanding at December 31, 2020 | | | 9,694,352 | | | $ | 15.24 | |
| Granted - 2021 | | | 906,500 | | | | 14.39 | |
| Exercised - 2021 | | | (946,646 | ) | | | 13.00 | |
| Forfeited - 2021 | | | (404,664 | ) | | | 15.69 | |
| Expired - 2021 | | | (1,139,816 | ) | | $ | 16.40 | |
| Outstanding at December 31, 2021 | | | 8,109,726 | | | $ | 15.22 | |
| Exercisable at: | | | | | | | | |
| December 31, 2019 | | | 8,449,389 | | | $ | 15.13 | |
| December 31, 2020 | | | 7,786,934 | | | $ | 15.42 | |
| December 31, 2021 | | | 6,297,849 | | | $ | 15.43 | |
Shares available for future option grants at December 31,
20182021 totaled
42,6392.2 million shares under all plans.
The following table summarizes information about stock options outstanding at December 31,
2018: | | | | | | | | | | | | | | | | |
Grant Date | | Exercise
Price | | | Number of
Options
Outstanding | | | Weighted-
Average
Remaining
Contractual
Life | | | Number of
Options
Exercisable | |
July 27, 2011 | | $ | 12.50 | | | | 991,105 | | | | 3.0 years | | | | 991,105 | |
December 20, 2012 | | | 14.50 | | | | 1,044,319 | | | | 4.0 years | | | | 1,044,319 | |
December 19, 2013 | | | 15.90 | | | | 2,056,804 | | | | 5.0 years | | | | 2,056,804 | |
December 18, 2014 | | | 15.80 | | | | 1,330,581 | | | | 6.0 years | | | | 1,330,581 | |
December 17, 2015 | | | 13.64 | | | | 1,349,877 | | | | 2.0 years | | | | 1,349,877 | |
December 15, 2016 | | | 16.48 | | | | 1,302,110 | | | | 3.0 years | | | | 867,987 | |
December 21, 2017 | | | 17.60 | | | | 887,966 | | | | 4.0 years | | | | 295,986 | |
December 20, 2018 | | | 13.69 | | | | 1,062,100 | | | | 5.0 years | | | | — | |
| | | | | | | | | | | | | | | | |
| | | Total | | | | 10,024,862 | | | | | | | | 7,936,659 | |
| | | | | | | | | | | | | | | | |
2021:
| Grant Date | | Exercise Price | | | Number of Options Outstanding | | Weighted-Average Remaining Contractual Life | | Number of Options Exercisable | |
| December 20, 2012 | | | 14.50 | | | | 874,014 | | 1.0 years | | | 874,014 | |
| December 19, 2013 | | | 15.90 | | | | 1,784,970 | | 2.0 years | | | 1,784,970 | |
| December 18, 2014 | | | 15.80 | | | | 1,116,965 | | 3.0 years | | | 1,116,965 | |
| December 21, 2017 | | | 17.60 | | | | 735,700 | | 1.0 years | | | 735,700 | |
| December 20, 2018 | | | 13.69 | | | | 824,877 | | 2.0 years | | | 824,877 | |
| March 4, 2019 | | | 13.51 | | | | 10,000 | | 2.2 years | | | 10,000 | |
| December 19, 2019 | | | 14.98 | | | | 986,100 | | 3.0 years | | | 657,393 | |
| December 17, 2020 | | | 14.43 | | | | 871,800 | | 4.0 years | | | 290,597 | |
| January 4, 2021 | | | 14.07 | | | | 10,000 | | 4.0 years | | | 3,333 | |
| December 16, 2021 | | | 14.39 | | | | 895,300 | | 5.0 years | | | 0 | |
| | | Total | | | | 8,109,726 | | | | | 6,297,849 | |
Employee Stock Purchase Plan
Since 1996, we have maintained an Employee Stock Purchase Plan. During 2011, we adopted a plan that made 300,000 shares of our Class A common stock available for
issuance, which we amended in 2019 to make 500,000 shares of our Class A common stock available for issuance. The
2011 plan
expired during 2021. During 2021, we adopted a new plan that made 500,000 shares of our Class A common stock available for issuance and extends over a
10-year period and period. The plan provides for shares to be offered to all eligible employees at a purchase price equal to the lesser of 85%of the fair market value of our Class A common stock on the last day before the first day of each enrollment period (June 1 and December 1 of each year) under the plan or 85% of the fair market value of our Class A common stock on the last day of each subscription period (June 30 and December 31 of each year).
A summary of plan activity follows:
| | | | | | | | |
| | | Shares Issued | |
| | | Price | | | Shares | |
January 1, 2016 | | $ | 11.97 | | | | 18,387 | |
July 1, 2016 | | | 11.83 | | | | 22,418 | |
January 1, 2017 | | | 13.76 | | | | 18,512 | |
July 1, 2017 | | | 13.52 | | | | 25,155 | |
January 1, 2018 | | | 13.34 | | | | 20,662 | |
July 1, 2018 | | | 11.57 | | | | 27,802 | |
| | | Shares Issued | |
| | | Price | | | Shares | |
| January 1, 2019 | | | 11.60 | | | | 24,834 | |
| July 1, 2019 | | | 12.24 | | | | 22,926 | |
| January 1, 2020 | | | 12.28 | | | | 20,424 | |
| July 1, 2020 | | | 12.09 | | | | 22,662 | |
| January 1, 2021 | | | 11.96 | | | | 23,336 | |
| July 1, 2021 | | | 11.88 | | | | 24,619 | |
On January 1,
2019,2022, we issued
24,83424,907 shares at a price of
$11.60$12.15 per share under this plan.
Agency Stock Purchase Plan
Since 1996, we have maintained an Agency Stock Purchase Plan. During
2015,2018, we adopted a plan that made 350,000
shares of our Class A common stock available for issuance to agents of our insurance subsidiaries and Donegal Mutual. During 2021, we amended the 2018 plan to make 400,000 shares of our Class A common stock available for issuance. The 2018 plan expired in 2021. During 2021, we adopted a new plan that made 500,000 shares of our Class A common stock available for issuance to agents of our insurance subsidiaries and Donegal Mutual. The plan permits an agent to invest up to $12,000 per subscription period (April 1 to September 30 and October 1 to March 31 of each year) under various methods. We issue stock at the end of each subscription period at a price equal to 90% of the average market price during the last
ten trading days of each subscription period. During
2018, 20172021, 2020 and
2016,2019, we issued
117,935, 104,41899,828, 101,647 and
99,800110,836 shares, respectively, under this plan. The expense we recognized under
thethis plan was not material.
-87-
14 - Statutory Net Income, Capital and Surplus and Dividend Restrictions
The following table presents selected information, as filed with state insurance regulatory authorities, for our insurance subsidiaries as determined in accordance with accounting practices prescribed or permitted by such insurance regulatory authorities:
| | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Atlantic States: | | | | | | | | | | | | |
Statutory capital and surplus | | $ | 194,386,473 | | | $ | 223,170,835 | | | $ | 227,907,377 | |
Statutory unassigned surplus | | | 131,803,666 | | | | 161,760,924 | | | | 167,872,138 | |
Statutory net (loss) income | | | (22,039,704 | ) | | | (312,221 | ) | | | 15,750,876 | |
Southern: | | | | | | | | | | | | |
Statutory capital and surplus | | | 45,355,785 | | | | 54,503,581 | | | | 63,331,001 | |
Statutory unassigned (deficit) surplus | | | (6,346,270 | ) | | | 2,914,532 | | | | 11,881,309 | |
Statutory net (loss) income | | | (9,822,457 | ) | | | (3,375,434 | ) | | | 1,774,299 | |
Le Mars: | | | | | | | | | | | | |
Statutory capital and surplus | | | 19,593,938 | | | | 23,434,801 | | | | 25,543,803 | |
Statutory unassigned surplus | | | 6,462,783 | | | | 10,394,533 | | | | 12,614,756 | |
Statutory net (loss) income | | | (3,281,643 | ) | | | (1,679,335 | ) | | | 603,226 | |
Peninsula: | | | | | | | | | | | | |
Statutory capital and surplus | | | 32,717,996 | | | | 39,396,818 | | | | 41,977,034 | |
Statutory unassigned surplus | | | 14,415,949 | | | | 21,148,253 | | | | 23,826,681 | |
Statutory net (loss) income | | | (6,316,130 | ) | | | (841,119 | ) | | | 966,391 | |
Sheboygan: | | | | | | | | | | | | |
Statutory capital and surplus | | | 16,755,902 | | | | 13,823,118 | | | | 13,129,143 | |
Statutory unassigned surplus | | | 2,446,669 | | | | 554,498 | | | | 914,773 | |
Statutory net income (loss) | | | 1,862,831 | | | | (46,116 | ) | | | 644,344 | |
MICO: | | | | | | | | | | | | |
Statutory capital and surplus | | | 55,708,442 | | | | 52,796,379 | | | | 49,863,705 | |
Statutory unassigned surplus | | | 28,949,919 | | | | 26,162,540 | | | | 23,380,942 | |
Statutory net income | | | 6,350,686 | | | | 7,931,774 | | | | 7,187,213 | |
| | | 2021
| | | 2020
| | | 2019
| |
| Atlantic States: | | | | | | | | | |
| Statutory capital and surplus | | $ | 278,883,189 | | | $ | 279,796,696 | | | $ | 259,030,868 | |
| Statutory unassigned surplus | | | 174,073,348 | | | | 175,777,393 | | | | 155,909,822 | |
| Statutory net (loss) income | | | (7,417,845 | ) | | | 20,735,871 | | | | 22,282,231 | |
| Southern: | | | | | | | | | | | | |
| Statutory capital and surplus | | | 64,238,221 | | | | 57,142,228 | | | | 54,405,568 | |
| Statutory unassigned surplus (deficit) | | | 7,330,382 | | | | 300,409 | | | | (2,375,794 | ) |
| Statutory net income | | | 6,927,576 | | | | 4,350,677 | | | | 5,061,477 | |
| Peninsula: | | | | | | | | | | | | |
| Statutory capital and surplus | | | 47,867,789 | | | | 49,285,069 | | | | 39,244,570 | |
| Statutory unassigned surplus | | | 29,558,589 | | | | 30,975,869 | | | | 20,936,805 | |
| Statutory net income | | | 3,536,404 | | | | 10,955,796 | | | | 7,360,378 | |
| MICO: | | | | | | | | | | | | |
| Statutory capital and surplus | | | 75,197,207 | | | | 72,183,575 | | | | 65,768,590 | |
| Statutory unassigned surplus | | | 53,201,571 | | | | 45,247,698 | | | | 38,910,008 | |
| Statutory net income | | | 7,704,417 | | | | 12,240,173 | | | | 9,976,610 | |
Our principal source of cash for payment of dividends is dividends from our insurance subsidiaries. State insurance laws require our insurance subsidiaries to maintain certain minimum capital and surplus amounts on a statutory basis. Our insurance subsidiaries are subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval of their domiciliary insurance regulatory authorities. Our insurance subsidiaries are also subject to risk-based capital (“RBC”) requirements that may further impact their ability to pay dividends. Our insurance subsidiaries’ statutory capital and surplus at December 31,
20182021 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin. Amounts available for distribution to us as dividends from our insurance subsidiaries without prior approval of insurance regulatory authorities in
20192022 are
$19.4approximately $27.9 million from Atlantic States,
$4.5$6.9 million from Southern,
$2.0 million from Le Mars, $1.7$4.8 million from Peninsula
$1.7 million from Sheboygan and
$5.6$7.7 million from MICO, or a total of approximately
$34.9$47.3 million.
15—
15 - Reconciliation of Statutory Filings to Amounts Reported in the Consolidated Financial Statements
Our insurance subsidiaries must file financial statements with state insurance regulatory authorities using accounting principles and practices prescribed or permitted by those authorities. We refer to these accounting principles and practices as statutory accounting principles (“SAP”). Accounting principles used to prepare these SAP financial statements differ from those used to prepare financial statements on the basis of GAAP.
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Reconciliations of statutory net
(loss) income and capital and surplus, as determined using SAP, to the net
(loss) income and stockholders’ equity amounts included in the accompanying consolidated financial statements are as follows:
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2018 | | | 2017 | | | 2016 | |
Statutory net (loss) income of insurance subsidiaries | | $ | (33,246,417 | ) | | $ | 1,677,549 | | | $ | 26,926,349 | |
Increases (decreases): | | | | | | | | | | | | |
Deferred policy acquisition costs | | | 325,267 | | | | 3,980,664 | | | | 4,200,808 | |
Deferred federal income taxes | | | 4,179,807 | | | | 1,334,410 | | | | (2,030,865 | ) |
Salvage and subrogation recoverable | | | 2,061,600 | | | | 1,199,200 | | | | 1,502,600 | |
Consolidating eliminations and adjustments | | | (16,013,971 | ) | | | (13,534,428 | ) | | | (12,327,517 | ) |
Parent-only net income | | | 9,933,374 | | | | 12,458,705 | | | | 12,529,762 | |
| | | | | | | | | | | | |
Net (loss) income | | $ | (32,760,340 | ) | | $ | 7,116,100 | | | $ | 30,801,137 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | December 31, | |
| | | 2018 | | | 2017 | | | 2016 | |
Statutory capital and surplus of insurance subsidiaries | | $ | 364,518,536 | | | $ | 407,125,532 | | | $ | 421,752,063 | |
Increases (decreases): | | | | | | | | | | | | |
Deferred policy acquisition costs | | | 60,615,127 | | | | 60,289,860 | | | | 56,309,196 | |
Deferred federal income taxes | | | (20,094,374 | ) | | | (14,422,511 | ) | | | (20,843,506 | ) |
Salvage and subrogation recoverable | | | 20,038,200 | | | | 17,976,600 | | | | 16,777,400 | |
Non-admitted assets and other adjustments, net | | | 1,904,083 | | | | 1,960,089 | | | | 1,689,814 | |
Fixed maturities | | | (16,528,367 | ) | | | (8,748,140 | ) | | | (7,271,932 | ) |
Parent-only equity and other adjustments | | | (11,583,304 | ) | | | (15,485,326 | ) | | | (29,797,715 | ) |
| | | | | | | | | | | | |
Stockholders’ equity | | $ | 398,869,901 | | | $ | 448,696,104 | | | $ | 438,615,320 | |
| | | | | | | | | | | | |
16—
| | | Year Ended December 31, | |
| | | 2021
| | | 2020
| | | 2019
| |
| Statutory net income of insurance subsidiaries | | $ | 10,750,552 | | | $ | 48,282,517 | | | $ | 44,680,696 | |
| Increases (decreases): | | | | | | | | | | | | |
| Deferred policy acquisition costs | | | 8,871,415 | | | | (127,901 | ) | | | (1,330,268 | ) |
| Deferred federal income taxes | | | (1,085,903 | ) | | | (6,448 | ) | | | 639,284 | |
| Salvage and subrogation recoverable | | | 2,551,800 | | | | 713,400 | | | | 207,000 | |
| Consolidating eliminations and adjustments | | | (18,769 | ) | | | (9,516,984 | ) | | | (11,048,314 | ) |
| Parent-only net income | | | 4,185,079 | | | | 13,470,668 | | | | 14,003,346 | |
| Net income | | $ | 25,254,174 | | | $ | 52,815,252 | | | $ | 47,151,744 | |
| | | December 31, | |
| | | 2021
| | | 2020
| | | 2019
| |
| Statutory capital and surplus of insurance subsidiaries | | $ | 466,186,406 | | | $ | 458,407,568 | | | $ | 418,449,596 | |
| Increases (decreases): | | | | | | | | | | | | |
| Deferred policy acquisition costs | | | 68,028,373 | | | | 59,156,958 | | | | 59,284,859 | |
| Deferred federal income taxes | | | (21,294,388 | ) | | | (18,586,428 | ) | | | (15,477,843 | ) |
| Salvage and subrogation recoverable | | | 23,510,400 | | | | 20,958,600 | | | | 20,245,200 | |
| Non-admitted assets and other adjustments, net | | | 929,862 | | | | 1,315,378 | | | | 1,727,754 | |
| Fixed maturities | | | 5,958,434 | | | | 15,309,610 | | | | (326,795 | ) |
| Parent-only equity and other adjustments | | | (12,283,000 | ) | | | (18,787,566 | ) | | | (32,887,252 | ) |
| Stockholders’ equity | | $ | 531,036,087 | | | $ | 517,774,120 | | | $ | 451,015,519 | |
16 - Supplementary Cash Flow Information
The following table reflects net income taxes we
paid (recovered)
paid and interest we paid during
2018, 20172021, 2020 and
2016: | | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Income taxes | | $ | (3,290,247 | ) | | $ | 3,050,000 | | | $ | 7,305,000 | |
Interest | | | 1,280,352 | | | | 1,341,706 | | | | 1,377,247 | |
17—2019:
| | | 2021
| | | 2020
| | | 2019
| |
| Income taxes | | $ | 6,200,000 | | | $ | 12,800,000 | | | $ | (9,827,433 | ) |
| Interest | | | 1,150,211 | | | | 1,191,800 | | | | 321,585 | |
We have two classes of common stock, which we refer to as Class A common stock and Class B common stock. Our Class A common stock is entitled to be paid cash dividends that are at least 10% higher than the cash dividends we pay on our Class B common stock. Accordingly, we use the
two-class method for the computation of 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 declared and an allocation of remaining undistributed earnings using a participation percentage reflecting the dividend rights of each class.
