| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
We recommend that you read the following information in conjunction with the historical financial information and the footnotes to that financial information we include in this Quarterly Report on Form 10-Q. We also
recommend you read Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023.
Critical Accounting Policies and Estimates
We combine our financial statements with those of our insurance subsidiaries and present our financial statements on a consolidated basis in accordance with United States generally accepted accounting principles
(“GAAP”).
Our insurance subsidiaries make estimates and assumptions that can have a significant effect on amounts and disclosures we report in our financial statements. The most significant estimates relate to the liabilities
of our insurance subsidiaries for property and casualty insurance losses and loss expenses. While we believe our estimates and the estimates of our insurance subsidiaries are appropriate, the ultimate amounts of these liabilities 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 current consolidated results of operations.
Liabilities for Losses and Loss Expenses
Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with respect to incurred policyholder claims based on facts and circumstances the insurer
knows at that point in time. For example, legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries to pay losses for damages that their policies
explicitly excluded or did not intend to cover. At the time of establishing its estimates, an insurer recognizes that its ultimate liability for losses and loss expenses will exceed or be less than such estimates. Our insurance subsidiaries base
their estimates of liabilities for losses and loss expenses on assumptions as to future loss trends, expected claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, our insurance subsidiaries
may learn additional facts regarding individual claims, and, consequently, it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates for these liabilities. We reflect any adjustments to the liabilities for
losses and loss expenses of our insurance subsidiaries in our consolidated results of operations in the period in which our insurance subsidiaries make adjustments to their estimates.
Our insurance subsidiaries maintain liabilities for the payment of losses and loss expenses with respect to both reported and unreported claims. Our insurance subsidiaries establish these liabilities for the purpose
of covering the ultimate costs of settling all losses, including investigation and litigation costs. Our insurance subsidiaries base the amount of their liability for reported losses primarily upon a case-by-case evaluation of the type of risk
involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss the policyholder incurred. Our insurance subsidiaries determine the amount of their liability for unreported claims and
loss expenses on the basis of historical information by line of insurance. Our insurance subsidiaries account for inflation in the reserving function through analysis of costs and trends and reviews of historical reserving results. Our insurance
subsidiaries monitor their liabilities closely and recompute them periodically using new information on reported claims and a variety of statistical techniques. Our insurance subsidiaries do not discount their liabilities for losses and loss
expenses.
Reserve estimates can change over time because of unexpected changes in assumptions related to our insurance subsidiaries’ external environment and, to a lesser extent, assumptions related to our insurance
subsidiaries’ internal operations. For example, our insurance subsidiaries have experienced an increase in claims severity and a lengthening of the claim settlement periods on bodily injury claims during the past several years. In addition, the
COVID-19 pandemic and related government mandates and restrictions resulted in various changes from historical claims reporting and settlement trends during 2020 and resulted in significant increases in loss costs in subsequent years due to a
number of factors, including supply chain disruption, higher used automobile values, lengthening of repair completion times, 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 September 30, 2024. At
September 30, 2024, for every 1% change in our insurance subsidiaries’ loss and loss expense reserves, net of reinsurance recoverable, the effect on our pre-tax results of operations would be approximately $7.1 million.
The establishment of appropriate liabilities is an inherently uncertain process and we can provide no assurance that our insurance subsidiaries’ ultimate liability will not exceed our insurance subsidiaries’ loss
and loss expense reserves and have an adverse effect on our results of operations and financial condition. Furthermore, we cannot predict the timing, frequency and extent of adjustments to our insurance subsidiaries’ estimated future liabilities,
because the historical conditions and events that serve as a basis for our insurance subsidiaries’ estimates of ultimate claim costs may change. As is the case for substantially all property and casualty insurance companies, our insurance
subsidiaries have found it necessary in the past to increase their estimated future liabilities for losses and loss expenses in certain periods and, in other periods, their estimated future liabilities for losses and loss expenses have exceeded
their actual liabilities for losses and loss expenses. Changes in our insurance subsidiaries’ estimates of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received subsequent to the
prior reporting period.
Excluding the impact of severe weather events and the COVID-19 pandemic, our insurance subsidiaries have noted stable amounts in the number of claims incurred and the number of claims outstanding at period ends
relative to their premium base in recent years across most of their lines of business. However, the amount of the average claim outstanding has increased gradually over the past several years due to various factors such as rising inflation 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 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 loss 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’ liabilities for losses and loss expenses by major line of business at September 30, 2024 and December 31, 2023 consisted of the following:
| |
|
September 30,
2024
|
|
|
December 31,
2023
|
|
| |
|
(in thousands)
|
|
|
Commercial lines:
|
|
|
|
|
|
|
|
Automobile
|
|
$
|
175,373
|
|
|
$
|
168,749
|
|
|
Workers’ compensation
|
|
|
127,258
|
|
|
|
122,473
|
|
|
Commercial multi-peril
|
|
|
212,329
|
|
|
|
217,292
|
|
|
Other
|
|
|
30,055
|
|
|
|
27,167
|
|
|
Total commercial lines
|
|
|
545,015
|
|
|
|
535,681
|
|
|
Personal lines:
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
112,453
|
|
|
|
112,509
|
|
|
Homeowners
|
|
|
35,438
|
|
|
|
28,001
|
|
|
Other
|
|
|
13,036
|
|
|
|
12,952
|
|
|
Total personal lines
|
|
|
160,927
|
|
|
|
153,462
|
|
|
Total commercial and personal lines
|
|
|
705,942
|
|
|
|
689,143
|
|
|
Plus reinsurance recoverable
|
|
|
428,910
|
|
|
|
437,014
|
|
|
Total liabilities for losses and loss expenses
|
|
$
|
1,134,852
|
|
|
$
|
1,126,157
|
|
We have evaluated the effect on our insurance subsidiaries’ loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables we consider in establishing the loss
and loss expense reserves of our insurance subsidiaries. We established the range of reasonably likely changes based on a review of changes in accident-year development by line of business and applied those changes to our insurance subsidiaries’
loss and loss expense reserves as a whole. The range we selected does not necessarily indicate what could be the potential best or worst case or the most likely scenario. The following table sets forth the estimated effect on our insurance
subsidiaries’ loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables we considered in establishing the loss and loss expense reserves of our insurance subsidiaries:
|
Percentage Change in Loss
and Loss Expense Reserves
Net of Reinsurance
|
|
|
Adjusted Loss and Loss
Expense Reserves Net of
Reinsurance at
September 30, 2024
|
|
|
Percentage Change
in Stockholders’ Equity at
September 30, 2024(1)
|
|
|
Adjusted Loss and Loss
Expense Reserves Net of
Reinsurance at
December 31, 2023
|
|
|
Percentage Change
in Stockholders’ Equity at
December 31, 2023(1)
|
|
|
(dollars in thousands)
|
|
|
(10.0)%
|
|
|
$
|
635,348
|
|
|
|
10.9%
|
|
|
$
|
620,229
|
|
|
|
11.3%
|
|
|
(7.5)
|
|
|
|
652,996
|
|
|
|
8.1
|
|
|
|
637,457
|
|
|
|
8.5
|
|
|
(5.0)
|
|
|
|
670,645
|
|
|
|
5.4
|
|
|
|
654,686
|
|
|
|
5.7
|
|
|
(2.5)
|
|
|
|
688,293
|
|
|
|
2.7
|
|
|
|
671,914
|
|
|
|
2.8
|
|
|
Base
|
|
|
|
705,942
|
|
|
|
—
|
|
|
|
689,143
|
|
|
|
—
|
|
|
2.5
|
|
|
|
723,591
|
|
|
|
(2.7)
|
|
|
|
706,372
|
|
|
|
(2.8)
|
|
|
5.0
|
|
|
|
741,239
|
|
|
|
(5.4)
|
|
|
|
723,600
|
|
|
|
(5.7)
|
|
|
7.5
|
|
|
|
758,888
|
|
|
|
(8.1)
|
|
|
|
740,829
|
|
|
|
(8.5)
|
|
|
10.0
|
|
|
|
776,536
|
|
|
|
(10.9)
|
|
|
|
758,057
|
|
|
|
(11.3)
|
|
| (1) |
Net of income tax effect.
|
Non-GAAP Information
We prepare our consolidated financial statements on the basis of GAAP. Our insurance subsidiaries also prepare financial statements based on statutory accounting principles state insurance regulators prescribe or
permit (“SAP”). SAP financial measures are considered non-GAAP financial measures under applicable SEC rules because the SAP financial measures include or exclude certain items that the most comparable GAAP financial measures do not ordinarily
include or exclude. Our calculation of non-GAAP financial measures may differ from similar measures other companies use, so investors should exercise caution when comparing our non-GAAP financial measures to the non-GAAP financial measures other
companies use.
Because our insurance subsidiaries do not prepare GAAP financial statements, we evaluate the performance of our personal lines and commercial lines segments utilizing SAP financial measures that reflect the growth
trends and underwriting results of our insurance subsidiaries. The SAP financial measures we utilize are net premiums written and statutory combined ratio.
Net Premiums Written
We define net premiums written as the amount of full-term premiums our insurance subsidiaries record for policies effective within a given period less premiums our insurance subsidiaries cede to reinsurers. Net
premiums earned is the most comparable GAAP financial measure to net premiums written. Net premiums earned represent the sum of the amount of net premiums written and the change in net unearned premiums during a given period. Our insurance
subsidiaries earn premiums and recognize them as revenue over the terms of their policies, which are one year or less in duration. Therefore, increases or decreases in net premiums earned generally reflect increases or decreases in net premiums
written in the preceding 12-month period compared to the comparable period one year earlier.