-89-
We present below a reconciliation of the numerators and denominators we used in the basic and diluted per share computations for our Class A common stock:
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| (in thousands, except per share amounts) | | 2018 | | | 2017 | | | 2016 | |
Basic (loss) earnings per share: | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | |
Allocation of net (loss) income | | $ | (26,691 | ) | | $ | 5,879 | | | $ | 24,885 | |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Weighted-average shares outstanding | | | 22,705 | | | | 21,799 | | | | 20,917 | |
| | | | | | | | | | | | |
Basic (loss) earnings per share | | $ | (1.18 | ) | | $ | 0.27 | | | $ | 1.19 | |
| | | | | | | | | | | | |
Diluted (loss) earnings per share: | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | |
Allocation of net (loss) income | | $ | (26,691 | ) | | $ | 5,879 | | | $ | 24,885 | |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Number of shares used in basic computation | | | 22,705 | | | | 21,799 | | | | 20,917 | |
Weighted-average effect of dilutive securities | | | | | | | | | | | | |
Add: Director and employee stock options | | | — | | | | 843 | | | | 613 | |
| | | | | | | | | | | | |
Number of shares used in per share computations | | | 22,705 | | | | 22,642 | | | | 21,530 | |
| | | | | | | | | | | | |
Diluted (loss) earnings per share | | $ | (1.18 | ) | | $ | 0.26 | | | $ | 1.16 | |
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| (in thousands) | | 2021
| | | 2020
| | | 2019
| |
| Basic earnings per share: | | | | | | | | | |
| Numerator: | | | | | | | | | |
| Allocation of net income | | $ | 21,131 | | | $ | 43,609 | | | $ | 38,718 | |
| Denominator: | | | | | | | | | | | | |
| Weighted-average shares outstanding | | | 25,388 | | | | 23,707 | | | | 22,986 | |
| Basic earnings per share | | $ | 0.83 | | | $ | 1.84 | | | $ | 1.68 | |
| Diluted earnings per share: | | | | | | | | | | | | |
| Numerator: | | | | | | | | | | | | |
| Allocation of net income | | $ | 21,131 | | | $ | 43,609 | | | $ | 38,718 | |
| Denominator: | | | | | | | | | | | | |
| Number of shares used in basic computation | | | 25,388 | | | | 23,707 | | | | 22,986 | |
| Weighted-average effect of dilutive securities | | | | | | | | | | | | |
| Add: Director and employee stock options | | | 146 | | | | 180 | | | | 211 | |
| Number of shares used in per share computations | | | 25,534 | | | | 23,887 | | | | 23,197 | |
| Diluted earnings per share | | $ | 0.83 | | | $ | 1.83 | | | $ | 1.67 | |
We used the following information in the basic and diluted per share computations for our Class B common stock:
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| (in thousands, except per share amounts) | | 2018 | | | 2017 | | | 2016 | |
Basic and diluted (loss) earnings per share: | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | |
Allocation of net (loss) income | | $ | (6,069 | ) | | $ | 1,237 | | | $ | 5,916 | |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Weighted-average shares outstanding | | | 5,577 | | | | 5,577 | | | | 5,577 | |
| | | | | | | | | | | | |
Basic and diluted (loss) earnings per share | | $ | (1.09 | ) | | $ | 0.22 | | | $ | 1.06 | |
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| (in thousands) | | 2021
| | | 2020
| | | 2019
| |
| Basic and diluted earnings per share: | | | | | | | | | |
| Numerator: | | | | | | | | | |
| Allocation of net income | | $ | 4,123 | | | $ | 9,206 | | | $ | 8,434 | |
| Denominator: | | | | | | | | | | | | |
| Weighted-average shares outstanding | | | 5,577 | | | | 5,577 | | | | 5,577 | |
| Basic and diluted earnings per share | | $ | 0.74 | | | $ | 1.65
| | | $ | 1.51 | |
During
2018,2021, we did not include
any effectoptions to purchase 3,637,635 shares of
dilutive securitiesour Class A common stock in the computation of diluted earnings per share
due to because the exercise price of the options was greater than the average market price of our net loss during the period.
-90-
Class A common stock.
18 - Condensed Financial Information of Parent Company
(in thousands)
| | | | | | | | |
| December 31, | | 2018 | | | 2017 | |
Assets | | | | | | | | |
Investment in subsidiaries/affiliates (equity method) | | $ | 465,030 | | | $ | 509,011 | |
Short-term investments | | | 29 | | | | 29 | |
Cash | | | 1,542 | | | | 3,237 | |
Property and equipment | | | 928 | | | | 994 | |
Other | | | — | | | | 1,479 | |
| | | | | | | | |
Total assets | | $ | 467,529 | | | $ | 514,750 | |
| | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
Liabilities | | | | | | | | |
Cash dividends declared to stockholders | | $ | 3,948 | | | $ | 3,842 | |
Borrowings under lines of credit | | | 60,000 | | | | 59,000 | |
Other | | | 4,711 | | | | 3,212 | |
| | | | | | | | |
Total liabilities | | | 68,659 | | | | 66,054 | |
| | | | | | | | |
Stockholders’ equity | | | 398,870 | | | | 448,696 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 467,529 | | | $ | 514,750 | |
| | | | | | | | |
-91-
| December 31, | | 2021
| | | 2020
| |
| Assets | | | | | | |
| Investment in subsidiaries/affiliates (equity method) | | $ | 554,804 | | | $ | 540,665 | |
| Short-term investments | | | 9 | | | | 9 | |
| Cash | | | 14,375 | | | | 15,321 | |
| Property and equipment | | | 716 | | | | 833 | |
| Other | | | 2,455 | | | | 1,721 | |
| Total assets | | $ | 572,359 | | | $ | 558,549 | |
| | | | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | | | |
| Liabilities | | | | | | | | |
| Cash dividends declared to stockholders | | $ | 4,915 | | | $ | 4,436 | |
| Notes payable to subsidiary | | | 35,000 | | | | 35,000 | |
| Other | | | 1,408 | | | | 1,339 | |
| Total liabilities | | | 41,323 | | | | 40,775 | |
| Stockholders’ equity | | | 531,036 | | | | 517,774 | |
| Total liabilities and stockholders’ equity | | $ | 572,359 | | | $ | 558,549 | |
Condensed Statements of
(Loss) Income and Comprehensive
(Loss) Income
(in thousands)
| | | | | | | | | | | | |
| Year Ended December 31, | | 2018 | | | 2017 | | | 2016 | |
Statements of (Loss) Income | | | | | | | | | | | | |
Revenues | | | | | | | | | | | | |
Dividends from subsidiaries | | $ | 11,000 | | | $ | 13,000 | | | $ | 13,000 | |
Other | | | 3,196 | | | | 2,131 | | | | 1,759 | |
| | | | | | | | | | | | |
Total revenues | | | 14,196 | | | | 15,131 | | | | 14,759 | |
| | | | | | | | | | | | |
Expenses | | | | | | | | | | | | |
Operating expenses | | | 1,628 | | | | 1,433 | | | | 1,413 | |
Interest | | | 2,224 | | | | 1,929 | | | | 1,747 | |
| | | | | | | | | | | | |
Total expenses | | | 3,852 | | | | 3,362 | | | | 3,160 | |
| | | | | | | | | | | | |
Income (loss) before income tax expense (benefit) and equity in undistributed net (loss) income of subsidiaries | | | 10,344 | | | | 11,769 | | | | 11,599 | |
Income tax expense (benefit) | | | 411 | | | | (690 | ) | | | (931 | ) |
| | | | | | | | | | | | |
Income before equity in undistributed net (loss) income of subsidiaries | | | 9,933 | | | | 12,459 | | | | 12,530 | |
Equity in undistributed net (loss) income of subsidiaries | | | (42,693 | ) | | | (5,343 | ) | | | 18,271 | |
| | | | | | | | | | | | |
Net (loss) income | | $ | (32,760 | ) | | $ | 7,116 | | | $ | 30,801 | |
| | | | | | | | | | | | |
Statements of Comprehensive (Loss) Income | | | | | | | | | | | | |
Net (loss) income | | $ | (32,760 | ) | | $ | 7,116 | | | $ | 30,801 | |
| | | | | | | | | | | | |
Other comprehensive (loss) income, net of tax | | | | | | | | | | | | |
Unrealized (loss) gain - subsidiaries | | | (6,625 | ) | | | 46 | | | | (3,028 | ) |
| | | | | | | | | | | | |
Other comprehensive (loss) income, net of tax | | | (6,625 | ) | | | 46 | | | | (3,028 | ) |
| | | | | | | | | | | | |
Comprehensive (loss) income | | $ | (39,385 | ) | | $ | 7,162 | | | $ | 27,773 | |
| | | | | | | | | | | | |
-92-
| Year Ended December 31, | | 2021
| | | 2020
| | | 2019
| |
| Statements of Income | | | | | | | | | |
| Revenues | | | | | | | | | |
| Dividends from subsidiaries | | $ | 5,000 | | | $ | 14,000 | | | $ | 4,000 | |
| Realized investment gains | | | 0 | | | | 0 | | | | 12,378 | |
| Other | | | 481 | | | | 463 | | | | 1,009 | |
| Total revenues | | | 5,481 | | | | 14,463 | | | | 17,387 | |
| Expenses | | | | | | | | | | | | |
| Operating expenses | | | 1,223 | | | | 1,258 | | | | 1,420 | |
| Interest | | | 787 | | | | 794 | | | | 1,327 | |
| Total expenses | | | 2,010 | | | | 2,052 | | | | 2,747 | |
| Income before income tax (benefit) expense and equity in undistributed net income of subsidiaries | | | 3,471 | | | | 12,411 | | | | 14,640 | |
| Income tax (benefit) expense | | | (714 | ) | | | (1,059 | ) | | | 636 | |
| Income before equity in undistributed net income of subsidiaries | | | 4,185 | | | | 13,470 | | | | 14,004 | |
| Equity in undistributed net income of subsidiaries | | | 21,069 | | | | 39,345 | | | | 33,148 | |
| Net income | | $ | 25,254 | | | $ | 52,815 | | | $ | 47,152 | |
| Statements of Comprehensive Income | | | | | | | | | | | | |
| Net income | | $ | 25,254 | | | $ | 52,815 | | | $ | 47,152 | |
| Other comprehensive (loss) income, net of tax | | | | | | | | | | | | |
| Unrealized (loss) gain - subsidiaries | | | (7,847 | ) | | | 10,627 | | | | 14,732 | |
| Other comprehensive (loss) income, net of tax | | | (7,847 | ) | | | 10,627 | | | | 14,732 | |
| Comprehensive income | | $ | 17,407 | | | $ | 63,442 | | | $ | 61,884 | |
Condensed Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | |
| Year Ended December 31, | | 2018 | | | 2017 | | | 2016 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net (loss) income | | $ | (32,760 | ) | | $ | 7,116 | | | $ | 30,801 | |
| | | | | | | | | | | | |
Adjustments: | | | | | | | | | | | | |
Equity in undistributed net loss (income) of subsidiaries | | | 42,694 | | | | 5,343 | | | | (18,271 | ) |
Other | | | 2,531 | | | | 2,048 | | | | 2,802 | |
| | | | | | | | | | | | |
Net adjustments | | | 45,225 | | | | 7,391 | | | | (15,469 | ) |
| | | | | | | | | | | | |
Net cash provided | | | 12,465 | | | | 14,507 | | | | 15,332 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Net sale of short-term investments | | | — | | | | 1 | | | | 2 | |
Net purchase of property and equipment | | | (106 | ) | | | (788 | ) | | | (11 | ) |
Investment in subsidiaries | | | (2,644 | ) | | | (2,992 | ) | | | (2,393 | ) |
Other | | | (1 | ) | | | (1 | ) | | | — | |
| | | | | | | | | | | | |
Net cash used | | | (2,751 | ) | | | (3,780 | ) | | | (2,402 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Cash dividends paid | | | (15,659 | ) | | | (14,821 | ) | | | (14,085 | ) |
Issuance of common stock | | | 3,250 | | | | 15,511 | | | | 13,822 | |
Payments on lines of credit | | | — | | | | (10,000 | ) | | | (12,000 | ) |
Borrowings under lines of credit | | | 1,000 | | | | — | | | | — | |
| | | | | | | | | | | | |
Net cash used | | | (11,409 | ) | | | (9,310 | ) | | | (12,263 | ) |
| | | | | | | | | | | | |
Net change in cash | | | (1,695 | ) | | | 1,417 | | | | 667 | |
Cash at beginning of year | | | 3,237 | | | | 1,820 | | | | 1,153 | |
| | | | | | | | | | | | |
Cash at end of year | | $ | 1,542 | | | $ | 3,237 | | | $ | 1,820 | |
| | | | | | | | | | | | |
19—
| Year Ended December 31, | | 2021
| | | 2020
| | | 2019
| |
| Cash flows from operating activities: | | | | | | | | | |
| Net income | | $ | 25,254 | | | $ | 52,815 | | | $ | 47,152 | |
| Adjustments: | | | | | | | | | | | | |
| Equity in undistributed net income of subsidiaries | | | (21,069 | ) | | | (39,345 | ) | | | (33,148 | ) |
| Realized investment gains | | | 0 | | | | 0 | | | | (12,378 | ) |
| Other | | | (536 | ) | | | (5,615 | ) | | | 490 | |
| Net adjustments | | | (21,605 | ) | | | (44,960 | ) | | | (45,036 | ) |
| Net cash provided | | | 3,649 | | | | 7,855 | | | | 2,116 | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Net sale (purchases) of short-term investments | | | 0 | | | | 2,493 | | | | (2,473 | ) |
| Net purchase of property and equipment | | | (13 | ) | | | (18 | ) | | | (150 | ) |
| Sale of DFSC | | | 0 | | | | 0 | | | | 33,923 | |
| Sale of equity securities - available for sale | | | 0 | | | | 0 | | | | 20,287 | |
| Investment in subsidiaries | | | (916 | ) | | | (1,037 | ) | | | (18,283 | ) |
| Net cash (used) received | | | (929 | ) | | | 1,438 | | | | 33,304 | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Cash dividends paid | | | (19,099 | ) | | | (16,976 | ) | | | (16,093 | ) |
| Issuance of common stock | | | 15,433 | | | | 20,654 | | | | 6,481 | |
| Payments on lines of credit | | | 0 | | | | 0 | | | | (25,000 | ) |
| Net cash (used) received | | | (3,666 | ) | | | 3,678 | | | | (34,612 | ) |
| Net change in cash | | | (946 | ) | | | 12,971 | | | | 808 | |
| Cash at beginning of year | | | 15,321 | | | | 2,350 | | | | 1,542 | |
| Cash at end of year | | $ | 14,375 | | | $ | 15,321 | | | $ | 2,350 | |
We have
four3 reportable segments, which consist of our investment function, our
personal lines of insurance, our commercial lines of insurance and our
investment in DFSC.personal lines of insurance. Using independent agents, our insurance subsidiaries market
personal lines of insurance to individuals and commercial lines of insurance to small and
medium-sized businesses. businesses and personal lines of insurance to individuals.
We evaluate the performance of the
personalcommercial lines and
commercialpersonal lines primarily based upon our insurance subsidiaries’ underwriting results as determined under SAP for our total business.
We do not allocate assets to the
personalcommercial and
commercialpersonal lines and review the two segments in total for purposes of decision-making. We operate only in the United States, and no single customer or agent provides 10 percent or more of our revenues.
-93-
Financial data by segment is as follows:
| | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
| | | (in thousands) | |
Revenues: | | | | | | | | | | | | |
Premiums earned: | | | | | | | | | | | | |
Commercial lines | | $ | 337,924 | | | $ | 318,391 | | | $ | 295,077 | |
Personal lines | | | 403,367 | | | | 384,124 | | | | 361,128 | |
| | | | | | | | | | | | |
GAAP premiums earned | | | 741,291 | | | | 702,515 | | | | 656,205 | |
Net investment income | | | 26,908 | | | | 23,527 | | | | 22,633 | |
Investment (losses) gains | | | (4,802 | ) | | | 5,705 | | | | 2,526 | |
Equity in earnings of DFSC | | | 2,694 | | | | 1,622 | | | | 1,086 | |
Other | | | 5,737 | | | | 5,658 | | | | 5,973 | |
| | | | | | | | | | | | |
Total revenues | | $ | 771,828 | | | $ | 739,027 | | | $ | 688,423 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
| | | (in thousands) | |
(Loss) income before income taxes: | | | | | | | | | | | | |
Underwriting (loss) income: | | | | | | | | | | | | |
Commercial lines | | $ | (22,059 | ) | | $ | 13,263 | | | $ | 18,284 | |
Personal lines | | | (53,590 | ) | | | (39,042 | ) | | | (10,745 | ) |
| | | | | | | | | | | | |
SAP underwriting (loss) income | | | (75,649 | ) | | | (25,779 | ) | | | 7,539 | |
GAAP adjustments | | | 894 | | | | 4,408 | | | | 4,642 | |
| | | | | | | | | | | | |
GAAP underwriting (loss) income | | | (74,755 | ) | | | (21,371 | ) | | | 12,181 | |
Net investment income | | | 26,908 | | | | 23,527 | | | | 22,633 | |
Investment (losses) gains | | | (4,802 | ) | | | 5,705 | | | | 2,526 | |
Equity in earnings of DFSC | | | 2,694 | | | | 1,622 | | | | 1,086 | |
Other | | | 1,718 | | | | 2,631 | | | | 2,902 | |
| | | | | | | | | | | | |
(Loss) income before income taxes | | $ | (48,237 | ) | | $ | 12,114 | | | $ | 41,328 | |
| | | | | | | | | | | | |
20—
| | | 2021
| | | 2020
| | | 2019
| |
| | | (in thousands) | |
| Revenues: | | | | | | | | | |
| Premiums earned: | | | | | | | | | |
| Commercial lines | | $ | 468,433 | | | $ | 412,877 | | | $ | 385,465 | |
| Personal lines | | | 307,582 | | | | 329,163 | | | | 370,613 | |
| GAAP premiums earned | | | 776,015 | | | | 742,040 | | | | 756,078 | |
| Net investment income | | | 31,126 | | | | 29,504 | | | | 29,515 | |
| Investment gains | | | 6,477 | | | | 2,778 | | | | 21,985 | |
| Equity in earnings of DFSC | | | 0 | | | | 0 | | | | 295 | |
| Other | | | 2,848 | | | | 3,497 | | | | 4,578 | |
| Total revenues | | $ | 816,466 | | | $ | 777,819 | | | $ | 812,451 | |
| | | 2021
| | | 2020
| | | 2019
| |
| | | (in thousands) | |
| Income before income taxes: | | | | | | | | | |
| Underwriting (loss) income: | | | | | | | | | |
| Commercial lines | | $ | (35,174 | ) | | $ | (858 | ) | | $ | 8,404 | |
| Personal lines | | | 17,235 | | | | 31,764 | | | | (1,617 | ) |
| SAP underwriting (loss) income | | | (17,939 | ) | | | 30,906 | | | | 6,787 | |
| GAAP adjustments | | | 9,945 | | | | (959 | ) | | | (3,079 | ) |
| GAAP underwriting (loss) income | | | (7,994 | ) | | | 29,947 | | | | 3,708 | |
| Net investment income | | | 31,126 | | | | 29,504 | | | | 29,515 | |
| Investment gains | | | 6,477 | | | | 2,778 | | | | 21,985 | |
| Equity in earnings of DFSC | | | 0 | | | | 0 | | | | 295 | |
| Other | | | 730 | | | | 1,043 | | | | 1,578 | |
| Income before income taxes | | $ | 30,339 | | | $ | 63,272 | | | $ | 57,081 | |
20 - Guaranty Fund and Other Insurance-Related Assessments
Our insurance subsidiaries’ liabilities for guaranty fund and other insurance-related assessments were
$1.9$1.7 million and $1.6 million at December 31,
20182021 and
2017,2020, respectively. These liabilities included
$583,361$602,523 and
$562,799$485,322 related to surcharges collected by our insurance subsidiaries on behalf of regulatory authorities for
20182021 and
2017,2020, respectively.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Donegal Group Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Donegal Group Inc. and subsidiaries (the Company) as of December 31,
20182021 and
2017,2020, the related consolidated statements of
(loss) income and comprehensive
(loss) income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31,
2018,2021, and the related notes and financial statement schedule
III (collectively, the consolidated financial statements). In our opinion,
based on our audits and the report of the other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
20182021 and
2017,2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31,
2018,2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31,
2018,2021, based on criteria established in Internal
Control—Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March
14, 20197, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
We did not audit the financial statements of Donegal Financial Services Corporation (a 48.2 percent owned investee company). The Company’s investment in Donegal Financial Services Corporation was $41,025,975 and $38,773,420 as of December 31, 2018 and 2017, respectively, and its equity in earnings of Donegal Financial Services Corporation was $2,693,962, $1,621,605, and $1,086,157 for the years ended December 31, 2018, 2017, and 2016, respectively. The financial statements of Donegal Financial Services Corporation were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Donegal Financial Services Corporation, is based solely on the report of the other auditors.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for changes in fair value of equity securities in 2018 due to the adoption of Accounting Standards Update2016-01, Recognition and Measurement of Financial Assets and Liabilities.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits
and the report of the other auditors provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Estimate of Liabilities for Losses and Loss Expenses
As discussed in Notes 1 and 8 to the consolidated financial statements, the Company estimates the liabilities for losses and loss expenses (reserves) through an internal reserve analysis that relies upon generally accepted actuarial practices. The Company develops reserve estimates by line of business and, as experience emerges and other information develops, the reserve estimates are assessed in aggregate and adjusted as necessary. As of December 31, 2021, the Company recorded a liability of $1.078 billion for reserves.