The following table provides a reconciliation of our net premiums earned to our net premiums written for the three and nine months ended September 30, 2024 and 2023:
| |
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
| |
|
2024
|
|
|
2023
|
|
|
2024
|
|
|
2023
|
|
| |
|
(in thousands)
|
|
|
Net premiums earned
|
|
$
|
237,957
|
|
|
$
|
224,393
|
|
|
$
|
700,017
|
|
|
$
|
655,886
|
|
|
Change in net unearned premiums
|
|
|
(5,749
|
)
|
|
|
(5,207
|
)
|
|
|
30,822
|
|
|
|
27,117
|
|
|
Net premiums written
|
|
$
|
232,208
|
|
|
$
|
219,186
|
|
|
$
|
730,839
|
|
|
$
|
683,003
|
|
Statutory Combined Ratio
The combined ratio is a standard measurement of underwriting profitability for an insurance company. The combined ratio does not reflect investment income, net investment gains or losses, federal income taxes or
other non-operating income or expense. A combined ratio of less than 100% generally indicates underwriting profitability.
The statutory combined ratio is a non-GAAP financial measure that is based upon amounts determined under SAP. We calculate our statutory combined ratio as the sum of:
|
• |
the statutory loss ratio, which is the ratio of calendar-year net incurred losses and loss expenses to net premiums earned;
|
|
• |
the statutory expense ratio, which is the ratio of expenses incurred for net commissions, premium taxes and underwriting expenses to net premiums written; and
|
|
• |
the statutory dividend ratio, which is the ratio of dividends to holders of workers’ compensation policies to net premiums earned.
|
The calculation of our statutory combined ratio differs from the calculation of our GAAP combined ratio. In calculating our GAAP combined ratio, we do not deduct installment payment fees from incurred expenses, and
we base the expense ratio on net premiums earned instead of net premiums written. Differences between our GAAP loss ratio and our statutory loss ratio result from anticipating salvage and subrogation recoveries for our GAAP loss ratio but not for
our statutory loss ratio.
Combined Ratios
The following table presents comparative details with respect to our GAAP and statutory combined ratios for the three and nine months ended September 30, 2024 and 2023:
| |
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
| |
|
2024
|
|
|
2023
|
|
|
2024
|
|
|
2023
|
|
|
GAAP Combined Ratios (Total Lines)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio - core losses
|
|
|
50.1
|
%
|
|
|
56.7
|
%
|
|
|
54.5
|
%
|
|
|
56.0
|
%
|
|
Loss ratio - weather-related losses
|
|
|
10.3
|
|
|
|
11.5
|
|
|
|
8.6
|
|
|
|
9.1
|
|
|
Loss ratio - large fire losses
|
|
|
3.7
|
|
|
|
4.9
|
|
|
|
5.2
|
|
|
|
5.3
|
|
|
Loss ratio - net prior-year reserve development
|
|
|
(2.6
|
)
|
|
|
(3.3
|
)
|
|
|
(2.2
|
)
|
|
|
(2.4
|
)
|
|
Loss ratio
|
|
|
61.5
|
|
|
|
69.8
|
|
|
|
66.1
|
|
|
|
68.0
|
|
|
Expense ratio
|
|
|
34.5
|
|
|
|
34.1
|
|
|
|
34.0
|
|
|
|
34.9
|
|
|
Dividend ratio
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
Combined ratio
|
|
|
96.4
|
%
|
|
|
104.5
|
%
|
|
|
100.6
|
%
|
|
|
103.5
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory Combined Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
101.5
|
%
|
|
|
86.5
|
%
|
|
|
98.2
|
%
|
|
|
94.8
|
%
|
|
Workers’ compensation
|
|
|
84.7
|
|
|
|
97.7
|
|
|
|
104.1
|
|
|
|
93.1
|
|
|
Commercial multi-peril
|
|
|
88.4
|
|
|
|
114.8
|
|
|
|
100.4
|
|
|
|
113.8
|
|
|
Other
|
|
|
59.4
|
|
|
|
76.2
|
|
|
|
78.4
|
|
|
|
82.7
|
|
|
Total commercial lines
|
|
|
89.8
|
|
|
|
97.5
|
|
|
|
98.6
|
|
|
|
100.2
|
|
|
Personal lines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
97.8
|
|
|
|
109.8
|
|
|
|
97.8
|
|
|
|
106.1
|
|
|
Homeowners
|
|
|
116.8
|
|
|
|
128.9
|
|
|
|
107.5
|
|
|
|
111.2
|
|
|
Other
|
|
|
102.2
|
|
|
|
46.4
|
|
|
|
97.2
|
|
|
|
81.3
|
|
|
Total personal lines
|
|
|
104.7
|
|
|
|
119.4
|
|
|
|
101.2
|
|
|
|
107.2
|
|
|
Total commercial and personal lines
|
|
|
96.0
|
|
|
|
105.2
|
|
|
|
99.7
|
|
|
|
102.9
|
|
Results of Operations - Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023
Net Premiums Earned. Our insurance subsidiaries’ net premiums earned for the third quarter of 2024 were $238.0 million, an increase of $13.6 million, or 6.0%, compared to
$224.4 million for the third quarter of 2023, primarily reflecting solid premium retention and renewal premium increases.
Net Premiums Written. Our insurance subsidiaries’ net premiums written for the third quarter of 2024 were $232.2 million, an increase of $13.0 million, or 5.9%, from the
$219.2 million of net premiums written for the third quarter of 2023. Commercial lines net premiums written increased $7.6 million, or 6.4%, for the third quarter of 2024 compared to the third quarter of 2023. Personal lines net premiums written
increased $5.4 million, or 5.4%, for the third quarter of 2024 compared to the third quarter of 2023. We attribute the increase in commercial lines net premiums written primarily to new business writings, strong premium retention and a continuation
of renewal premium increases in lines other than workers’ compensation, offset partially by planned attrition in states in which we are executing ongoing profit improvement initiatives as part of our state-specific strategies. We attribute the
increase in personal lines net premiums written primarily to renewal premium increases and strong policy retention, offset partially by planned attrition due to non-renewal actions.
Investment Income. Our net investment income was $10.8 million for the third quarter of 2024, an increase of $290,503, or 2.8%, compared to $10.5 million for the third
quarter of 2023. We attribute the increase primarily to an increase in the average investment yield relative to the third quarter of 2023.
Net Investment Gains (Losses). Net investment gains for the third quarter of 2024 were $1.9 million, compared to net investment losses of $1.2 million for the third quarter
of 2023. The net investment gains (losses) for the third quarter of 2024 and 2023 resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at September 30, 2024 and 2023, respectively. We did not
recognize any impairment losses for individual securities in our investment portfolio during the third quarter of 2024 or 2023.
Losses and Loss Expenses. Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 61.5% for the third quarter
of 2024, a decrease from our insurance subsidiaries’ loss ratio of 69.8% for the third quarter of 2023. We attribute this decrease primarily to decreased core losses, offset partially by decreased favorable loss reserve development. The core loss
ratio, which excludes weather-related losses, large fire losses and net favorable development of reserves for losses incurred in prior accident years, was 50.1% for the third quarter of 2024, compared to 56.7% for the third quarter of 2023. For the
commercial lines segment, the core loss ratio of 48.5% for the third quarter of 2024 decreased from 53.7% for the third quarter of 2023. For the personal lines segment, the core loss ratio of 52.5% for the third quarter of 2024 decreased from 61.8%
for the third quarter of 2023. Weather-related losses were $24.4 million, or 10.3 percentage points of the loss ratio, for the third quarter of 2024, compared to $25.7 million, or 11.5 percentage points of the loss ratio, for the third quarter of
2023. The impact of weather-related loss activity to the loss ratio for the third quarter of 2024 was higher than our previous five-year average of 9.4 percentage points for third quarter weather-related losses. Large fire losses, which we define
as individual fire losses in excess of $50,000, for the third quarter of 2024 were $8.8 million, or 3.7 percentage points of the loss ratio, compared to $11.0 million, or 4.9 percentage points of the loss ratio, for the third quarter of 2023. On a
statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 52.5% for the third quarter of 2024, compared to 60.9% for the third quarter of 2023, primarily due to a decrease in the commercial multi-peril loss ratio. The personal
lines statutory loss ratio of our insurance subsidiaries decreased to 74.5% for the third quarter of 2024, compared to 86.8% for the third quarter of 2023. We attribute this decrease primarily to a decrease in the personal automobile and homeowners
loss ratios. Our insurance subsidiaries experienced favorable loss reserve development for the third quarter of 2024 of $6.2 million that decreased the loss ratio by 2.6 percentage points, compared to favorable loss reserve development for the
third quarter of 2023 of approximately $7.3 million that decreased the loss ratio by 3.3 percentage points. Our insurance subsidiaries experienced favorable development primarily in the commercial multi-peril and other commercial lines of business
for the third quarter of 2024.