We identified the evaluation of the estimate of reserves as a critical audit matter. The evaluation of the Company’s estimate of reserves involved a high degree of auditor judgment due to the inherent uncertainties in the use of actuarial methods and assumptions, which considered internal and external factors. Assumptions included the selection of loss development factors, a priori ratios, and the weighting of actuarial methods when more than one was used. Evaluating the actuarial methods and assumptions required specialized skills and auditor judgment.
The following are the primary procedures we performed to address this critical audit matter. We evaluated, with the involvement of actuarial professionals, when appropriate, the design and tested the operating effectiveness of certain internal controls related to the Company’s reserving process. These included controls related to the Company’s actuarial analyses and determination of the Company’s estimate of recorded reserves. We involved actuarial professionals with specialized skills and knowledge, who assisted in:
evaluating the Company’s actuarial methods by comparing them to generally accepted actuarial practices
developing an independent estimate of reserves for certain lines of business using methods consistent with generally accepted actuarial practices by independently forming assumptions of loss development factors, a priori ratios, and the weighting of actuarial methods when more than one was used, considering internal and external factors
assessing the Company's internal actuarial analysis for certain lines of business by reviewing the assumptions and actuarial methods used, which included the selection of loss development factors, a priori ratios, and the weighting of actuarial methods when more than one was used, considering internal and external factors
developing a range of reserves and comparing to the Company’s recorded reserves and assessing movement of the Company’s recorded reserves within that range.
We or our predecessor firms have served as the Company’s auditor since 1986.
Philadelphia, Pennsylvania
March
14, 2019-96-
7, 2022
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
Item 9A. Controls and Procedures.| Item 9A. | 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) at December 31,
20182021 covered by this Form
10-K Report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, at December 31,
2018,2021, our disclosure controls and procedures are 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 are 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.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rule
13a-15(f) under the Exchange Act. Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, our management has conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in
Internal Control—Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Based on our evaluation under the COSO Framework, our management has concluded that our internal control over financial reporting was effective at December 31,
2018.2021.
The effectiveness of our internal control over financial reporting at December 31,
20182021 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its report, which is included in this Form
10-K Report.
Changes in Internal Control over Financial Reporting
There were no
During 2021, Donegal Mutual implemented new infrastructure and applications systems that Donegal Mutual and our insurance subsidiaries began to utilize for the issuance of new personal automobile, homeowners and personal umbrella liability policies in certain states effective beginning in the fourth quarter of 2021. The implementation of the new systems represented the second phase of a multi-year systems modernization initiative Donegal Mutual is implementing to achieve various benefits for Donegal Mutual and our insurance subsidiaries, including streamlined workflows and innovative business solutions.
Donegal Mutual also implemented a new application system that Donegal Mutual and our insurance subsidiaries began to utilize during 2021 for the allocation of expenses. The new application system provides for further automation of, and enhanced internal controls over, the expense allocation process. The implementation of the new system represented the first phase of a multi-year accounting systems and process modernization initiative Donegal Mutual is implementing to achieve various benefits for Donegal Mutual and our insurance subsidiaries, including streamlined financial reporting workflows and a more efficient control environment.
Such changes
resulted in changes to
procedures related to our financial reporting. Prior to the implementation of the new systems, we identified and designed new internal controls that we incorporated into our internal controls over financial reporting. Following the implementation, we validated these new controls according to our established processes. We did not implement these changes in internal controls to respond to any actual or perceived significant deficiencies in our internal control over financial
reporting (as such term is defined in Rules13a-15(f) and15d-15(f) under the Exchange Act) that occurred during the fourth quarter of 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.| Item 9B. | Other Information. |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Opinion on Internal Control Over Financial Reporting
We have audited Donegal Group
Inc.andInc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31,
2018,2021, based on criteria established in
Internal Control—Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2018,2021, based on criteria established in
Internal Control—Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31,
20182021 and
2017,December 31, 2020, the related consolidated statements of
(loss) income and comprehensive
(loss) income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31,
2018,2021, and the related notes and financial statement schedule
III (collectively, the consolidated financial statements), and our report dated March
14, 20197, 2022 expressed an unqualified opinion on those consolidated financial statements.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Philadelphia, Pennsylvania
March
14, 2019-98-
7, 2022
Item 10. Directors, Executive Officers and Corporate Governance.We
| Item 10. | Directors, Executive Officers and Corporate Governance. |
Other than the information we provide below, we incorporate the response to this Item 10 by reference to our proxy statement we will file with the SEC on or about March 15, 20192022 relating to our annual meeting of stockholders that we will hold on April 18, 2019,21, 2022, or our Proxy Statement. We respond to this Item with respect to our
Executive Officers of the Registrant
The following table sets forth information regarding the executive officers
by reference to Part Iof Donegal Mutual and the Registrant as of the date of this Form
10-K Report. Report:
| Name | | Age | | Position |
| Kevin G. Burke | | 56 | | President and Chief Executive Officer of us since 2015; President and Chief Executive Officer of Donegal Mutual since 2018; Executive Vice President and Chief Operating Officer of Donegal Mutual from 2014 to 2018; Senior Vice President of Human Resources of Donegal Mutual and us from 2005 to 2014; other positions from 2000 to 2005. |
| Jeffrey D. Miller | | 57 | | Executive Vice President and Chief Financial Officer of Donegal Mutual and us since 2014; Senior Vice President and Chief Financial Officer of Donegal Mutual and us from 2005 to 2014; other positions from 1993 to 2005. |
| Kristi S. Altshuler | | 41 | | Senior Vice President and Chief Analytics Officer of us since 2020; Senior Vice President and Chief Analytics Officer of Donegal Mutual since 2019; Director of Willis Towers Watson from 2018 to 2019; Director of Pricing Innovation of USAA from 2014 to 2018; other positions at USAA from 2001 to 2014. |
| W. Daniel DeLamater | | 49 | | Senior Vice President of us since 2022; Senior Vice President and Head of Field Operations & National Accounts of Donegal Mutual since 2022; Senior Vice President of National Accounts for Donegal Mutual from 2020 to 2022; President of Southern Mutual Insurance Company since 2016; other positions at Southern Mutual Insurance Company from 2000 to 2016. |
| William A. Folmar | | 63 | | Senior Vice President of Claims of Donegal Mutual and Senior Vice President of us since 2019; Vice President of Claims of Donegal Mutual from 2010 to 2019; other positions from 1998 to 2010. |
| Francis J. Haefner, Jr. | | 58 | | Senior Vice President of us since 2020; Senior Vice President of Commercial Lines Underwriting of Donegal Mutual since 2012; other positions from 1984 to 2012. |
| Jeffery T. Hay | | 47 | | Senior Vice President and Chief Underwriting Officer of Donegal Mutual and Senior Vice President of us since 2021; Senior Director of Willis Towers Watson from 2018 to 2021; Head of Personal Lines Product Management of The Hartford from 2015 to 2018; other positions at The Hartford from 2005 to 2015. |
| Christina M. Hoffman | | 47 | | Senior Vice President and Chief Risk Officer of Donegal Mutual and us since 2019; Senior Vice President of Internal Audit of Donegal Mutual and Senior Vice President of us from 2013 to 2019; Vice President of Internal Audit of Donegal Mutual and Vice President of us from 2009 to 2013. |
| Jeffrey A. Jacobsen | | 68 | | Senior Vice President of us since 2020; Senior Vice President of Personal Lines Underwriting of Donegal Mutual since 2008; other positions from 1991 to 2008. |
| Robert R. Long, Jr. | | 63 | | Senior Vice President and General Counsel of Donegal Mutual and us since 2018; Vice President and House Counsel of Donegal Mutual from 2012 to 2018; other positions from 2010 to 2012. |
| Sanjay Pandey | | 55 | | Senior Vice President and Chief Information Officer of Donegal Mutual and us since 2013; other positions from 2000 to 2013. |
| V. Anthony Viozzi | | 48 | | Senior Vice President and Chief Investment Officer of Donegal Mutual and us since 2012; Vice President of Investments of Donegal Mutual and us from 2007 to 2012. |
| Daniel J. Wagner | | 61 | | Senior Vice President and Treasurer of Donegal Mutual and us since 2005; other positions from 1987 to 2005. |
We incorporate the full text of our Code of Business Conduct and Ethics by reference to Exhibit 14 to this Form
10-K Report.
Item 11. Executive Compensation.| Item 11. | Executive Compensation. |
We incorporate the response to this Item 11 by reference to our Proxy Statement. Neither the Report of our Compensation Committee nor the Report of our Audit Committee included in our Proxy Statement shall constitute or be deemed to constitute a filing with the SEC under the Securities Act or the Exchange Act or be deemed to have been incorporated by reference into any filing we make under the Securities Act or the Exchange Act, except to the extent we specifically incorporate the Report of Our Compensation Committee or the Report of Our Audit Committee by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
We incorporate the response to this Item 12 by reference to our Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
We incorporate the response to this Item 13 by reference to our Proxy Statement.
Item 14. Principal Accounting Fees and Services.| Item 14. | Principal Accounting Fees and Services. |
We incorporate the response to this Item 14 by reference to our Proxy Statement.
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Item 15. Exhibits, Financial Statement Schedules.| Item 15. | Exhibits, Financial Statement Schedules. |
| (a) | Financial statements, financial statement schedule and exhibits filed: |
| (i) | Consolidated Financial Statements |
| | (a) | Consolidated Financial Statements
|
| (b) | Financial Statement Schedule |
We have omitted all other schedules since they are not required, not applicable or the information is included in the financial statements or notes to the financial statements.
-100-
| | |
10.1310.8 | | Employment Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company, Donegal Group Inc. and Robert G. Shenk. | | (e) |
| | |
10.14 | | Employment Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company, Donegal Group Inc. and Daniel J. Wagner. | | (e) |
| | |
10.15 | | | | (f)(a) |
| | |
10.16 | | | | |
| 10.9 | | | | (f)(a) |
| | |
10.17 | | | | |
| 10.10 | | | | (b) |
| | |
10.18 | | | | |
| 10.11 | | | | (b) |
| | |
10.19 | | | | |
| 10.12 | | | | (b) |
| | |
10.20 | | | | |
| 10.13 | | | | (b) |
| | |
10.21 | | | | |
| 10.14 | | | | (g)(c) |
| | |
10.22 | | Donegal Group Inc. Cash Incentive Bonus Plan. | | (t) |
| | |
10.2310.15 | | | | (q)(j) |
| | |
10.24 | | | | |
| 10.16 | | | | (q)(j) |
| | | | |
10.17 | | | | (l) |
| | | | |
| 10.18 | | | | (l) |
| | | | |
| 10.19 | | | | (m) |
| | | | |
| 10.20 | | | | (m) |
| | | | |
| 10.21 | | | | (o) |
| | | | |
| 10.22 | | | | (p) |
| | | | |
| 10.23 | | | | Filed herewith |
| | | | |
| Other Material Contracts | | |
| | |
10.25 | | | | |
| 10.24 | | | | (j)(f) |
| | |
10.26 | | | | |
| 10.25 | | | | (k)(g) |
| | |
10.27 | | | | |
| 10.26 | | | | (k)Filed herewith |
| | |
10.28 | | | | |
| 10.27 | | | | (k)(g) |
| | | | |
| 10.28 | | | | (q) |
| | | | |
| 10.29 | | | | (l) |
| | |
10.30 | | Credit Agreement dated June 21, 2010 between Donegal Group Inc. and Manufacturers and Traders Trust Company, First Amendment to Credit Agreement dated October 12, 2010 and Second Amendment to Credit Agreement dated June 1, 2011. | | (m) |
| | |
10.31 | | Third Amendment to CreditDiscretionary Loan Agreement between Donegal Group Inc. and Manufacturers and Traders Trust CompanyM&T Bank dated JuneAugust 1, 2012 and Fourth Amendment to Credit Agreement dated December 5, 2012.2020. | | (n) |
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| | | | |
| | |
10.32 | | Fifth Amendment to Credit Agreement between Donegal Group Inc. and Manufacturers and Traders Trust Company dated June 1, 2013. | | (o) |
| | |
10.33 | | Sixth Amendment to Credit Agreement between Donegal Group Inc. and Manufacturers and Traders Trust Company dated June 1, 2014. | | (p) |
| | |
10.34 | | Seventh Amendment to Credit Agreement between Donegal Group Inc. and Manufacturers and Traders Trust Company dated June 1, 2015. | | (s) |
| | |
10.35 | | Eighth Amendment to Credit Agreement between Donegal Group Inc. and Manufacturers and Traders Trust Company dated July 1, 2016. | | (u) |
| | |
10.36 | | Ninth Amendment to Credit Agreement between Donegal Group Inc. and Manufacturers and Traders Trust Company dated July 1, 2017. | | (v) |
| | |
10.37 | | Tenth Amendment to Credit Agreement between Donegal Group Inc. and Manufacturers and Traders Trust Company dated July 1, 2018. | | Filed
herewith |
| | |
10.38 | | Stock Purchase and Standstill Agreement dated as of December 18, 2015 among Donegal Mutual Insurance Company, Donegal Group Inc. and Gregory M. Shepard. | | (r) |
| | |
10.39 | | Eleventh Amendment to Credit Agreement between Donegal Group Inc. and Manufacturers and Traders Trust Company dated March 5, 2019. | | Filed
herewith |
| | |
10.40 | | Credit Agreement between Donegal Group Inc. and Manufacturers and Traders Trust Company dated March 5, 2019. | | Filed
herewith |
| | |
| 14 | | | | (h)(d) |
| | | | |
| 21 | | | | Filed
herewith |
| | | | |
| 23.1 | | | | Filed
herewith |
| | |
23.2 | | Consent of Independent Registered Public Accounting Firm. | | Filed
herewith |
| | |
| 31.1 | | | | Filed
herewith |
| | | | |
| 31.2 | | | | Filed
herewith |
| | |
| 32.1 | | | | Filed
herewith |
| | | | |
| 32.2 | | | | 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 |
| (a) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form10-Q 10-K Report for the quarterly periodyear ended MarchDecember 31, 2013. 1999. |
| (b) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form10-K Report for the year ended December 31, 2001. |
| (c) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form8-K 10-K Report dated April 22, 2011. for the year ended December 31, 2002. |
| (d) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form8-K 10-K Report dated April 22, 2013. for the year ended December 31, 2003. |
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| (e) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form8-K Report dated August 3, 2011. July 18, 2008. |
| (f) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form10-K Report for the year ended December 31, 1999. 2009. |
| (g) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form10-K Report for the year ended December 31, 2002. 2010. |
| (h) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form10-K 8-K Report for the year ended December 31, 2003. dated April 22, 2011. |
| (i) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form8-K Report dated July 18, 2008. April 22, 2013. |
| (j) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form10-K Report for the year ended December 31, 2009. |
(k) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form10-K Report for the year ended December 31, 2010.
|
(l) | We incorporate such exhibit by reference to the like-described exhibit filed in Registrant’s FormS-3 registration statement filed on April 28, 2015.
|
(m) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form10-K Report for the year ended December 31, 2011.
|
(n) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form10-K Report for the year ended December 31, 2012.
|
(o) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form10-K Report for the year ended December 31, 2013.
|
(p) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form10-K Report for the year ended December 31, 2014.
|
(q) | We incorporate such exhibit by reference to the descriptioncopy of such plan in Registrant’s definitive proxy statement for its Annual Meeting of Stockholders held on April 16, 2015 filed on March 16, 2015.
|
(r)
| (k) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form8-K 10-Q Report dated December 22, 2015.for the quarter ended June 30, 2019. |
(s) | (l) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form10-K Report for the year ended December 31, 2015. |
(t) | We incorporate such exhibit by reference to the descriptioncopy of such plan in Registrant’s definitive proxy statement for its Annual Meeting of Stockholders held on April 20, 201718, 2019 filed on March 16, 2017.
18, 2019. |
(u) | (m) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form10-K Report for the year ended December 31, 2016.2019. |
(v) | (n) | We incorporate such exhibit by reference to the like-described exhibit in Registrant's Form 8-K Report dated October 1, 2020. |
| (o) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form10-K Report for the year ended December 31, 2017.2020. |
-103-
| (p) | We incorporate such exhibit by reference to the copy of such plan in Registrant’s definitive proxy statement for its Annual Meeting of Stockholders held on April 15, 2021 filed on March 15, 2021. |
| (q) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form S-3 Registration Statement filed on September 30, 2021. |
| Item 16. | Form 10-K Summary. |
None.