Underwriting Expenses. The expense ratio for an insurance company is the ratio of policy acquisition costs and other underwriting expenses to premiums earned. The expense
ratio of our insurance subsidiaries was 34.5% for the third quarter of 2024, compared to 34.1% for the third quarter of 2023. We attribute the modest increase to higher technology costs related to our ongoing systems modernization initiatives and
an increase in underwriting-based incentive costs for the third quarter of 2024 compared to the prior-year quarter. These increases were offset partially by impacts of various expense reduction initiatives, including agency incentive program
revisions, commission schedule adjustments, targeted staffing reductions, and deferred replacement of open employment positions, among others. We expect the impact from allocated costs from Donegal Mutual to our insurance subsidiaries related to
the ongoing systems modernization project will peak at approximately 1.3 percentage points of the expense ratio for the full year of 2024 before beginning to subside gradually in subsequent years.
Combined Ratio. The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of policyholder dividends incurred to
premiums earned. Our insurance subsidiaries’ combined ratios were 96.4% and 104.5% for the third quarter of 2024 and 2023, respectively. We attribute the decrease in the combined ratio primarily to a decrease in the loss ratio for the third quarter
of 2024 compared to the third quarter of 2023.
Income Tax Expense (Benefit). We recorded income tax expense of $3.7 million for the third quarter of 2024, representing an effective tax rate of 17.9%. We recorded an income
tax benefit of $199,613 for the third quarter of 2023. The income tax expense (benefit) for the third quarter of 2024 and 2023 represented estimates based on our projected annual taxable income and effective tax rates.
Net Income (Loss) and Net Income (Loss) Per Share. Our net income for the third quarter of 2024 was $16.8 million, or $.51 per share of Class A common stock on a diluted
basis and $.46 per share of Class B common stock, compared to a net loss of $805,301, or $.02 per share of Class A common stock and $.02 per share of Class B common stock, for the third quarter of 2023. We had 28.2 million and 27.6 million Class A
shares outstanding at September 30, 2024 and 2023, respectively. We had 5.6 million Class B shares outstanding at the end of both periods.
Results of Operations - Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
Net Premiums Earned. Our insurance subsidiaries’ net premiums earned for the first nine months of 2024 were $700.0 million, an increase of $44.1 million, or 6.7%, compared to
$655.9 million for the first nine months of 2023, primarily reflecting solid premium retention and renewal premium increases.
Net Premiums Written. Our insurance subsidiaries’ net premiums written for the first nine months of 2024 were $730.8 million, an increase of $47.8 million, or 7.0%, from the
$683.0 million of net premiums written for the first nine months of 2023. Commercial lines net premiums written increased $16.1 million, or 4.0%, for the first nine months of 2024 compared to the first nine months of 2023. Personal lines net
premiums written increased $31.7 million, or 11.5%, for the first nine months of 2024 compared to the first nine months of 2023. We attribute the increase in commercial lines net premiums written primarily to new business writings, strong premium
retention and a continuation of renewal premium increases in lines other than workers’ compensation, offset partially by planned attrition in states we exited or have targeted for profit improvement. We attribute the increase in personal lines net
premiums written primarily to renewal premium increases and strong policy retention.
Investment Income. Our net investment income was $32.9 million for the first nine months of 2024, an increase of $2.7 million, or 9.0%, compared to $30.1 million for the
first nine months of 2023. We attribute the increase primarily to an increase in the average investment yield relative to the first nine months of 2023.
Net Investment Gains. Net investment gains for the first nine months of 2024 were $4.7 million, compared to $930,302 for the first nine months of 2023. The net investment
gains for the first nine months of 2024 and 2023 resulted primarily from the net change in unrealized gains and losses within our equity securities portfolio at September 30, 2024 and 2023, respectively. We did not recognize any impairment losses
for individual securities in our investment portfolio during the first nine months of 2024 or 2023.
Losses and Loss Expenses. Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 66.1% for the first nine
months of 2024, a decrease from our insurance subsidiaries’ loss ratio of 68.0% for the first nine months of 2023. We attribute this decrease primarily to lower core and weather-related losses. The core loss ratio, which excludes weather-related
losses, large fire losses and net favorable development of reserves for losses incurred in prior accident years, was 54.5% for the first nine months of 2024, compared to 56.0% for the first nine months of 2023. For the commercial lines segment, the
core loss ratio of 54.1% for the first nine months of 2024 decreased from 55.2% for the first nine months of 2023. For the personal lines segment, the core loss ratio of 55.2% for the first nine months of 2024 decreased from 57.3% for the first
nine months of 2023. Weather-related losses were $60.0 million, or 8.6 percentage points of the loss ratio, for the first nine months of 2024, compared to $59.5 million, or 9.1 percentage points of the loss ratio, for the first nine months of 2023.