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION
Years Ended December 31,
2018, 20172021, 2020 and
20162019
($ in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
Segment | | Net
Premiums
Earned | | | Net
Investment
Income | | | Net Losses
and Loss
Expenses | | | Amortization
of Deferred
Policy
Acquisition
Costs | | | Other
Underwriting
Expenses | | | Net
Premiums
Written | |
Year Ended December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | | |
Personal lines | | $ | 403,367 | | | $ | — | | | $ | 330,410 | | | $ | 65,821 | | | $ | 61,635 | | | $ | 394,121 | |
Commercial lines | | | 337,924 | | | | — | | | | 246,048 | | | | 55,143 | | | | 51,635 | | | | 349,895 | |
Investments | | | — | | | | 26,908 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 741,291 | | | $ | 26,908 | | | $ | 576,458 | | | $ | 120,964 | | | $ | 113,270 | | | $ | 744,016 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | |
Personal lines | | $ | 384,124 | | | $ | — | | | $ | 289,924 | | | $ | 62,916 | | | $ | 63,721 | | | $ | 400,023 | |
Commercial lines | | | 318,391 | | | | — | | | | 197,344 | | | | 52,149 | | | | 52,817 | | | | 329,116 | |
Investments | | | — | | | | 23,527 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 702,515 | | | $ | 23,527 | | | $ | 487,268 | | | $ | 115,065 | | | $ | 116,538 | | | $ | 729,139 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | |
Personal lines | | $ | 361,128 | | | $ | — | | | $ | 247,323 | | | $ | 59,367 | | | $ | 59,688 | | | $ | 371,657 | |
Commercial lines | | | 295,077 | | | | — | | | | 175,993 | | | | 48,509 | | | | 48,771 | | | | 310,377 | |
Investments | | | — | | | | 22,633 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 656,205 | | | $ | 22,633 | | | $ | 423,316 | | | $ | 107,876 | | | $ | 108,459 | | | $ | 682,034 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
-104-
| Segment | | Net Premiums Earned | | | Net Investment Income | | | Net Losses and Loss Expenses | | | Amortization of Deferred Policy Acquisition Costs | | | Other Underwriting Expenses | | | Net Premiums Written | |
| Year Ended December 31, 2021 | | | | | | | | | | | | | | | | | | |
| Commercial lines | | $ | 468,433 | | | $ | 0 | | | $ | 321,483 | | | $ | 84,927 | | | $ | 85,345 | | | $ | 501,785 | |
| Personal lines | | | 307,582 | | | | 0 | | | | 199,227 | | | | 43,806 | | | | 44,023 | | | | 302,482 | |
| Investments | | | 0 | | | | 31,126 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| | | $ | 776,015 | | | $ | 31,126 | | | $ | 520,710 | | | $ | 128,733 | | | $ | 129,368 | | | $ | 804,267 | |
| Year Ended December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial lines | | $ | 412,877 | | | $ | 0 | | | $ | 264,053 | | | $ | 66,253 | | | $ | 72,245 | | | $ | 425,986 | |
| Personal lines | | | 329,163 | | | | 0 | | | | 195,711 | | | | 52,819 | | | | 53,618 | | | | 316,154 | |
| Investments | | | 0 | | | | 29,504 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| | | $ | 742,040 | | | $ | 29,504 | | | $ | 459,764 | | | $ | 119,072 | | | $ | 125,863 | | | $ | 742,140 | |
| Year Ended December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial lines | | $ | 385,465 | | | $ | 0 | | | $ | 242,685 | | | $ | 62,424 | | | $ | 61,631 | | | $ | 404,879 | |
| Personal lines | | | 370,613 | | | | 0 | | | | 263,703 | | | | 60,019 | | | | 52,931 | | | | 347,722 | |
| Investments | | | 0 | | | | 29,515 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| | | $ | 756,078 | | | $ | 29,515 | | | $ | 506,388 | | | $ | 122,443 | | | $ | 114,562 | | | $ | 752,601 | |
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
($ in thousands)
| | | | | | | | | | | | | | | | |
| | | At December 31, | |
Segment | | Deferred
Policy
Acquisition
Costs | | | Liability
For Losses
and Loss
Expenses | | | Unearned
Premiums | | | Other Policy
Claims and
Benefits
Payable | |
2018 | | | | | | | | | | | | | | | | |
Personal lines | | $ | 32,853 | | | $ | 296,538 | | | $ | 274,539 | | | $ | — | |
Commercial lines | | | 27,762 | | | | 518,127 | | | | 231,990 | | | | — | |
Investments | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | $ | 60,615 | | | $ | 814,665 | | | $ | 506,529 | | | $ | — | |
| | | | | | | | | | | | | | | | |
2017 | | | | | | | | | | | | | | | | |
Personal lines | | $ | 33,823 | | | $ | 239,542 | | | $ | 282,439 | | | $ | — | |
Commercial lines | | | 26,467 | | | | 437,130 | | | | 221,018 | | | | — | |
Investments | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | $ | 60,290 | | | $ | 676,672 | | | $ | 503,457 | | | $ | — | |
| | | | | | | | | | | | | | | | |
See accompanying Report and Consent of Independent Registered Public Accounting Firm.
-105-
| | | | |
| | | | Donegal Financial Services
Corporation
|
| | |
| | | | Consolidated Financial Statements |
| | |
| | | | As of December 31, 2018 and 2017 |
| | | | Years Ended December 31, 2018, 2017 and 2016 |
| | | At December 31, | |
| Segment | | Deferred Policy Acquisition Costs | | | Liability For Losses and Loss Expenses | | | Unearned Premiums | | | Other Policy Claims and Benefits Payable | |
2021
| | | | | | | | | | | | |
| Commercial lines | | $ | 41,225 | | | $ | 814,681 | | | $ | 347,213 | | | $ | 0 | |
| Personal lines | | | 26,803 | | | | 262,939 | | | | 225,745 | | | | 0 | |
| Investments | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| | | $ | 68,028 | | | $ | 1,077,620 | | | $ | 572,958 | | | $ | 0 | |
2020
| | | | | | | | | | | | | | | | |
| Commercial lines | | $ | 33,246 | | | $ | 694,569 | | | $ | 301,901 | | | $ | 0 | |
| Personal lines | | | 25,911 | | | | 267,438 | | | | 235,289 | | | | 0 | |
| Investments | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| | | $ | 59,157 | | | $ | 962,007 | | | $ | 537,190 | | | $ | 0 | |
Donegal Financial Services Corporation
Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Donegal Financial Services Corporation
Mount Joy, Pennsylvania
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Donegal Financial Services Corporation and subsidiary (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2013.
Harrisburg, Pennsylvania
March 7, 2019
Consolidated Financial Statements
Donegal Financial Services Corporation
Consolidated Balance Sheets
(dollars in thousands)
| | | | | | | | |
December 31, | | 2018 | | | 2017 | |
Assets | | | | | | | | |
Cash and due from banks | | $ | 20,436 | | | $ | 17,146 | |
Interest-bearing demand deposits in other banks | | | 13,821 | | | | 1,336 | |
| | | | | | | | |
Cash and cash equivalents | | | 34,257 | | | | 18,482 | |
Interest-bearing time deposits in other banks | | | 6 | | | | 6 | |
Securitiesavailable-for-sale | | | 79,904 | | | | 92,715 | |
Loans held for sale | | | — | | | | 510 | |
Loans receivable, net of allowance for loan losses of $5,006 at December 31, 2018 and $4,979 at December 31, 2017 | | | 411,558 | | | | 427,142 | |
Restricted investment in bank stocks | | | 512 | | | | 901 | |
Property and equipment, net | | | 8,564 | | | | 9,108 | |
Bank-owned life insurance | | | 14,135 | | | | 13,786 | |
Goodwill | | | 901 | | | | 901 | |
Intangible assets | | | 114 | | | | 213 | |
Accrued interest receivable | | | 1,434 | | | | 1,495 | |
Other assets | | | 1,805 | | | | 2,676 | |
| | | | | | | | |
Total Assets | | $ | 553,190 | | | $ | 567,935 | |
| | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | |
Liabilities | | | | | | | | |
Deposits: | | | | | | | | |
Demand,non-interest bearing | | $ | 111,994 | | | $ | 107,652 | |
Interest bearing | | | 349,536 | | | | 370,401 | |
| | | | | | | | |
Total deposits | | | 461,530 | | | | 478,053 | |
Short-term borrowings | | | — | | | | 2,985 | |
Junior subordinated debentures | | | 5,008 | | | | 4,843 | |
Other liabilities | | | 1,649 | | | | 1,722 | |
| | | | | | | | |
Total Liabilities | | | 468,187 | | | | 487,603 | |
| | | | | | | | |
Shareholders’ Equity | | | | | | | | |
Common stock, par value $0.01 per share; 17,864 shares authorized, issued and outstanding | | | 1 | | | | 1 | |
Surplus | | | 62,989 | | | | 62,888 | |
Retained earnings | | | 23,685 | | | | 18,227 | |
Accumulated other comprehensive loss | | | (1,672 | ) | | | (784 | ) |
| | | | | | | | |
Total Shareholders’ Equity | | | 85,003 | | | | 80,332 | |
| | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 553,190 | | | $ | 567,935 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements.
Donegal Financial Services Corporation
Consolidated Statements of Income
(dollars in thousands)
| | | | | | | | | | | | |
Years Ended December 31, | | 2018 | | | 2017 | | | 2016 | |
Interest Income | | | | | | | | | | | | |
Loans, including fees | | $ | 21,473 | | | $ | 18,807 | | | $ | 16,525 | |
Securities: | | | | | | | | | | | | |
Taxable | | | 1,270 | | | | 1,482 | | | | 1,534 | |
Tax exempt | | | 570 | | | | 587 | | | | 506 | |
Other | | | 232 | | | | 198 | | | | 206 | |
| | | | | | | | | | | | |
Total Interest Income | | | 23,545 | | | | 21,074 | | | | 18,771 | |
| | | | | | | | | | | | |
Interest Expense | | | | | | | | | | | | |
Deposits | | | 2,691 | | | | 1,735 | | | | 1,516 | |
Junior subordinated debentures | | | 715 | | | | 576 | | | | 516 | |
Other | | | 8 | | | | 70 | | | | 3 | |
| | | | | | | | | | | | |
Total Interest Expense | | | 3,414 | | | | 2,381 | | | | 2,035 | |
| | | | | | | | | | | | |
Net interest income | | | 20,131 | | | | 18,693 | | | | 16,736 | |
Provision for Loan Losses | | | — | | | | 817 | | | | 521 | |
| | | | | | | | | | | | |
Net interest income after provision for loan losses | | | 20,131 | | | | 17,876 | | | | 16,215 | |
| | | | | | | | | | | | |
Other Income | | | | | | | | | | | | |
Service charges on deposits | | | 719 | | | | 772 | | | | 807 | |
Other service charges, commissions, fees | | | 1,287 | | | | 1,196 | | | | 1,217 | |
Income from fiduciary activities | | | 12 | | | | 12 | | | | 51 | |
Investment sales commissions | | | 991 | | | | 1,032 | | | | 645 | |
Gains on sales of loans | | | 69 | | | | 161 | | | | 343 | |
Net realized gains on sales of securities | | | — | | | | — | | | | 8 | |
Earnings from bank-owned life insurance | | | 349 | | | | 353 | | | | 506 | |
Other | | | 183 | | | | 10 | | | | 193 | |
| | | | | | | | | | | | |
Total Other Income | | | 3,610 | | | | 3,536 | | | | 3,770 | |
| | | | | | | | | | | | |
Other Expenses | | | | | | | | | | | | |
Salaries and employee benefits | | | 9,322 | | | | 9,371 | | | | 9,367 | |
Occupancy and equipment | | | 2,164 | | | | 2,205 | | | | 2,278 | |
Advertising and marketing | | | 719 | | | | 712 | | | | 711 | |
Data and ATM processing | | | 2,307 | | | | 2,203 | | | | 2,345 | |
Professional fees | | | 484 | | | | 422 | | | | 390 | |
Supplies and printing | | | 119 | | | | 133 | | | | 151 | |
FDIC insurance | | | 159 | | | | 160 | | | | 224 | |
Amortization of core deposit intangible | | | 99 | | | | 134 | | | | 168 | |
Other | | | 1,052 | | | | 1,261 | | | | 1,243 | |
| | | | | | | | | | | | |
Total Other Expenses | | | 16,425 | | | | 16,601 | | | | 16,877 | |
| | | | | | | | | | | | |
Income before income tax expense | | | 7,316 | | | | 4,811 | | | | 3,108 | |
Income Tax Expense | | | 1,858 | | | | 1,449 | | | | 856 | |
| | | | | | | | | | | | |
Net Income | | $ | 5,458 | | | $ | 3,362 | | | $ | 2,252 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
Donegal Financial Services Corporation
Consolidated Statements of Comprehensive Income
(dollars in thousands)
| | | | | | | | | | | | |
Years Ended December 31, | | 2018 | | | 2017 | | | 2016 | |
Net Income | | $ | 5,458 | | | $ | 3,362 | | | $ | 2,252 | |
| | | | | | | | | | | | |
Other Comprehensive (Loss) Income: | | | | | | | | | | | | |
Unrealized (losses) gains arising during the period onavailable-for-sale securities, net of income taxes of ($236), $257 and ($166), respectively | | | (888 | ) | | | 499 | | | | (325 | ) |
Reclassification adjustment for net gains on sales ofavailable-for-sale securities included in net income, income taxes of $-, $- and ($5), respectively(A)(B) | | | — | | | | — | | | | (5 | ) |
| | | | | | | | | | | | |
Total other comprehensive (loss) income | | | (888 | ) | | | 499 | | | | (330 | ) |
| | | | | | | | | | | | |
Total Comprehensive Income | | $ | 4,570 | | | $ | 3,861 | | | $ | 1,922 | |
| | | | | | | | | | | | |
(A) | Amounts are included in net realized (losses) gains on sales of securities on the consolidated statements of income in total other income.
|
(B) | Income tax amounts are included in income tax expense on the consolidated statements of income.
|
See accompanying notes to consolidated financial statements.
Donegal Financial Services Corporation
Consolidated Statements of Shareholders’ Equity
(dollars in thousands except per share data)
| | | | | | | | | | | | | | | | | | | | |
| | | Common
Stock | | | Surplus | | | Retained
Earnings | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Total | |
Balance, January 1, 2016 | | | 1 | | | | 62,607 | | | | 17,933 | | | | (824 | ) | | | 79,717 | |
Net income | | | — | | | | — | | | | 2,252 | | | | — | | | | 2,252 | |
Other comprehensive loss, net of taxes | | | — | | | | — | | | | — | | | | (330 | ) | | | (330 | ) |
Common stock dividend ($185 per share) | | | — | | | | — | | | | (3,300 | ) | | | — | | | | (3,300 | ) |
Stock option expense | | | — | | | | 150 | | | | — | | | | — | | | | 150 | |
| | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2016 | | | 1 | | | | 62,757 | | | | 16,885 | | | | (1,154 | ) | | | 78,489 | |
Net income | | | — | | | | — | | | | 3,362 | | | | — | | | | 3,362 | |
Other comprehensive income, net of taxes | | | — | | | | — | | | | — | | | | 499 | | | | 499 | |
Impact of change in enacted income tax rate | | | — | | | | — | | | | 129 | | | | (129 | ) | | | — | |
Common stock dividend ($120 per share) | | | — | | | | — | | | | (2,150 | ) | | | — | | | | (2,150 | ) |
Stock option expense | | | — | | | | 131 | | | | — | | | | — | | | | 131 | |
| | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2017 | | | 1 | | | | 62,888 | | | | 18,227 | | | | (784 | ) | | | 80,332 | |
Net income | | | — | | | | — | | | | 5,458 | | | | — | | | | 5,458 | |
Other comprehensive loss, net of taxes | | | — | | | | — | | | | — | | | | (888 | ) | | | (888 | ) |
Stock option expense | | | — | | | | 101 | | | | — | | | | — | | | | 101 | |
| | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2018 | | $ | 1 | | | $ | 62,989 | | | $ | 23,685 | | | $ | (1,672 | ) | | $ | 85,003 | |
| | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
Donegal Financial Services Corporation
Consolidated Statements of Cash Flows
(dollars in thousands)
| | | | | | | | | | | | |
| Years Ended December 31, | | 2018 | | | 2017 | | | 2016 | |
Cash Flows from Operating Activities | | | | | | | | | | | | |
Net income | | $ | 5,458 | | | $ | 3,362 | | | $ | 2,252 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Provision for loan losses | | | — | | | | 817 | | | | 521 | |
Depreciation and amortization | | | 567 | | | | 664 | | | | 720 | |
Intangible amortization | | | 99 | | | | 164 | | | | 168 | |
Accretion of junior subordinated debentures | | | 165 | | | | 149 | | | | 135 | |
Net gain on calls, sales of securities | | | — | | | | — | | | | (8 | ) |
Net loss on sales of other real estate owned | | | — | | | | 48 | | | | 61 | |
Gain on sales of loans | | | (69 | ) | | | (161 | ) | | | (331 | ) |
Proceeds from sales of loans | | | 1,762 | | | | 6,667 | | | | 10,750 | |
Loans originated for sale | | | (1,183 | ) | | | (6,800 | ) | | | (9,956 | ) |
Stock option expense | | | 101 | | | | 131 | | | | 150 | |
Amortization on securities, net | | | 164 | | | | 205 | | | | 222 | |
Earnings from bank-owned life insurance | | | (349 | ) | | | (353 | ) | | | (378 | ) |
Gain from life insurance proceeds | | | | | | | — | | | | (128 | ) |
Deferred income taxes | | | 1,406 | | | | 88 | | | | 157 | |
(Increase) decrease in accrued interest receivable and other assets | | | (239 | ) | | | (423 | ) | | | 752 | |
(Decrease) increase in other liabilities | | | (73 | ) | | | 184 | | | | (582 | ) |
| | | | | | | | | | | | |
Net Cash Provided by Operating Activities | | | 7,809 | | | | 4,742 | | | | 4,505 | |
| | | | | | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | | | | | |
Purchases of securitiesavailable-for-sale | | | — | | | | (10,003 | ) | | | (10,227 | ) |
Proceeds from calls, maturities and principal repayments of securitiesavailable-for-sale | | | 11,523 | | | | 12,410 | | | | 17,331 | |
Net decrease (increase) in loans | | | 15,584 | | | | (78,565 | ) | | | (39,888 | ) |
Decrease (increase) in interest bearing time deposits | | | — | | | | 2,503 | | | | (2,503 | ) |
Redemption (Purchase) of restricted stock | | | 389 | | | | (381 | ) | | | 871 | |
Proceeds from life insurance claim | | | — | | | | — | | | | 604 | |
Purchases of property and equipment | | | (23 | ) | | | (61 | ) | | | (337 | ) |
Proceeds from sale of other real estate owned | | | — | | | | 683 | | | | 145 | |
| | | | | | | | | | | | |
Net Cash Provided by (Used in) Investing Activities | | | 27,473 | | | | (73,414 | ) | | | (34,004 | ) |
| | | | | | | | | | | | |
Donegal Financial Services Corporation
Consolidated Statements of Cash Flows
(dollars in thousands)
| | | | | | | | | | | | |
| Years Ended December 31, | | 2018 | | | 2017 | | | 2016 | |
Cash Flows from Financing Activities | | | | | | | | | | | | |
Net (decrease) increase in deposits | | $ | (16,523 | ) | | $ | 27,183 | | | $ | 50,961 | |
Net (decrease) increase in short-term borrowings | | | (2,985 | ) | | | 2,985 | | | | (20,833 | ) |
Dividends paid | | | — | | | | (2,150 | ) | | | (3,300 | ) |
| | | | | | | | | | | | |
Net Cash (Used in) Provided by Financing Activities | | | (19,508 | ) | | | 28,018 | | | | 26,828 | |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 15,774 | | | | (40,654 | ) | | | (2,671 | ) |
Cash and Cash Equivalents, Beginning of Year | | | 18,482 | | | | 59,136 | | | | 61,807 | |
| | | | | | | | | | | | |
Cash and Cash Equivalents, End of Year | | $ | 34,257 | | | $ | 18,482 | | | $ | 59,136 | |
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Supplementary Cash Flows Information | | | | | | | | | | | | |
Interest paid | | $ | 3,486 | | | $ | 2,401 | | | $ | 2,057 | |
| | | | | | | | | | | | |
Income taxes paid | | $ | 830 | | | $ | 1,290 | | | $ | 670 | |
| | | | | | | | | | | | |
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The accounting policies discussed below are followed consistently by Donegal Financial Services Corporation (the “Company”). These policies are in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and conform to common practices in the banking industry.
Nature of Operations
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Union Community Bank, (the “Bank”). All material intercompany transactions have been eliminated in consolidation. The Company is owned by Donegal Mutual Insurance Company (the “Insurance Company”) and Donegal Group Inc.
The Company is aone-bank holding company and provides full banking services through its subsidiary, Union Community Bank. The Bank serves primarily Lancaster County, Pennsylvania.
On May 6, 2011, Donegal Financial Services Corporation, the parent company of Province Bank, FSB, merged with Union National Financial Corporation, the parent company of Union National Community Bank, pursuant to which Union National Financial Corporation merged with and into Donegal Financial Services Corporation. As part of the transaction, Union National Community Bank merged with and into Province Bank, FSB. The entity is operating under the new name Union Community Bank. This series of transactions is collectively referred to as the “acquisition.”
Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, and the evaluation of investment securities for other than temporary impairment.
Presentation of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, interest-bearing demand deposits with other banks, and short-term investments consisting of money market accounts and U.S. Treasury bills purchased with a maturity date of three months or less. Generally, federal funds are purchased and sold forone-day periods.
Securities
Management determines the appropriate classification of debt securities at the time of purchase, or acquisition, andre-evaluates such designation as of each balance sheet date.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
Securities classified asavailable-for-sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified asavailable-for-sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securitiesavailable-for-sale are carried at fair value. Unrealized gains and losses are reported as increases or decreases in other comprehensive (loss) income. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
Other-than-temporary impairment guidance on debt securities specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a loss due to credit quality. When an entity does not intend to sell the security, and it is more likely than not, the entity will not have to sell the security before the recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive (loss) income. The Company has not recognized any other-than-temporary impairment losses in the years ended December 31, 2018, 2017 or 2016.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried in the aggregate at the lower of cost or estimated fair value. The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attribute of that loan. Net unrealized losses are recognized through a valuation allowance with corresponding charges in the consolidated statements of income. The Company did not write down any loans held for sale during the years ended December 31, 2018, 2017, or 2016. All sales are made without recourse and are sold with servicing released.
Loans Receivable
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are generally stated at their outstanding unpaid principal balances, net of an allowance for credit losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is amortizing these amounts over the contractual life of the loan. Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method.
The loan portfolio is segmented into commercial and consumer loans. Commercial loans consist of the following classes: commercial real estate secured; commercial and industrial (“C&I”); and commercial other. Consumer loans consist of the following classes: residential mortgage loans; home equity installment loans and lines of credit; and consumer loans other.
Commercial Loans—Real Estate Secured—the Company engages in commercial lending secured by real estate in its primary market, Lancaster County, Pennsylvania, and surrounding areas. The majority of the commercial loan portfolio is secured by owner-occupied commercial office and manufacturing properties, as well as agricultural land. A smaller portion of the Company’s commercial real estate portfolio is secured by commercial real estate development and construction projects.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
Generally, commercial real estate loans have terms that do not exceed 20 years, haveloan-to-value ratios of up to 80% of the appraised value of the property, and typically require the personal guarantees of the principals of the borrowing entities. Terms of construction loans depend on the specifics of the project such as estimated absorption rates, estimated time to complete, etc. In underwriting commercial real estate loans, the Company performs a thorough analysis of the financial condition and cash flows of the borrower, the borrower’s credit history, the borrower’s character, and the reliability and predictability of the cash flow generated by the business and property securing the loan. Appraisals supporting the underwriting of properties securing commercial real estate loans are performed by independent appraisers.
Commercial real estate loans generally present a higher level of risk than other types ofnon-commercial loans primarily due to adverse economic conditions causing declines in the values of the collateral. This market value risk is somewhat mitigated for owner-occupied commercial real estate loans since the performance and cash flow of the business is the primary source of loan repayment, and not the sale or rent of the real estate.
Commercial Loans - C & I, and Other—The Company originates commercial loans not secured by real estate, but instead by business operations andnon-real-estate assets, generally referred to as commercial and industrial loans. These commercial and industrial loans are made primarily to businesses located in the Company’s primary market, Lancaster County, Pennsylvania, and surrounding areas. These loans are used for various business purposes which include short-term loans and lines of credit to finance machinery and equipment purchases, and inventory and accounts receivable management, supporting the businesses growth, stability, and profitability.
Generally, the maximum term for commercial loans used for machinery and equipment purchases is based on the projected useful life of such machinery and equipment. Most working capital and business lines of credit are written on demand and require annual renewal. Commercial and industrial loans are generally secured with short-term assets; however, in some cases, additional collateral such as junior liens on real estate is provided as additional security for the loan.Loan-to-values have been established by the Company, specific to the type of business collateral, and generally do not exceed 75% of the value of the underlying business assets. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports and collateral appraisals.
In underwriting commercial and industrial loans, an analysis of the borrower’s capacity to repay the loan, the adequacy of the borrower’s capital and collateral, the borrower’s character, as well as an evaluation of the local and broader economic conditions affecting the borrower’s business, is performed. Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Company’s underwriting analysis.
Commercial loans generally present a higher level of risk than other types ofnon-commercial loans primarily due to adverse economic conditions having a negative effect on business sales, receivable collections, and, cash flows.
Residential Mortgage Loans, and Home Equity Loans and Lines of Credit—The Company originatesone-to-four-family first position residential mortgage loans, and junior lien home equity loans and lines of credit, through the Company’s marketing efforts, to present customers, newwalk-in
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
customers, and referred customers. Residential mortgage and home equity credits include fixed-rate and adjustable rate mortgages with terms up to a maximum of 20 years for both permanent structures and those under construction. Theseone-to-four-family mortgage originations are secured by residential properties primarily located in the Company’s primary market, Lancaster County, Pennsylvania, and surrounding areas. The majority of residential mortgage and home equity credits have a totalloans-to-value ratio of 80% or less. If the total of residential mortgage and home equity loans and lines on a residential property exceed 80% of the underlying real estate value, the borrowers are required to have private mortgage insurance.
In underwritingone-to-four-family residential mortgage and home equity credits, the Company evaluates both the borrower’s ability to make monthly payments (from the borrower’s existing financial condition and sustainable income sources), and the value of the residential property securing the loan. Real estate properties securing residential mortgage and home equity credits are appraised by independent appraisers. The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (and flood insurance, if necessary) in an amount not less than the appraised value of the property securing the loan. The Company has not engaged insub-prime residential mortgage originations.
Residential mortgage and home equity credits present a credit risk to the Company, but generally at a lower risk profile as compared to other types of loans since, though adverse economic conditions may cause a decline in property value or cessation in borrower repayment ability, theloan-to-value underwriting standards and generally higher marketability of residential real estate provides for more effective collateral liquidation to cover outstanding loan balances.
Consumer Loans, Other—The Company offers a variety of secured and unsecured consumer loans, including vehicle loans, loans secured by savings deposits, and unsecured consumer loans. Consumer loan terms vary according to the type and value of collateral and creditworthiness of the borrower. In underwriting consumer loans, a thorough analysis of the borrower’s willingness and financial ability to repay the loan as agreed is performed. The ability to repay shall be determined by the borrower’s employment history, current financial conditions, and credit background.
Consumer loans not secured by real estate generally entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
Nonaccrual Loans—Generally, a loan is classified as nonaccrual, and the accrual of interest on such loan is discontinued, when (1) the contractual payment of principal or interest has become 90 days past due or (2) management has serious doubts about the further collectability of principal or interest, even though the loan is currently performing. A loan 90 days or more past due may remain on accrual status if it is in the process of collection and is either guaranteed or well-secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans including impaired loans is either applied against principal or reported as interest income, according to management’s judgment as to the
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
collectability of principal. Generally, loans are restored to accrual status when both principal and interest are brought current, the loan has performed in accordance with the contractual terms for a reasonable period of time (generally six months), and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on the contractual due dates for loan payments.
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of probable losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a monthly evaluation of the adequacy of the allowance, which is based on the Company’s past loan loss experience, industry peer analysis, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance for loan losses consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the (i) discounted cash flows, or (ii) collateral value, or (iii) observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity loans and home equity lines of credit, and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for relevant qualitative factors. Separate qualitative factor adjustments are made for higher-risk criticized loans that are not impaired.
Qualitative risk factors used by the Company to adjust historical loan loss rates include:
| 1. | Lending policies and procedures including underwriting standards and risk assessment.
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| 2. | Quality of the Company’s credit and collection processes.
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| 3. | National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.
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Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
| 4. | Nature and volume of the portfolio and terms of loans.
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| 5. | Experience, ability, and depth of lending management and staff.
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| 6. | Volume and severity of past due, classified and nonaccrual loans as well as trends and other loan modifications.
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| 7. | Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors.
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| 8. | Existence and effect of any concentrations of credit and changes in the level of such concentrations.
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| 9. | Effect of external factors, such as competition and legal and regulatory requirements.
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Each qualitative factor is assigned a value that is added to or deducted from the historical loss rate for separately defined loan pools to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation.
A component of the allowance for loan losses is unallocated and covers uncertainties that could affect management’s estimate of probable losses. The unallocated component reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating the specific and general loss components in the portfolio.
If, based on current information and events, it is probable that the Company will be unable to collect both the contractual principal and interest payments as scheduled according to a loan’s contractual terms, the loan is considered impaired. However, management determines the significance of payment delays and shortfalls on acase-by-case basis and may judge an insignificant delay or insignificant shortfall in the amount of payments as not reflective of an impairment. For example, a loan is not considered impaired during a period of delay in payment if the Company expects to collect all amounts due including interest accrued at the contractual interest rate for the period of delay.
Measuring impairment of a loan requires judgment and estimates, and the eventual outcomes may differ from those estimates. When the Company determines that a loan is impaired, the Company measures impairment based on the present value of expected future cash flows, or based upon a loan’s observable market price, or based upon the fair value of collateral if the loan is collateral dependent. When the Company uses the fair value of collateral to measure impairment where some or all of the repayment of the loan is dependent upon the liquidation of the collateral, the fair value of the collateral shall be adjusted by the estimated costs of liquidation.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, theloan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
For commercial loans secured bynon-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are associated with a commercial relationship or the subject of a troubled debt restructuring agreement.
Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date.Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.
The allowance calculation methodology includes further segregation of loan pools into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged off against the allowance for loan losses. Loans not criticized are rated pass.
In addition, Federal and state regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to or charge-offs against the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management.
Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
Reserve for Unfunded Lending Commitments—The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet. The Company had a reserve of $186,000 as of December 31, 2018 and $212,000 as of December 31, 2017.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
Acquired Loans
Loans acquired in connection with business combinations are recorded at fair value with no carryover of the related allowance for loan losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.
The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows will require an evaluation for the need for an additional allowance for credit losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount which will then be reclassified as accretable discount that will be recognized into interest income over the remaining life of the loan.
Acquired loans that met the criteria for impaired or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent if the Company expects to fully collect the new carrying value (i.e. fair value) of the loans. As such, the Company may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. In addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value adjustment.
Loans acquired through business combinations that do not meet the specific criteria of Accounting Standards Codification(“ASC”) 310-30, but for which a discount is attributable at least in part to credit quality, are accounted for in accordance with ASC310-20. As a result, related discounts are recognized subsequently through accretion based on the contractual cash flows of the acquired loans.
Business Combinations and Core Deposit Intangible
The Company accounts for business combinations using the acquisition accounting method. Acquisition accounting requires the total purchase price to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain intangible assets that must be recognized. Typically, this allocation results in the purchase price exceeding the fair value of net assets acquired, which is recorded as goodwill. Core deposit intangibles are a measure of the value of checking, money market and savings deposits acquired in business combinations accounted for under the purchase method. Core deposit intangibles are being amortized over a ten year period using the sum of years’ digits. We complete an annual impairment test for goodwill and other intangible assets. Identifiable intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
Goodwill
Goodwill represents the excess of the purchase price over the underlying fair value of the acquired entity. We assess goodwill for impairment annually as of October 1 of each year. If certain events occur which indicate goodwill might be impaired between annual tests, goodwill must be tested when such events occur. In making this assessment, we consider a number of factors including operating results, business plans, economic projections, anticipated future cash flows, current market data, etc. There are inherent uncertainties related to these factors and our judgment in applying them to the analysis of goodwill impairment. Changes in economic and operating conditions could result in goodwill impairment in future periods. The Company did not identify any impairment on its outstanding goodwill from its most recent testing which was performed as of October 1, 2018. Goodwill was evaluated in accordance with ASC350-20 using a qualitative analysis.
Transfers of Financial Assets
Transfers of financial assets, including loan and loan participation sales, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Property and Equipment
Buildings and improvements, leasehold improvements, and furniture, fixtures and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the assets’ estimated useful lives. Buildings and improvements are depreciated using an estimated life of six to forty years. Furniture, fixtures, and equipment are depreciated using an estimated useful life of three to ten years. Land improvements are depreciated over an estimated useful life of five to twenty years. Leasehold improvements are depreciated using an estimated useful life that is the lesser of the remaining life of the lease or ten to forty years.
Restricted Investment in Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank system to hold stock of its district Federal Home Loan Bank according to a predetermined formula. This restricted stock is carried at cost.
Bank-Owned Life Insurance
The Company invests in bank-owned life insurance (“BOLI”) as a source of funding for employee benefit expenses. BOLI involves the purchase of life insurance by the Company on a chosen group of employees. The Company is the owner and is a joint or sole beneficiary of the policies. This life insurance investment is carried as an asset at the cash surrender value of the underlying policies. Income from the increase in cash surrender value of the policies and income from the realization of death benefits is reflected in other income.
ASC Topic 715, Compensation—Retirement Benefits, requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The Company has certain split-dollar life insurance arrangements as part of the Company’s bank-owned life insurance program, and recognized its liability and related compensation expense in accordance with ASC Topic 715. (Benefit) expense related to this split-dollar life insurance was ($12,000), ($4,000) and $14,000 for the years ended December 31, 2018, 2017, and 2016, respectively.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
Other Real Estate Owned
Other real estate owned (“OREO”) includes assets acquired through foreclosure, deedin-lieu of foreclosure, and loans identified asin-substance foreclosures. A loan is classified as anin-substance foreclosure when effective control of the real estate collateral has been taken prior to completion of formal foreclosure proceedings. OREO is held for sale and is recorded at fair value less estimated costs to sell. Net costs to maintain OREO and subsequent net losses or gains attributable to OREO liquidations are included in the consolidated income statement in other expense as realized. No depreciation or amortization expense is recognized.
Advertising Costs
The Company follows the policy of charging the costs of advertising to expense as incurred.
Income Taxes
The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740,Income Taxes).
The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets themore-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met themore-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. As of December 31, 2018 and 2017, there were no uncertain tax positions.
The Company recognizes interest and penalties on income taxes as a component of income tax expense. Tax years subject to examination by tax authorities are the years ended December 31, 2018, 2017, and 2016.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered intooff-balance sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the consolidated balance sheet when they are funded.
Stock-based Compensation
The Company measures all stock-based compensation, which is comprised of stock options, using the Black-Scholes option pricing model. The significant assumptions the Company utilizes in applying the Black-Scholes option pricing model are the risk-free interest rate, expected term, dividend yield and expected volatility. The expense is recognized over the period during which an employee is required to provide service in exchange for the award.
Comprehensive Income
Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gain and losses on securitiesavailable-for-sale, are reported as a separate component of the shareholders’ equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income. Our policy for releasing stranded income tax effects from accumulated other comprehensive income is to release when the related income or loss is realized in earnings when income or loss from all similar items has been recognized in earnings.
Revenue Recognition
The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Company’s primary source of revenue is interest income from the Bank’s loans and investment securities. The Company also earns noninterest revenue from various banking services offered by the Bank.
Interest Income: The Company’s largest source of revenue is interest income which is primarily recognized on an accrual basis based on contractual terms written into loans and investment contracts.
Other Income: The Company derives the majority of its noninterest income from: (1) investment sales commissions, (2) service charges for deposit related services, and (3) debit and credit card interchange income. Most of these services are transaction based and revenue is recognized as the related service is provided.