The impact of weather-related loss activity to the loss ratio for the first nine months of 2024 was modestly higher than our previous five-year average of 7.6 percentage points for first nine months weather-related losses. Large fire losses, which
we define as individual fire losses in excess of $50,000, for the first nine months of 2024 were $36.2 million, or 5.2 percentage points of the loss ratio, compared to $34.7 million, or 5.3 percentage points of the loss ratio, for the first nine
months of 2023. On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 63.0% for the first nine months of 2024, compared to 63.9% for the first nine months of 2023, primarily due to a decrease in the commercial
multi-peril loss ratio. The personal lines statutory loss ratio of our insurance subsidiaries decreased to 71.5% for the first nine months of 2024, compared to 75.2% for the first nine months of 2023. We attribute this decrease primarily to a
decrease in the personal automobile loss ratio. Our insurance subsidiaries experienced favorable loss reserve development for the first nine months of 2024 of approximately $15.4 million that decreased the loss ratio by 2.2 percentage points,
compared to $15.8 million that decreased the loss ratio for the first nine months of 2023 by 2.4 percentage points. Our insurance subsidiaries experienced favorable development primarily in the commercial multi-peril, commercial automobile,
personal automobile and other lines of business for the first nine months of 2024, offset partially by unfavorable development in the workers’ compensation line of business that we attribute to higher-than-expected severity for a relatively small
number of previously reported claims.
Underwriting Expenses. The expense ratio for an insurance company is the ratio of policy acquisition costs and other underwriting expenses to premiums earned. The expense
ratio of our insurance subsidiaries was 34.0% for the first nine months of 2024, compared to 34.9% for the first nine months of 2023. The decrease in the expense ratio primarily reflected impacts of expense reduction initiatives, including agency
incentive program revisions, commission schedule adjustments, targeted staffing reductions, and deferred replacement of open employment positions, among others, offset partially by higher technology costs related to our ongoing systems
modernization initiatives for the first nine months of 2024 compared to the first nine months of 2023. We expect the impact from allocated costs from Donegal Mutual to our insurance subsidiaries related to the ongoing systems modernization project
will peak at approximately 1.3 percentage points of the expense ratio for the full year of 2024 before beginning to subside gradually in subsequent years.
Combined Ratio. The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of policyholder dividends incurred to
premiums earned. Our insurance subsidiaries’ combined ratios were 100.6% and 103.5% for the first nine months of 2024 and 2023, respectively. We attribute the decrease in the combined ratio primarily to a decrease in the loss and expense ratios for
the first nine months of 2024 compared to the first nine months of 2023.
Income Tax Expense. We recorded income tax expense of $5.8 million for the first nine months of 2024, representing an effective tax rate of 17.8%. We recorded income tax
expense of $1.1 million for the first nine months of 2023, representing an effective tax rate of 15.2%. The income tax expense for the first nine months of 2024 and 2023 represented estimates based on our projected annual taxable income and
effective tax rates.
Net Income and Net Income Per Share. Our net income for the first nine months of 2024 was $26.9 million, or $.81 per share of Class A common stock on a diluted basis and $.74
per share of Class B common stock, compared to $6.4 million, or $.20 per share of Class A common stock on a diluted basis and $.17 per share of Class B common stock, for the first nine months of 2023. We had 28.2 million and 27.6 million Class A
shares outstanding at September 30, 2024 and 2023, respectively. We had 5.6 million Class B shares outstanding at the end of both periods.
Liquidity and Capital Resources
Liquidity is a measure of an entity’s ability to secure enough cash to meet its contractual obligations and operating needs as such obligations and needs arise. Our major sources of funds from operations are the net
cash flows we generate from our insurance subsidiaries’ underwriting results, investment income and investment maturities.
Our operations have historically generated sufficient net positive cash flow to fund our commitments and add to our investment portfolio, thereby increasing future investment returns and enhancing our liquidity. The
impact of the pooling agreement between Donegal Mutual and Atlantic States has historically been cash-flow positive because of the consistent underwriting profitability of the pool. Donegal Mutual and Atlantic States settle their respective
obligations to each other under the pool monthly, thereby resulting in cash flows substantially similar to the cash flows that would result from each company writing the business directly. We have not experienced any unusual variations in the
timing of claim payments associated with the loss reserves of our insurance subsidiaries. We maintain significant liquidity in our investment portfolio in the form of readily 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, thereby providing an
additional measure of liquidity to meet our obligations should an unexpected variation occur in the future. Our operating activities provided net cash flows in the first nine months of 2024 and 2023 of $39.2 million and $26.0 million, respectively.
At September 30, 2024, we had no outstanding borrowings under our line of credit with M&T and had the ability to borrow up to $20.0 million at an interest rate equal to the then-current Term SOFR rate plus
2.11%. At September 30, 2024, Atlantic States had a $35.0 million outstanding advance with the FHLB of Pittsburgh that carries a fixed interest rate of 3.81%.