Recent Accounting Pronouncements
Pronouncements Adopted in 2018
In January 2016, the FASB issued ASU2016-01, “Financial Instruments-Overall”. This ASU requires equity investments to be measured at fair value with changes in fair value recognized in net income, excluding equity investments that are consolidated or accounted for under the equity
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
method of accounting. The ASU allows equity investments without readily determinable fair values to be measured at cost minus impairment, with a qualitative assessment required to identify impairment. The ASU also requires public companies to use exit prices to measure the fair value of financial instruments, eliminates the disclosure requirements related to measurement assumptions for the fair value of instruments measured at amortized cost, and requires separate presentation of financial assets and liabilities based on form and measurement category. In addition, for liabilities measured at fair value under the fair value option, the changes in fair value due to changes in instrument-specific credit risk should be recognized in OCI. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted ASU2016-01 on January 1, 2018 and it did not have a material effect on its accounting for fair value disclosures and other disclosure requirements.
FASB issued ASUNo. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force). This ASU addresses concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. In particular, this ASU addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement ofzero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The amendments were effective for annual periods beginning after December 15, 2017, and for interim periods within those annual periods. The impact of adoption of this ASU by the Company on January 1, 2018 was not material.
Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU2014-09, “Revenue from Contracts with Customers”. This ASU provides a framework that replaces most existing revenue recognition guidance. The guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company adopted this standard on January 1, 2019 utilizing a modified retrospective method and the adoption of the new standard did not have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASC Update2016-02, “Leases”, and in July 2018 issuedASU-2018-10 and ASU 201811, Codification Improvements to Topic 842, Leases. This ASU states that a lessee should recognize the assets and liabilities that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a“right-of-use” asset. The accounting applied by the lessor is relatively unchanged. The standards update also requires expanded qualitative and quantitative disclosures. For public business entities, ASC Update2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. ASC Update2016-02 mandates a modified retrospective transition for all entities. Early application is permitted. For the Company, this standards update is effective on January 1, 2020. The Company has determined that the provisions of ASUNo. 2016-02 will result in an increase in assets to recognize the present value of lease obligations with a corresponding increase in liabilities; however, the Company is still evaluating the impact this ASU will have on the Company’s financial position, results of operations and cash flows.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
In June 2016, the FASB issued ASC Update2016-13, “Financial Instruments—Credit Losses.” The new impairment model prescribed by this standards update is a single impairment model for all financial assets (i.e., loans and investments). The recognition of credit losses would be based on an entity’s current estimate of expected losses (referred to as the Current Expected Credit Loss model, or “CECL”), as opposed to recognition of losses only when they are probable (current practice). ASC Update2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company intends to adopt this standards update effective January 1, 2020. The Company is currently evaluating the impact of the adoption of ASC Update2016-13 on its consolidated financial statements. The impact of the ASU will depend upon the state of the economy and the nature of the Company’s portfolios at the date of adoption.
In January 2017, the FASB issued ASU2017-04, “Intangibles – Goodwill and Other”. The amendments in this ASU are required for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. To simplify the subsequent measurement of goodwill, the Update eliminates Step 2 from the goodwill impairment test. An entity should now perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment, and if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. An entity should apply the amendments in this Update on a prospective basis. A public business entity should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this ASU in 2020 is not expected to have a material impact on the Company’s consolidated financial statements.
Subsequent Events
The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of December 31, 2018 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through March 7, 2019, the date these consolidated financial statements were available to be issued.
On May 6, 2011, Donegal Financial Services Corporation, the parent company of Province Bank, FSB, merged with Union National Financial Corporation, the parent company of Union National Community Bank, with Donegal Financial Services Corporation as the surviving entity. As part of the transaction, Union National Community Bank merged with and into Province Bank, FSB. The merged Bank is operating under the new name Union Community Bank.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
As a result of the allocation of the purchase price, goodwill and core deposit intangible of $901,000 and $1,738,000, respectively, were recorded. The core deposit intangible is being amortized over aten-year period using a sum of the years’ digits basis. The goodwill is not amortized, but is measured annually for impairment. Core deposit intangible amortization expense of $99,000, $134,000 and $168,000 was recorded in 2018, 2017, and 2016, respectively. Intangible amortization expense projected for the succeeding three years beginning 2019 is estimated to be $65,000, $30,000, and $2,000 per year, respectively.
3. | Restrictions on Cash and Cash Equivalents
|
The Company is required to maintain cash reserve balances for the Federal Reserve Bank. The total required reserve balances were $6,189,000 and $10,458,000 as of December 31, 2018 and 2017, respectively. The required reserve balances are included in cash and due from banks on the consolidated balance sheet.
4. | SecuritiesAvailable-for-Sale
|
The amortized cost, related fair value and unrealized gains and losses of securitiesavailable-for-sale are as follows at December 31, 2018 and 2017 (in thousands):
| | | | | | | | | | | | | | | | |
December 31, 2018 | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Fair
Value | |
U.S. treasuries | | $ | 7,477 | | | $ | — | | | $ | (166 | ) | | $ | 7,311 | |
U.S. government agencies securities | | | 8,208 | | | | — | | | | (124 | ) | | | 8,084 | |
Corporate debt securities | | | 2,033 | | | | — | | | | (27 | ) | | | 2,006 | |
Tax-free municipal securities | | | 21,875 | | | | 57 | | | | (486 | ) | | | 21,446 | |
U.S. government sponsored enterprise mortgage-backed securities | | | 42,386 | | | | — | | | | (1,370 | ) | | | 41,016 | |
Other securities | | | 41 | | | | — | | | | — | | | | 41 | |
| | | | | | | | | | | | | | | | |
| | $ | 82,020 | | | $ | 57 | | | $ | (2,173 | ) | | $ | 79,904 | |
| | | | | | | | | | | | | | | | |
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | |
December 31, 2017 | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Fair
Value | |
U.S. treasuries | | $ | 7,474 | | | $ | 3 | | | $ | (102 | ) | | $ | 7,375 | |
U.S. government agencies securities | | | 8,165 | | | | 22 | | | | (54 | ) | | | 8,133 | |
Corporate debt securities | | | 2,564 | | | | 13 | | | | (5 | ) | | | 2,572 | |
Tax-free municipal securities | | | 22,938 | | | | 239 | | | | (181 | ) | | | 22,996 | |
U.S. government sponsored enterprise mortgage-backed securities | | | 52,526 | | | | 25 | | | | (953 | ) | | | 51,598 | |
Other securities | | | 41 | | | | — | | | | — | | | | 41 | |
| | | | | | | | | | | | | | | | |
| | | $93,708 | | | $302 | | | $(1,295) | | | $92,715 | |
| | | | | | | | | | | | | | | | |
Certain obligations of the U.S. Government are pledged to secure public deposits. The carrying value of the pledged assets was $35,333,000 and $36,046,000 at December 31, 2018 and 2017, respectively.
The amortized cost and fair value of securities as of December 31, 2018, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without any penalty (in thousands).
| | | | | | | | |
| | | Amortized
Cost | | | Fair
Value | |
Due in one year or less | | $ | 1,954 | | | $ | 1,949 | |
Due after one year through five years | | | 14,299 | | | | 14,007 | |
Due after five years through ten years | | | 9,382 | | | | 9,135 | |
Due after ten years | | | 13,958 | | | | 13,756 | |
U.S. government sponsored enterprise mortgage-backed securities | | | 42,386 | | | | 41,016 | |
Other securities | | | 41 | | | | 41 | |
| | | | | | | | |
| | $ | 82,020 | | | $ | 79,904 | |
| | | | | | | | |
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2018 and 2017 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | Less than 12 Months | | | 12 Months or More | | | Total | |
| | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | |
U.S. treasuries | | $ | 477 | | | $ | (5 | ) | | $ | 6,834 | | | $ | (161 | ) | | $ | 7,311 | | | $ | (166 | ) |
U.S. government agencies securities | | | 2,917 | | | | (19 | ) | | | 5,167 | | | | (105 | ) | | | 8,084 | | | | (124 | ) |
Corporate debt securities | | | 750 | | | | (11 | ) | | | 1,006 | | | | (16 | ) | | | 1,756 | | | | (27 | ) |
Tax-free municipal securities | | | 8,781 | | | | (85 | ) | | | 12,665 | | | | (401 | ) | | | 21,446 | | | | (486 | ) |
U.S. government sponsored enterprise mortgage-backed securities | | | 2,898 | | | | (39 | ) | | | 38,118 | | | | (1,331 | ) | | | 41,016 | | | | (1,370 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 15,823 | | | $ | (159 | ) | | $ | 63,790 | | | $ | (2,014 | ) | | $ | 79,613 | | | $ | (2,173 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2017 | | Less than 12 Months | | | 12 Months or More | | | Total | |
| | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | |
U.S. treasuries | | $ | 3,442 | | | $ | (24 | ) | | $ | 3,449 | | | $ | (78 | ) | | $ | 6,891 | | | $ | (102 | ) |
U.S. government agencies securities | | | 3,506 | | | | (23 | ) | | | 1,720 | | | | (31 | ) | | | 5,226 | | | | (54 | ) |
Corporate debt securities | | | 1,029 | | | | (5 | ) | | | — | | | | — | | | | 1,029 | | | | (5 | ) |
Tax-free municipal securities | | | 4,160 | | | | (106 | ) | | | 6,653 | | | | (75 | ) | | | 10,813 | | | | (181 | ) |
U.S. government sponsored enterprise mortgage-backed securities | | | 15,821 | | | | (138 | ) | | | 31,982 | | | | (815 | ) | | | 47,803 | | | | (953 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 27,958 | | | $ | (296 | ) | | $ | 43,804 | | | $ | (999 | ) | | $ | 71,762 | | | $ | (1,295 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2018, five U.S. treasury securities had unrealized losses. One of the five of the securities have been in a continuous loss position less than 12 months. Four securities have been in a continuous loss position for more than 12 months. None of the securities in this category had a fair value significantly below their amortized cost. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of specific securities.
At December 31, 2018, seven U.S. government and agency securities had unrealized losses. Two of the seven securities have been in a continuous loss position less than 12 months. Five securities have been in a continuous loss position for more than 12 months. None of the securities in this category had a fair value significantly below their amortized cost. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of specific securities.
At December 31, 2018, three corporate debt securities had an unrealized loss. One of the three securities has been in a continuous loss position for less than 12 months. Two of the securities have been in a continuous loss position for more than 12 months. None of the securities in this category had a fair value significantly below their amortized cost. The unrealized loss relates principally to changes in interest rates subsequent to the acquisition of the security.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
At December 31, 2018, thirtytax-free municipal securities had unrealized losses. Thirteen of the thirty securities have been in a continuous loss position less than 12 months. Seventeen securities have been in a continuous loss position for more than 12 months. None of the securities in this category had a fair value significantly below their amortized cost. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of specific securities.
At December 31, 2018, forty-three U.S. government sponsored enterprise mortgage-backed securities had unrealized losses. Seven of the forty securities have been in a continuous loss position less than 12 months.Thirty-six securities have been in a continuous loss position for more than 12 months. None of the securities in this category had a fair value significantly below their amortized cost. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of specific securities.
At December 31, 2017, four U.S. treasury securities had unrealized losses. Two of the four of the securities have been in a continuous loss position less than 12 months. Two securities have been in a continuous loss position for more than 12 months. None of the securities in this category had a fair value significantly below their amortized cost. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of specific securities.
At December 31, 2017, five U.S. government and agency securities had unrealized losses. Three of the five securities have been in a continuous loss position less than 12 months. Two securities have been in a continuous loss position for more than 12 months. None of the securities in this category had a fair value significantly below their amortized cost. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of specific securities.
At December 31, 2017, two corporate debt securities had an unrealized loss. Both securities have been in a continuous loss position for less than 12 months. None of the securities in this category had a fair value significantly below their amortized cost. The unrealized loss relates principally to changes in interest rates subsequent to the acquisition of the security.
At December 31, 2017, seventeentax-free municipal securities had unrealized losses. Six of the seventeen securities have been in a continuous loss position less than 12 months. Eleven securities have been in a continuous loss position for more than 12 months. None of the securities in this category had a fair value significantly below their amortized cost. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of specific securities.
At December 31, 2017, thirty-three U.S. government sponsored enterprise mortgage-backed securities had unrealized losses. Fourteen of the thirty-three securities have been in a continuous loss position less than 12 months. Nineteen securities have been in a continuous loss position for more than 12 months. None of the securities in this category had a fair value significantly below their amortized cost. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of specific securities.
Unrealized losses on these securities have not been recognized into earnings because the issuers of the securities are of high credit quality, management has the ability and intent to hold these securities for the foreseeable future and does not believe they will have to sell the securities or be required to sell the securities, and the declines in fair value are largely due to market interest rates and not a result of credit risk. The fair values of these securities are expected to recover as they approach maturity and/or market interest rates fluctuate.
Gross realized gains on securities sold during 2018, 2017 and 2016 totaled $0, $0 and $8,000, respectively. There were no gross realized losses on securities sold during 2018, 2017 and 2016.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
5. | Loans and Allowance for Loan Losses
|
Credit Quality Indicators
Commercial and industrial, commercial real estate, multi-family, residential real estate development and construction loans are based on an internally assigned risk rating system which are assigned at loan origination and reviewed on a periodic or “as needed” basis. Other consumer loans are evaluated based on the payment activity of the loan.
To facilitate the monitoring of credit quality within commercial and industrial, commercial real estate, construction, multi-family and residential real estate development loans, and for purposes of analyzing historical loss rates used in the determination of the allowance for loan losses for the respective portfolio class, the Bank utilizes the following categories of risk ratings: pass/satisfactory (includes risk rating 1 through 5), special mention, substandard, doubtful, and loss. The risk rating categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass/satisfactory ratings, which are assigned to those borrowers who do not have identified potential or well-defined weaknesses and for whom there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter. Consumer loans are not assigned a risk rating. While assigning risk ratings involves judgment, the risk-rating process allows management to identify riskier credits in a timely manner and allocate the appropriate resources to managing the loans.
The risk ratings are defined as follows:
(1) - Excellent
Loans collateralized by cash, assigned cash surrender value of life insurance, government bonds or time deposits.
Loans collateralized by margined listed securities.
Loans fully guaranteed by federal or state governments or agencies thereof.
Loans granted to entities with taxing powers that have demonstrated the ability to service all debt.
(2) - Good
Borrowers with consistent earnings and historical cash flows of at least 2.0 times debt service with reasonable consideration given to allow for discretionary owners’ withdrawals.
Balance sheets of borrowers with liquidity and leverage positions that exceed industry averages.
Loans would generally be secured by readily marketable collateral or real estate with appropriate appraisals but collateral is viewed clearly as precautionary.Loan-to-value ratios are within specified policy levels.
Strong and stable management in critical positions.
Loans to municipal authorities that have captive markets from which sufficient fees have been/will be charged to service all debt.
(3) - Satisfactory
Borrowers with sufficient earnings and historical cash flows of at least 1.5 times debt service with reasonable consideration given to allow for discretionary owners’ withdrawals.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
Balance sheets of borrowers with liquidity and leverage positions that generally meet industry averages.
Loans secured with collateral that has readily established values, not subject to material market fluctuations, and saleable within reasonable periods of time.
(4) - Fair
Borrowers with sufficient earnings and historical cash flows of at least 1.2 times debt service with reasonable consideration given to allow for discretionary owners’ withdrawals.
Balance sheets of borrowers with liquidity and leverage positions that are generally below those of industry peers.
Business operates in an industry that may be negatively impacted by downturns in the economy.
Loans secured with collateral that has readily established values, not subject to material market fluctuations, and saleable within reasonable periods of time.
(5) - Pass Watch
Borrowers who do not have the financial and/or managerial strength to sustain a major setback. Historical cash flows greater than 1.0 times, but consistently marginal.
Borrowers whose leverage, inconsistent operating performance or occasional payment delinquency requires regular management attention.
Borrowers who are performing according to agreed upon terms but might be adversely affected by deteriorating industry or economic conditions, operating problems, significant pending litigation, or a decline in the quality or adequacy of collateral.
Borrowers engaged in astart-up venture.
Loans to borrowers where repayment ability cannot be based on historical performance but rather reliance on projected cash flow.
Alternative sources of funding are limited only to competitor banks.
Financially strong individuals who have not met all repayment terms.
Borrowers with loans secured by collateral that, due to prevailing market conditions, may have a protracted cash conversion period.
Dependence on few customers or source of supply is highly dependent on a few vendors.
Business operates in an industry that is in the declining stage and/or is negatively impacted by downturns in the economy.
Management demonstrates some weakness.
(6) - Special Mention
Loans are currently protected, but have the potential and/or exhibit potential weaknesses. These loans exhibit greater than normal risk, but do not yet warrant a substandard classification (risk rating (7)). The credit risk may be minor, yet constitute an unwarranted risk in light of the circumstances surrounding a specific loan. The loan could have weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Bank’s credit position at a later date. Loans in this category could have the following characteristics:
Condition and/or control over collateral may be in doubt.
Weakened financial condition with cash flow coverage declining and further deterioration likely resulting in shortfalls which could impair the ability to repay.
Loan agreement deficiencies, lack of proper documentation, or other deviation from prudent lending practices.
Economic and/or market conditions negatively affecting the borrower with additional deterioration possible in the future.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
An adverse trend in the borrower’s operations or an unbalanced financial condition, which has not reached the stage where repayment is in jeopardy.
(7) - Substandard
Loans not adequately protected by the current financial position and debt service capacity of the borrower, thereby placing significant reliance on secondary repayment sources.
Borrowers with significant deterioration in financial performance (i.e., operating losses) and/or position (i.e., reduced liquidity, high leverage).
Loans to borrowers for which current financial information is not on file that are exhibiting other risk factors such as ongoing delinquency or overdrafts.
Loans dependent on the liquidation of collateral for repayment of the debt.
Loans with a well-defined weakness or weaknesses such that the repayment of the debt is in jeopardy. Loans so classified will have a higher potential for loss than Pass or Special Mention loans if the deficiencies are not corrected.
Loans with a seven (7) rating require close and constant supervision. A plan of action should be put in place and closely monitored by management.
(7a) - Retail and Small Business Substandard
In compliance with FFIEC Uniform Retail Credit Classifications regarding retail credit:
Open-end andclosed-end retail loans (to individuals for household, family or other personal expenditures) past due 90 days from contractual due date at the reporting period will be classified Substandard.
1-4 residential & home equity loans that are delinquent 90 days or more at the reporting period with aLoan-To-Value greater than 60% will be classified Substandard. Properly secured residential real estate loans with LTV ratios equal to or less than 60% will generally not be classified based solely on delinquency status.
Home equity loans to the same borrower at the same institution as the senior mortgage loan (UCB) with a combined LTV ratio equal to or less than 60% need not be classified.
Home equity loans where the bank does not hold the senior mortgage that are delinquent 90 days or more at the reporting period will be classified Substandard, even if the LTV ratio is equal to or less than 60%.
Loans in bankruptcy and delinquent more than 45 days will be classified Substandard until the borrowerre-establishes the ability and willingness to repay (6 months minimum demonstrated payment performance) or until there is receipt of proceeds from liquidation of collateral.
| • | | Small Business loans(relationships for commercial purposes that are less than $150,000 in total exposure and made to or guaranteed by an individual(s)) will be treated for credit risk rating purposes as retail loans. Small business loans more than 90 days delinquent at the reporting period will be classified Substandard.
|
(8) - Doubtful
Loans will have all the weaknesses inherent in a loan with a Substandard (7) classification rating, however the severity of the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, doubtful. The probability of loss is high, but due to pending specific factors which could strengthen either collateral position or debt service ability of the borrower, a risk rating of Loss (9) is precluded at the current time.
Pending factors include:
Merger or acquisition is pending.
Refinancing or additional financing.
Pledge of additional collateral.
Such companies exhibit all the indicators of insolvency or bankruptcy, and stringent action required by lending officers and workout staff.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
(9) - Loss
Loans uncollectible with collateral value unable to support the loan. Although partial recovery may be affected in the future, it is not practical or desirable to continue to carry the asset at any value.
The following tables present the classes of the loan portfolio summarized by the aggregate credit risk ratings (special mention, substandard and doubtful) within the Company’s internal risk rating system as of December 31, 2018 and 2017 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | Pass | | | Special
Mention | | | Substandard | | | Doubtful | | | Total | |
Commercial loans: | | | | | | | | | | | | | | | | | | | | |
Real estate secured | | $ | 279,160 | | | $ | 1,471 | | | $ | 2,206 | | | $ | — | | | $ | 282,837 | |
C & I | | | 35,590 | | | | 39 | | | | 1,188 | | | | — | | | | 36,817 | |
Other | | | 2,268 | | | | — | | | | — | | | | — | | | | 2,268 | |
Residential mortgage loans | | | 4,841 | | | | — | | | | — | | | | — | | | | 4,841 | |
Home equity installments and lines of credit | | | 88,244 | | | | — | | | | 6 | | | | — | | | | 88,250 | |
Consumer loans, other | | | 1,533 | | | | — | | | | 18 | | | | — | | | | 1,551 | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 411,636 | | | $ | 1,510 | | | $ | 3,418 | | | $ | — | | | $ | 416,564 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
December 31, 2017 | | Pass | | | Special
Mention | | | Substandard | | | Doubtful | | | Total | |
Commercial loans: | | | | | | | | | | | | | | | | | | | | |
Real estate secured | | $ | 282,598 | | | $ | 1,720 | | | $ | 2,564 | | | $ | — | | | $ | 286,882 | |
C & I | | | 41,427 | | | | 200 | | | | 1,258 | | | | — | | | | 42,885 | |
Other | | | 1,510 | | | | — | | | | — | | | | — | | | | 1,510 | |
Residential mortgage loans | | | 4,477 | | | | — | | | | — | | | | — | | | | 4,477 | |
Home equity installments and lines of credit | | | 94,550 | | | | — | | | | 86 | | | | 31 | | | | 94,667 | |
Consumer loans, other | | | 1,679 | | | | — | | | | 21 | | | | — | | | | 1,700 | |
| | | | | | | | | | | | | | | | | | | | |
| | | $426,241 | | | $1,920 | | | $3,929 | | | $31 | | | $432,121 | |
| | | | | | | | | | | | | | | | | | | | |
-116-
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
Loans that are individually and collectively evaluated for impairment, as well as the related allowance for loan loss at December 31, 2018 and 2017 are presented below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | Collectively Evaluated
for Impairment | | | Individually Evaluated for
Impairment | | | Loans Acquired with
Credit Deterioration | | | Total | |
| | | Recorded
Investment | | | Allowance
for Loan
Losses | | | Recorded
Investment | | | Unpaid
Principal
Balance | | | Allowance
for Loan
Losses | | | Recorded
Investment | | | Allowance
for Loan
Losses | | | Recorded
Investment | | | Allowance
for Loan
Losses | |
Commercial loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate secured | | $ | 281,251 | | | $ | 3,479 | | | $ | 226 | | | $ | 293 | | | $ | — | | | $ | 1,360 | | | $ | — | | | $ | 282,837 | | | $ | 3,479 | |
C & I | | | 35,647 | | | | 680 | | | | — | | | | — | | | | — | | | | 1,170 | | | | — | | | | 36,817 | | | | 680 | |
Other | | | 2,268 | | | | 14 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,268 | | | | 14 | |
Residential mortgage loans | | | 4,807 | | | | 27 | | | | 34 | | | | — | | | | — | | | | — | | | | — | | | | 4,841 | | | | 27 | |
Home equity installments and lines of credit | | | 87,925 | | | | 597 | | | | 325 | | | | 8 | | | | — | | | | — | | | | — | | | | 88,250 | | | | 597 | |
Consumer loans, other | | | 1,551 | | | | 9 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,551 | | | | 9 | |
Unallocated | | | | | | | -200 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | 200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 413,449 | | | $ | 5,006 | | | $ | 585 | | | $ | 301 | | | $ | — | | | $ | 2,530 | | | $ | — | | | $ | 416,564 | | | $ | 5,006 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2017 | | Collectively Evaluated
for Impairment | | | Individually Evaluated for
Impairment | | | Loans Acquired with
Credit Deterioration | | | Total | |
| | | Recorded
Investment | | | Allowance
for Loan
Losses | | | Recorded
Investment | | | Unpaid
Principal
Balance | | | Allowance
for Loan
Losses | | | Recorded
Investment | | | Allowance
for Loan
Losses | | | Recorded
Investment | | | Allowance
for Loan
Losses | |
Commercial loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate secured | | $ | 285,241 | | | $ | 3,452 | | | $ | 226 | | | $ | 303 | | | $ | — | | | $ | 1,415 | | | $ | — | | | $ | 286,882 | | | $ | 3,452 | |
C & I | | | 41,805 | | | | 659 | | | | — | | | | — | | | | — | | | | 1,080 | | | | — | | | | 42,885 | | | | 659 | |
Other | | | 1,510 | | | | 8 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,510 | | | | 8 | |
Residential mortgage loans | | | 4,477 | | | | 28 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,477 | | | | 28 | |
Home equity installments and lines of credit | | | 94,654 | | | | 821 | | | | 13 | | | | 10 | | | | — | | | | — | | | | — | | | | 94,667 | | | | 821 | |
Consumer loans, other | | | 1,700 | | | | 11 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,700 | | | | 11 | |
Unallocated | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $429,387 | | | $4,979 | | | $239 | | | $313 | | | $— | | | $2,495 | | | $— | | | $432,121 | | | $4,979 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The average recorded investment and interest income recognized on impaired commercial real estate loans for the year ended December 31, 2018 was $295,000 and $13,000, respectively. The average recorded investment and interest income recognized on home equity installments and lines of credit for the year ended December 31, 2018 was $9,000 and $1,000, respectively.
The average recorded investment and interest income recognized on impaired commercial real estate loans for the year ended December 31, 2017 was $303,000 and $12,000, respectively. The average recorded investment and interest income recognized on home equity installments and lines of credit for the year ended December 31, 2017 was $11,000 and $200, respectively.
The average recorded investment and interest income recognized on impaired commercial real estate loans for the year ended December 31, 2016 was $314,000 and $17,000, respectively. The average recorded investment and interest income recognized on home equity installments and lines of credit for the year ended December 31, 2016 was $13,000 and $1,000, respectively.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | 30-59 Days
Past Due | | | 60-89 Days
Past Due | | | >90 Days Past
Due and
Accruing | | | Non-Accrual
Loans | | | Total Past
Due and
Non-Accrual | | | Current
Loans | | | Total
Loans
Receivable | |
Commercial loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate secured | | $ | 133 | | | $ | 80 | | | $ | — | | | $ | 807 | | | $ | 1,020 | | | $ | 280,252 | | | $ | 281,272 | |
C & I | | | — | | | | — | | | | — | | | | 1,170 | | | | 1,170 | | | | 34,477 | | | | 35,647 | |
Other | | | 39 | | | | — | | | | — | | | | — | | | | 39 | | | | 2,229 | | | | 2,268 | |
Acquired with credit deterioration | | | — | | | | — | | | | — | | | | 779 | | | | 779 | | | | 1,956 | | | | 2,735 | |
Residential mortgage loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage loans | | | — | | | | — | | | | — | | | | 34 | | | | 34 | | | | 4,807 | | | | 4,841 | |
Acquired with credit deterioration | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Home equity loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity installments and lines of credit | | | 8 | | | | 144 | | | | 34 | | | | 325 | | | | 511 | | | | 87,739 | | | | 88,250 | |
Acquired with credit deterioration | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Consumer loans, other | | | — | | | | 2 | | | | 7 | | | | — | | | | 9 | | | | 1,542 | | | | 1,551 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 180 | | | $ | 226 | | | $ | 41 | | | $ | 3,115 | | | $ | 3,562 | | | $ | 413,002 | | | $ | 416,564 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2017 | | 30-59 Days
Past Due | | | 60-89 Days
Past Due | | | >90 Days Past
Due and
Accruing | | | Non-Accrual
Loans | | | Total Past
Due and
Non-Accrual | | | Current
Loans | | | Total
Loans
Receivable | |
Commercial loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate secured | | $ | — | | | $ | — | | | $ | — | | | $ | 546 | | | $ | 546 | | | $ | 285,016 | | | $ | 285,562 | |
C & I | | | — | | | | — | | | | — | | | | — | | | | — | | | | 41,715 | | | | 41,715 | |
Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,510 | | | | 1,510 | |
Acquired with credit deterioration | | | — | | | | — | | | | — | | | | 534 | | | | 534 | | | | 1,956 | | | | 2,490 | |
Residential mortgage loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage loans | | | — | | | | — | | | | — | | | | 40 | | | | 40 | | | | 4,437 | | | | 4,477 | |
Acquired with credit deterioration | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Home equity loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity installments and lines of credit | | | 188 | | | | 54 | | | | 66 | | | | 360 | | | | 668 | | | | 93,999 | | | | 94,667 | |
Acquired with credit deterioration | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Consumer loans, other | | | — | | | | — | | | | — | | | | 13 | | | | 13 | | | | 1,687 | | | | 1,700 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 188 | | | $ | 54 | | | $ | 66 | | | $ | 1,493 | | | $ | 1,801 | | | $ | 430,320 | | | $ | 432,121 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
The Company identified no loans that were considered troubled debt restructurings during the periods presented, and did not have any troubled debt restructurings as of December 31, 2018 or 2017.
There were no loans in the process of foreclosure as of December 31, 2018 or December 31, 2017.
As of December 31, 2018 and 2017, the Company did not have any residential real estate foreclosed assets.
The following table provides activity for the accretable yield of purchased impaired loans for the years ended December 31, 2018, 2017, and 2016 (in thousands):
| | | | |
Accretable yield, December 31, 2015 | | $ | — | |
Accretable yield amortized to interest income | | | (235 | ) |
Reclassification from nonaccretable difference (1) | | | 281 | |
| | | | |
Accretable yield, December 31, 2016 | | | 46 | |
Accretable yield amortized to interest income | | | (181 | ) |
Reclassification from nonaccretable difference (1) | | | 148 | |
| | | | |
Accretable yield, December 31, 2017 | | | 13 | |
Accretable yield amortized to interest income | | | (571 | ) |
Reclassification from nonaccretable difference (1) | | | 595 | |
| | | | |
Accretable yield, December 31, 2018 | | $ | 37 | |
| | | | |
(1) | Reclassification from nonaccretable difference represents an increase to the estimated cash flows to be collected on the underlying portfolio.
|
The components of property and equipment at December 31, 2018 and 2017 are as follows (in thousands):
| | | | | | | | |
| | | 2018 | | | 2017 | |
Land and land improvements | | $ | 3,353 | | | $ | 3,353 | |
Buildings and improvements | | | 7,466 | | | | 7,466 | |
Leasehold improvements | | | 703 | | | | 703 | |
Furniture, fixtures and equipment | | | 3,785 | | | | 3,763 | |
| | | | | | | | |
| | | 15,307 | | | | 15,285 | |
Accumulated depreciation and amortization | | | (6,743 | ) | | | (6,177 | ) |
| | | | | | | | |
| | $ | 8,564 | | | $ | 9,108 | |
| | | | | | | | |
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
Total depreciation and amortization expense was $567,000, $664,000 and $720,000, for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company has entered into certain arrangements that are classified as operating leases. The operating leases are for some branch and office locations. The majority of the operating leases are renewable at the Company’s option. The Company leases one of the Company’s branch offices from the Insurance Company. On September 1, 2018, the Company renewed the lease for an additional term of one year. Lease expense for the years ended December 31, 2018, 2017 and 2016 was $31,000, $30,000 and $30,000, respectively, under this related party operating lease.
Future minimum lease payments by year, including payments due under renewal agreements, are as follows (in thousands):
| | | | | | | | |
| | | Lease
Obligation | | | Obligation
to Related
Party | |
2019 | | $ | 472 | | | $ | 24 | |
2020 | | | 443 | | | | — | |
2021 | | | 349 | | | | — | |
2022 | | | 287 | | | | — | |
2023 | | | 267 | | | | — | |
Thereafter | | | 15 | | | | — | |
Net rental expense in 2018, 2017 and 2016 consisted of the following (in thousands):
| | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Rental expense | | $ | 496 | | | $ | 482 | | | $ | 492 | |
Sublease rental income | | | (14 | ) | | | (18 | ) | | | (20 | ) |
| | | | | | | | | | | | |
Net Rental Expense | | $ | 482 | | | $ | 464 | | | $ | 472 | |
| | | | | | | | | | | | |
The components of deposits at December 31, 2018 and 2017 are as follows (in thousands):
| | | | | | | | |
| | | 2018 | | | 2017 | |
Demand,non-interest bearing | | $ | 111,994 | | | $ | 107,652 | |
Demand, interest bearing | | | 83,495 | | | | 92,327 | |
Savings and money market | | | 138,836 | | | | 136,747 | |
Time, $250 and over | | | 7,458 | | | | 6,698 | |
Time, other | | | 119,747 | | | | 120,424 | |
Brokered deposits | | | — | | | | 14,205 | |
| | | | | | | | |
Total Deposits | | $ | 461,530 | | | $ | 478,053 | |
| | | | | | | | |
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
The aggregate amount of demand deposit overdrafts that were reclassified as loans were $16,000 at December 31, 2018, compared to $22,000 as of December 31, 2017.
At December 31, 2018, the scheduled maturities of time deposits are as follows (in thousands):
| | | | |
2019 | | $ | 98,876 | |
2020 | | | 19,135 | |
2021 | | | 4,289 | |
2022 | | | 3,563 | |
2023 | | | 1,264 | |
Thereafter | | | 77 | |
| | | | |
| | $ | 127,204 | |
| | | | |
As of December 31, 2018, the Company has a maximum borrowing capacity of $257,121,300 from the Federal Home Loan Bank. As of December 31, 2018, the Company did not have any outstanding overnight borrowings outstanding from the Federal Home Loan Bank. As of December 31, 2017, the Company had a maximum borrowing capacity of $258,515,200 from the Federal Home Loan Bank. As of December 31, 2017, the Company had $2,985,000 overnight borrowings outstanding from the Federal Home Loan Bank with an actual rate of 1.54%. Collateral for all outstanding advances consisted of1-4 family mortgage loans and other real estate secured loans totaling $257,121,300 at December 31, 2018.
9. | Junior Subordinated Debentures
|
Through the acquisition of Union National Financial Corporation, the Company acquired two issuances of junior subordinated debentures with a contractual value of $11,341,000 and a fair market value at the date of acquisition of $4,110,000. The outstanding balance as of December 31, 2018 was $5,008,000 and $4,843,000 at December 31, 2017.
The Company acquired a junior subordinated debenture issued in December 2003 by Union National Capital Trust I (“UNCT 1”) in the amount of $8,248,000. The floating-rate debenture is due January 23, 2034, of which $248,000 is related to the Company’s capital contribution. UNCT I provides for quarterly distributions at a variable annual coupon rate that is reset quarterly, based on three-month LIBOR plus 2.85%. The outstanding balance was $3,825,000, the coupon rate was 5.37%, and the market yield was 14.80% at December 31, 2018. The outstanding balance was $3,706,000, the coupon rate was 4.23%, and the market yield was 12.41% at December 31, 2017.
The Company acquired a junior subordinated debenture issued in October 2004, by Union National Capital Trust II (“UNCT II”) in the amount of $3,093,000. The floating–rate debenture is due November 23, 2034, of which $93,000 is related to the Company’s capital contribution. UNCT II provides for quarterly distributions at a variable annual coupon rate that is reset quarterly, based on three-month LIBOR plus 2.00%. The outstanding balance was $1,183,000, the coupon rate was 4.65% and the market yield was 16.20% at December 31, 2018. The outstanding balance was $1,137,000, the coupon rate was 3.45% and the market yield was 13.19% at December 31, 2017.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
UNCT I and UNCT II are callable at the Company’s option beginning at five years from the date of issuance. These debentures do not have to be called in full. UNCT I became callable in December 2008, and UNCT II became callable in October 2009.