We estimate the timing of claim payments associated with the liabilities for losses and loss expenses of our insurance subsidiaries based on historical experience and expectations of future payment patterns. We show
these liabilities net of reinsurance recoverable on unpaid losses and loss expenses to reflect expected future cash flows related to such liabilities. Amounts Atlantic States assumes pursuant to the pooling agreement with Donegal Mutual represent a
substantial portion of our insurance subsidiaries’ gross liabilities for losses and loss expenses, and amounts Atlantic States cedes pursuant to the pooling agreement represent a substantial portion of our insurance subsidiaries’ reinsurance
recoverable on unpaid losses and loss expenses. We include cash settlement of Atlantic States’ assumed liabilities from the pool in monthly settlements of pooled activity, as we net amounts ceded to and assumed from the pool. Although Donegal
Mutual and we do not anticipate any changes in the pool participation levels in the foreseeable future, any such change would be prospective in nature and therefore would not impact the timing of expected payments by Atlantic States for its
percentage share of pooled losses occurring in periods prior to the effective date of such change.
We discuss in Note 7 – Borrowings our estimate of the timing of the amounts payable for the borrowings under our lines of credit based on their contractual maturities.
On July 18, 2013, our board of directors authorized a share repurchase program pursuant to which we have the authority to purchase up to 500,000 shares of our Class A common stock at prices prevailing from time to
time in the open market subject to the provisions of applicable rules of the SEC and in privately negotiated transactions. We did not purchase any shares of our Class A common stock under this program during the nine months ended September 30, 2024
or 2023. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through September 30, 2024.
On October 17, 2024, our board of directors declared quarterly cash dividends of $.1725 per share of our Class A common stock and $.155 per share of our Class B common stock,
payable on November 15, 2024 to our stockholders of record as of the close of business on November 1, 2024. We are not subject to any restrictions on our payment of dividends to our stockholders, although there are state law restrictions on the
payment of dividends by our insurance subsidiaries to us. Dividends from our insurance subsidiaries are our principal source of cash for payment of dividends to our stockholders. 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 limit their ability to
pay dividends to us. Our insurance subsidiaries’ statutory capital and surplus at December 31, 2023 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant
margin. Our insurance subsidiaries paid $10.0 million in dividends to us during the first nine months of 2024. Amounts remaining available for distribution to us as dividends from our insurance subsidiaries without prior approval of their
domiciliary insurance regulatory authorities in 2024 are $22.4 million from Atlantic States and $7.2 million from MICO, or a total of approximately $29.6 million.
At September 30, 2024, we had no material commitments for capital expenditures.
Equity Price Risk
Our portfolio of marketable equity securities, which we carry on our consolidated balance sheets at estimated fair value, has exposure to the risk of loss resulting from an adverse change in prices. We manage this
risk by having our investment personnel perform an analysis of prospective investments and regular reviews of our portfolio of equity securities.
Credit Risk
Our portfolio of fixed-maturity securities and, to a lesser extent, our portfolio of short-term investments is subject to credit risk, which we define as the potential loss in market value resulting from adverse
changes in the borrower’s ability to repay its debt. We manage this risk by having our investment personnel perform an analysis of prospective investments and regular reviews of our portfolio of fixed-maturity securities. We also limit the
percentage and amount of our total investment portfolio that we invest in the securities of any one issuer.
Our insurance subsidiaries provide property and casualty insurance coverages through independent insurance agencies. We bill the majority of this business directly to the insured, although we bill a portion of our
commercial business through licensed insurance agents to whom our insurance subsidiaries extend credit in the normal course of business.
Because the pooling agreement does not relieve Atlantic States of primary liability as the originating insurer, Atlantic States is subject to a concentration of credit risk arising from the business
it cedes to Donegal Mutual. Our insurance subsidiaries maintain reinsurance agreements with Donegal Mutual and with a number of other major unaffiliated authorized reinsurers.
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk.
|
Our market risk generally represents the risk of gain or loss that may result from the potential change in the fair value of the securities we hold in our investment portfolio as a result of fluctuations in prices
and interest rates and, to a lesser extent, our debt obligations. We manage our interest rate risk by maintaining an appropriate relationship between the average duration of our investment portfolio and the approximate duration of our liabilities,
i.e., policy claims of our insurance subsidiaries and our debt obligations.
There have been no material changes to our quantitative or qualitative market risk exposure from December 31, 2023 through September 30, 2024.
| Item 4. |
Controls and Procedures.