10. Income Taxes
The components of the income tax expense for the years ended December 31, 2018, 2017 and 2016 are as follows (in thousands):
| | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Federal: | | | | | | | | | | | | |
Current | | $ | (193 | ) | | $ | 991 | | | $ | 481 | |
Deferred | | | 1,406 | | | | 88 | | | | 157 | |
| | | | | | | | | | | | |
| | | 1,213 | | | | 1,079 | | | | 638 | |
State, current | | | 645 | | | | 370 | | | | 218 | |
| | | | | | | | | | | | |
| | $ | 1,858 | | | $ | 1,449 | | | $ | 856 | |
| | | | | | | | | | | | |
A reconciliation of the statutory income tax at a rate of 21%, 34%, and 34% to the income tax expense included in the consolidated statement of income is as follows for 2018, 2017 and 2016, respectively.
| | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
Federal income tax at statutory rate | | | 21.0 | % | | | 34.0 | % | | | 34.0 | % |
State tax expense, net of federal benefit | | | 7.0 | | | | 5.1 | | | | 4.6 | |
Tax exempt income, net of disallowed interest expense | | | (1.9 | ) | | | (4.5 | ) | | | (6.3 | ) |
Bank owned life insurance | | | (1.0 | ) | | | (2.5 | ) | | | (5.5 | ) |
Stock option expense | | | 0.3 | | | | 0.9 | | | | 1.6 | |
Effect of change in enacted tax rate | | | — | | | | (2.9 | ) | | | — | |
Other | | | — | | | | — | | | | (0.9 | ) |
| | | | | | | | | | | | |
Effective Income Tax Rate | | | 25.4 | % | | | 30.1 | % | | | 27.5 | % |
| | | | | | | | | | | | |
On December 22, 2017, the enacted income tax rate changed from 34 percent to 21 percent for tax years beginning on or after January 1, 2018 as a result of the Tax Cuts and Jobs Act. Included in income tax expense for 2017 is a benefit of $141,000 related to the adjustment of net deferred tax liabilities from the historic 34 percent to the newly enacted 21 percent tax rate on December 22, 2017. The impact on the 2017 effective income tax rate is shown in the table above. The Company has determined that the accounting for the Tax Cuts and Jobs Act is final as of December 31, 2017.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
The components of the net deferred tax asset, included in other assets on the consolidated balance sheets, at December 31, 2018 and 2017 are as follows (in thousands):
| | | | | | | | |
| | | 2018 | | | 2017 | |
Deferred tax assets: | | | | | | | | |
Allowance for loan loss | | $ | 1,051 | | | $ | 1,046 | |
State net operating loss carryforward | | | 567 | | | | 511 | |
Alternative minimum tax credit carryforward | | | — | | | | 1,122 | |
Nonaccrual interest | | | 12 | | | | 13 | |
Low income housing tax credit carryforward | | | — | | | | 437 | |
Unrealized loss onavailable-for-sale securities | | | 445 | | | | 208 | |
Other | | | 194 | | | | 59 | |
| | | | | | | | |
| | | 2,269 | | | | 3,396 | |
Valuation allowance | | | (567 | ) | | | (511 | ) |
| | | | | | | | |
Total deferred tax assets, net of valuation allowance | | | 1,702 | | | | 2,885 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Property and equipment | | | (23 | ) | | | (191 | ) |
Purchase accounting adjustments | | | (1,544 | ) | | | (1,365 | ) |
| | | | | | | | |
Net deferred tax liabilities | | | (1,567 | ) | | | (1,556 | ) |
| | | | | | | | |
Net Deferred Tax Assets | | $ | 135 | | | $ | 1,329 | |
| | | | | | | | |
At December 31, 2018 and 2017, the Company had no valuation allowance established against its low income housing tax credit carryforward or alternative minimum tax (“AMT”) credit carryforward, as management believes the Company will generate sufficient future taxable income to fully utilize these deferred tax assets. The low income housing credit carryforward will expire between 2021 and 2027, and as a result of the Tax Cuts and Jobs Act enacted on December 22, 2017 Corporate AMT has been repealed. As of December 31, 2018, the Company’s AMT credit carryforward was fully utilized. The valuation allowance at December 31, 2018 and 2017 relates to state net operating loss carryforwards for which realizability is uncertain. At December 31, 2018 and 2017, the Company had state net operating loss carryforwards of $5,598,000 and $5,119,000, respectively, which are available to offset future state taxable income, and expire at various dates through 2036.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible and tax planning strategies, management believes it is more likely than not that the Company will realize the benefits of these deferred tax assets, net of any valuation allowance at December 31, 2018.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
11. | Transactions with Executive Officers, Directors and Affiliated Companies
|
In addition to leasing transactions disclosed in Note 6, the Company has had, and may be expected to have in the future, banking transactions with its executive officers, directors, their immediate families and affiliated companies (commonly referred to as related parties). Deposits of related parties totaled $17,207,000 and $22,579,000 at December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017 related party loans totaled $1,920,000 and $2,196,000, respectively. During 2018, loan advances and repayments totaled $974,000 and $1,250,000, respectively.
12. | Financial Instruments withOff-Balance Sheet Risk
|
The Company is a party to financial instruments withoff-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does foron-balance sheet instruments.
At December 31, 2018 and 2017, the following financial instruments were outstanding whose contract amounts represent credit risk (in thousands):
| | | | | | | | |
| | | 2018 | | | 2017 | |
Commitments to grant loans | | $ | 4,752 | | | $ | 3,672 | |
Unfunded commitments under lines of credit | | | 110,276 | | | | 117,515 | |
| | | | | | | | |
| | $ | 115,028 | | | $ | 121,187 | |
| | | | | | | | |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s credit worthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held typically consists of residential or commercial real estate.
13. | Concentration of Credit Risk
|
The Company’s loans by type of loan are set forth in Note 5. The debtors’ ability to honor their contracts is influenced by the region’s economy and financial stability.
The Bank maintains a defined contribution 401(k) retirement Plan that covers eligible employees. The Bank’s matching contribution is 100% of each participant’s first 1% of elective contribution and 50% of each participant’s next 5% of elective contributions with a maximum contribution of 3.50% of the participants compensation. The Bank’s contributions to the Plan totaled $219,000, $207,000 and $196,000, for the years ended December 31, 2018, 2017 and 2016, respectively.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
The Bank is subject to various regulatory capital requirements administered by its primary regulators, The Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certainoff-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors, to be considered “well capitalized.”
The Company restricts its capital distributions in any calendar year to not exceed net income year to date plus retained net income for the preceding two years.
In July 2013, the Federal Reserve Board approved final rules (the “U.S. Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations and implementing the Basel Committee on Banking Supervision’s December 2010 framework for strengthening international capital standards. The U.S. Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions.
The new minimum regulatory capital requirements established by the U.S. Basel III Capital Rules became effective for the Bank on January 1, 2015, and will be fully phased in on January 1, 2019.
The U.S. Basel III Capital Rules requires the Bank to:
Meet a minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a Tier 1 capital ratio of 6.00% of risk-weighted assets;
Continue to require the current minimum total capital ratio of 8.00% of risk-weighted assets and the minimum Tier 1 leverage capital ratio of 4.00% of average assets; and
Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certainnon-qualifying capital instruments, including cumulative preferred stock and trust preferred securities, are being phased out as a component of Tier 1 capital for institutions of the Bank’s size.
The capital conservation buffer will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
The U.S. Basel III Capital Rules use a standardized approach for risk weightings that expands the risk-weightings for assets and off balance sheet exposures from the previous 0%, 20%, 50% and 100% categories to a much larger and more risk-sensitive number of categories, depending on the nature of the assets andoff-balance sheet exposures and resulting in higher risk weights for a variety of asset categories.
As of December 31, 2018, the Bank met the applicable minimum requirements of the U.S. Basel III Capital Rules, and each of the Bank’s capital ratios exceeded the amounts required to be considered “well capitalized” as defined in the regulations. As of December 31, 2018, the Bank’s capital levels also met the fully-phased in minimum capital requirements.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to assets. Management believes, as of December 31, 2018, that the Bank meets all capital adequacy requirements to which it is subject.
A comparison of the Bank’s actual capital amounts to the regulatory requirements at December 31, 2018 and 2017 is presented below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | Actual | | | For Capital
Adequacy
Purposes | | | Minimum Capital
Adequacy with
Capital Buffer | | | To be Well
Capitalized under
Prompt Corrective
Action Provisions | |
| | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
Total capital (to risk-weighted assets) | | $ | 94,550 | | | | 21.59 | % | | $ | 35,028 | | | ³ | 8.0 | % | | $ | 43,238 | | | ³ | 9.875 | % | | $ | 43,786 | | | ³ | 10.0 | % |
Tier 1 capital (to risk-weighted assets) | | | 89,358 | | | | 20.41 | % | | | 26,271 | | | ³ | 6.0 | % | | | 34,481 | | | ³ | 7.875 | % | | | 35,028 | | | ³ | 8.0 | % |
Common equity tier 1 capital (to risk-weighted assets) | | | 89,358 | | | | 16.15 | % | | | 24,901 | | | ³ | 4.5 | % | | | 35,277 | | | ³ | 6.375 | % | | | 35,969 | | | ³ | 6.5 | % |
Core (Tier 1) capital (to adjusted total assets) | | | 89,358 | | | | 16.15 | % | | | 22,135 | | | ³ | 4.0 | % | | | N/A | | | | N/A | | | | 27,668 | | | ³ | 5.0 | % |
| | | | |
December 31, 2017 | | Actual | | | For Capital
Adequacy
Purposes | | | Minimum Capital
Adequacy with
Capital Buffer | | | To be Well
Capitalized under
Prompt Corrective
Action Provisions | |
| | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
Total capital (to risk-weighted assets) | | $ | 88,592 | | | | 19.17 | % | | $ | 36,973 | | | ³ | 8.0 | % | | $ | 42,750 | | | ³ | 9.250 | % | | $ | 46,216 | | | ³ | 10.0 | % |
Tier 1 capital (to risk-weighted assets) | | | 83,401 | | | | 18.05 | % | | | 27,730 | | | ³ | 6.0 | % | | | 33,507 | | | ³ | 7.250 | % | | | 36,973 | | | ³ | 8.0 | % |
Common equity tier 1 capital (to risk-weighted assets) | | | 83,401 | | | | 18.05 | % | | | 20,797 | | | ³ | 4.5 | % | | | 26,574 | | | ³ | 5.750 | % | | | 30,040 | | | ³ | 6.5 | % |
Core (Tier 1) capital (to adjusted total assets) | | | 83,401 | | | | 14.80 | % | | | 22,547 | | | ³ | 4.0 | % | | | N/A | | | | N/A | | | | 28,184 | | | ³ | 5.0 | % |
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
16. | Fair Value Measurements
|
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as ofyear-end and have not beenre-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at year end.
FASB ASC Topic820-10,Fair Value Measurements and Disclosures, defines fair value measurement and disclosure guidance as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Additional guidance is provided in determining fair value when the volume and level of activity for the asset or liability has significantly decreased, including guidance on identifying circumstances when a transaction may not be considered orderly. Fair value measurement and disclosure guidance provides a list of factors a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value.
The guidance further clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability; some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly, considering the circumstances that indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.
Fair value measurement and disclosure guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2017 and 2016 are as follows (in thousands):
| | | | | | | | | | | | | | | | |
December 31, 2018 | | Total | | | (Level 1)
Quoted Prices
in Active Markets for
Identical Assets | | | (Level 2)
Significant
Other Observable
Inputs | | | (Level 3)
Significant
Unobservable
Inputs | |
U.S. treasuries | | $ | 7,311 | | | $ | 7,311 | | | $ | — | | | $ | — | |
U.S. government agencies securities | | | 8,084 | | | | — | | | | 8,084 | | | | — | |
Corporate debt securities | | | 2,006 | | | | — | | | | 2,006 | | | | — | |
Tax-free municipal securities | | | 21,446 | | | | — | | | | 21,446 | | | | — | |
U.S. government sponsored enterprise mortgage-backed securities | | | 41,016 | | | | — | | | | 41,016 | | | | — | |
Other securities | | | 41 | | | | — | | | | 41 | | | | — | |
| | | | | | | | | | | | | | | | |
Total | | $ | 79,904 | | | $ | 7,311 | | | $ | 72,593 | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
December 31, 2017 | | Total | | | (Level 1)
Quoted Prices
in Active Markets
for Identical Assets | | | (Level 2)
Significant Other
Observable Inputs | | | (Level 3)
Significant
Unobservable
Inputs | |
U.S. treasuries | | $ | 7,375 | | | $ | 7,375 | | | $ | — | | | $ | — | |
U.S. government agencies securities | | | 8,133 | | | | — | | | | 8,133 | | | | — | |
Corporate debt securities | | | 2,572 | | | | — | | | | 2,572 | | | | — | |
Tax-free municipal securities | | | 22,996 | | | | — | | | | 22,996 | | | | — | |
U.S. government sponsored enterprise mortgage-backed securities | | | 51,598 | | | | — | | | | 51,598 | | | | — | |
Other securities | | | 41 | | | | — | | | | 41 | | | | — | |
| | | | | | | | | | | | | | | | |
Total | | $ | 92,715 | | | $ | 7,375 | | | $ | 85,340 | | | $ | — | |
| | | | | | | | | | | | | | | | |
The valuation technique used to measure the fair values for the items in the tables above are as follows:
Securities Available for Sale
The fair values of investment securities were measured using information from a third-party pricing service. The pricing service uses quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted market prices for the
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. At least annually, the Corporation reviews a random sample of the pricing information received from the third-party pricing service by comparing it to price quotes from third-party brokers. Historically, price deviations have been immaterial.
There are no assets measured at fair value on a nonrecurring basis at December 31, 2018 and 2017.
The estimated fair values of financial instruments as of December 31, 2018 and 2017 are set forth in the tables below (in thousands). The information in the table should not be interpreted as an estimate of the fair value of the Company in its entirety since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.
| | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | Carrying
Amount | | | Fair
Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 34,257 | | | $ | 34,257 | | | $ | 34,257 | | | $ | — | | | $ | — | |
Interest-bearing time deposits in other banks | | | 6 | | | | 6 | | | | — | | | | 6 | | | | — | |
Securitiesavailable-for-sale | | | 79,904 | | | | 79,904 | | | | 7,311 | | | | 72,593 | | | | — | |
Loans held for sale | | | — | | | | — | | | | — | | | | — | | | | — | |
Loans, net | | | 411,558 | | | | 401,486 | | | | — | | | | — | | | | 401,486 | |
Restricted investment in bank stocks | | | 512 | | | | 512 | | | | — | | | | 512 | | | | — | |
Accrued interest receivable | | | 1,434 | | | | 1,434 | | | | — | | | | 1,434 | | | | — | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Demand and savings deposits | | | 334,325 | | | | 334,325 | | | | — | | | | 334,325 | | | | — | |
Time deposits | | | 127,205 | | | | 126,000 | | | | — | | | | 126,000 | | | | — | |
Short-term borrowings | | | — | | | | — | | | | — | | | | — | | | | — | |
Junior subordinated debentures | | | 5,008 | | | | 5,008 | | | | — | | | | 5,008 | | | | — | |
Accrued interest payable | | | 155 | | | | 155 | | | | — | | | | 155 | | | | — | |
Off-Balance-Sheet Items: | | | | | | | | | | | | | | | | | | | | |
Commitments to extend credit and standby letters of credit | | | — | | | | — | | | | — | | | | — | | | | — | |
Donegal Financial Services Corporation
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | |
December 31, 2017 | | Carrying
Amount | | | Fair
Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 18,482 | | | $ | 18,482 | | | $ | 18,482 | | | $ | | | | $ | — | |
Interest-bearing time deposits in other banks | | | 1,342 | | | | 1,342 | | | | — | | | | 1,342 | | | | — | |
Securitiesavailable-for-sale | | | 92,715 | | | | 92,715 | | | | 7,375 | | | | 85,340 | | | | | |
Loans held for sale | | | 510 | | | | 510 | | | | — | | | | — | | | | 510 | |
Loans, net | | | 427,142 | | | | 433,446 | | | | — | | | | — | | | | 433,446 | |
Restricted investment in bank stocks | | | 901 | | | | 901 | | | | — | | | | 901 | | | | — | |
Accrued interest receivable | | | 1,495 | | | | 1,495 | | | | — | | | | 1,495 | | | | — | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Demand and savings deposits | | | 350,931 | | | | 350,931 | | | | — | | | | 350,931 | | | | — | |
Time deposits | | | 127,122 | | | | 126,084 | | | | — | | | | 126,084 | | | | — | |
Short-term borrowings | | | 2,985 | | | | 2,985 | | | | — | | | | 2,985 | | | | — | |
Junior subordinated debentures | | | 4,843 | | | | 4,843 | | | | — | | | | 4,843 | | | | — | |
Accrued interest payable | | | 162 | | | | 162 | | | | — | | | | 162 | | | | — | |
Off-Balance-Sheet Items: | | | | | | | | | | | | | | | | | | | | |
Commitments to extend credit and standby letters of credit | | | — | | | | — | | | | — | | | | — | | | | — | |
The following methods and assumptions were used by the Company to estimate the fair value of certain of its assets and liabilities at December 31, 2018 and 2017.
On June 11, 2018, Donegal Group Inc. and Donegal Mutual Insurance Company entered into an agreement and plan of merger whereby Northwest Bancshares, Inc. will acquire the Company and its wholly owned subsidiary, Union Community Bank, for a combination of cash and Northwest common stock. The parties anticipate that the merger will close in March 2019.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. |
| |
| By: | | /s/ Kevin G. Burke |
| | Kevin G. Burke, President and Chief Executive Officer |
Date: March
14, 20197, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
| | | | |
Signature | | Title | | Date |
| | | | |
/s/ Kevin G. Burke | | President, Chief Executive Officer and a Director | | March 14, 20197, 2022 |
| Kevin G. Burke | | (principal executive officer) | | |
| | | | |
/s/ Jeffrey D. Miller | | Executive Vice President and Chief Financial Officer | | March 14, 20197, 2022 |
| Jeffrey D. Miller | | (principal financial and accounting officer) | | |
| | | | |
/s/ Scott A. Berlucchi | | Director | | March 14, 20197, 2022 |
| Scott A. Berlucchi | | | | |
| | | | |
/s/ Dennis J. Bixenman | | Director | | March 14, 20197, 2022 |
| Dennis J. Bixenman | | | | |
| | |
/s/ Robert S. Bolinger
| | Director
| | March 14, 2019 |
Robert S. Bolinger | | | | |
| | |
/s/ Patricia A. Gilmartin
| | Director
| | March 14, 2019 |
Patricia A. Gilmartin | | | | |
| | |
/s/ Jack L. Hess | | Director | | March 14, 20197, 2022 |
| Jack L. Hess | | | | |
| | | | |
/s/ Barry C. Huber | | Director | | March 14, 20197, 2022 |
| Barry C. Huber | | | | |
| | | | |
/s/ David C. King | | Director | | March 7, 2022 |
| David C. King | | | | |
| | | | |
| /s/ Kevin M. Kraft, Sr. | | Director | | March 14, 20197, 2022 |
| Kevin M. Kraft, Sr. | | | | |
| | | | |
/s/ Jon M. Mahan | | Director | | March 14, 20197, 2022 |
| Jon M. Mahan | | | | |
| | | | |
/s/ S. Trezevant Moore, Jr. | | Director | | March 14, 20197, 2022 |
| S. Trezevant Moore, Jr. | | | | |
| | | | |
/s/ Annette B. Szady | | Director | | March 7, 2022 |
| Annette B. Szady | | | | |
| | | |
|
| /s/ Richard D. Wampler, II | | Director | | March 14, 20197, 2022 |
| Richard D. Wampler, II | | | | |
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