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Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act). Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, at September 30, 2024, our disclosure controls and procedures were effective in recording,
processing, summarizing and reporting, on a timely basis, information we are required to disclose in the reports that we file or submit under the Exchange Act, and our disclosure controls and procedures were also effective to ensure that
information we disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required
disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to affect materially,
our internal control over financial reporting.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
We base all statements contained in this Quarterly Report on Form 10-Q that are not historic facts on our current expectations. Such statements are forward-looking in nature (as defined in the Private Securities
Litigation Reform Act of 1995) and necessarily involve risks and uncertainties. Forward-looking statements we make may be identified by our use of words such as “will,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “seek,” “estimate” and
similar expressions. Our actual results could vary materially from our forward-looking statements. The factors that could cause our actual results to vary materially from the forward-looking statements we have previously made include, but are not
limited to, adverse litigation and other trends that could increase our loss costs (including social inflation, labor shortages and escalating medical, automobile and property repair costs), adverse and catastrophic weather events (including from
changing climate conditions), our ability to maintain profitable operations (including our ability to underwrite risks effectively and charge adequate premium rates), the adequacy of the loss and loss expense reserves of our insurance subsidiaries,
the availability and successful operation of the information technology systems our insurance subsidiaries utilize, the successful development of new information technology systems to allow our insurance subsidiaries to compete effectively,
business and economic conditions in the areas in which we and our insurance subsidiaries operate, interest rates, competition from various insurance and other financial businesses, terrorism, the availability and cost of reinsurance, legal and
judicial developments (including those related to COVID-19 business interruption coverage exclusions), changes in regulatory requirements, our ability to attract and retain independent insurance agents, changes in our A.M. Best rating and the other
risks that we describe from time to time in our filings with the Securities and Exchange Commission. We disclaim any obligation to update such statements or to announce publicly the results of any revisions that we may make to any forward-looking
statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
Part II. Other Information
| Item 1. |
Legal Proceedings.
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None.
Our business, results of operations and financial condition, and, therefore, the value of our Class A common stock and our Class B common stock, are subject to a number of risks. For a description of certain risks,
we refer to “Risk Factors” in our 2023 Annual Report on Form 10-K that we filed with the SEC on March 6, 2024. There have been no material changes in the risk factors we disclosed in that Form 10-K Report during the nine months ended September 30,
2024.
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds.
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Period
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(a) Total Number of Shares (or Units) Purchased
|
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(b) Average Price Paid per Share (or Unit)
|
|
(c) Total Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs
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(d) Maximum Number (or Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs
|
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Month #1 July 1-31, 2024
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Class A – 19,024
Class B – None
|
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Class A – $14.97
Class B – None
|
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Class A – 19,024
Class B – None
|
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(1)
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Month #2
August 1-31, 2024
|
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Class A – 146,605
Class B – None
|
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Class A – $14.63
Class B – None
|
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Class A – 146,605
Class B – None
|
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(1)
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Month #3
September 1-30, 2024
|
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Class A – 91,215
Class B – None
|
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Class A – $15.23
Class B – None
|
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Class A – 91,215
Class B – None
|
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(1)
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| |
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Total
|
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Class A – 256,844
Class B – None
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Class A – $14.87
Class B – None
|
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Class A – 256,844
Class B – None
|
|
|
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(1) |
Donegal Mutual purchased these shares pursuant to its announcement on April 29, 2022 that it will, at its discretion, purchase shares of our Class A common stock and Class B common stock at market prices prevailing from time to
time in the open market subject to the provisions of SEC Rule 10b-18 and in privately negotiated transactions. Such announcement did not stipulate a maximum number of shares that may be purchased under this program.
|
| Item 3. |
Defaults upon Senior Securities.
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None.
| Item 4. |
Mine Safety Disclosure.
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Not Applicable.
| Item 5. |
Other Information.
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None.
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Exhibit No.
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Description
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Reference
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Other Exhibits
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Donegal Group Inc. 2024 Agency Stock Purchase Plan.
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(a)
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Certification of Chief Executive Officer.
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Filed herewith
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Certification of Chief Financial Officer.
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Filed herewith
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Statement of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of Title 18 of the United States Code.
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Filed herewith
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Statement of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of Title 18 of the United States Code.
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Filed herewith
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Exhibit 101.INS
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XBRL Instance Document
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Filed herewith
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Exhibit 101.SCH
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XBRL Taxonomy Extension Schema Document
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Filed herewith
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Exhibit 101.PRE
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XBRL Taxonomy Presentation Linkbase Document
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Filed herewith
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Exhibit 101.CAL
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XBRL Taxonomy Calculation Linkbase Document
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Filed herewith
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Exhibit 101.LAB
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XBRL Taxonomy Label Linkbase Document
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Filed herewith
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Exhibit 101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document
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Filed herewith
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Exhibit 104
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Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
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Filed herewith
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(a) |
We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form S-3 Registration Statement filed on August 30, 2024.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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DONEGAL GROUP INC.
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November 6, 2024
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By:
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/s/ Kevin G. Burke
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Kevin G. Burke, President and Chief Executive Officer
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November 6, 2024
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By:
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/s/ Jeffrey D. Miller
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Jeffrey D. Miller, Executive Vice President
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and Chief Financial Officer
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