Donegal Group Inc. Annual Report 2017

FY2017 Annual Report · Donegal Group Inc.
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2017 ANNUAL REPORT
Donegal Group

Donegal Group

COMPANY OVERVIEW

Donegal Group Inc. is an insurance holding company that
offers property and casualty insurance through its wholly owned
insurance subsidiaries. Our insurance subsidiaries and Donegal
Mutual Insurance Company have interrelated operations and
conduct business together as the Donegal Insurance Group.

The Donegal Insurance Group, which is rated A (Excellent) by
A.M. Best Company, offers personal and commercial insurance
products through a network of independent insurance
agencies in 26 states.

As an effective acquirer of small to medium-sized “main
street” property and casualty insurers, we have grown proﬁtably
over the last three decades.

We employ a multi-faceted strategy that includes prudent
organic and acquisition growth, conservative underwriting,
pricing discipline, technological proﬁciency, efﬁcient operations
and conservative investing. Our strategy is designed to allow us
to achieve our longstanding goal to outperform the property and
casualty insurance industry in terms of service, proﬁtability and
book value growth. Achieving that goal provides value to the
policyholders of our insurance subsidiaries and to
our stockholders.

FINANCIAL HIGHLIGHTS

YEAR ENDED DECEMBER 31,

2017

2016

2015

2014

2013

INCOME STATEMENT DATA

Premiums earned

Investment income, net

Realized investment gains

Total revenues

Income before income taxes

Income taxes

Net income

Basic earnings per share - Class A

Diluted earnings per share - Class A

Cash dividends per share - Class A

Basic earnings per share - Class B

Diluted earnings per share - Class B

Cash dividends per share - Class B

$ 702,514,755

$ 656,204,797

$ 605,640,728

$ 556,497,535

$ 515,291,944

23,527,304

22,632,730

20,949,698

18,344,382

18,795,239

5,705,255

2,525,575

1,934,424

3,134,081

2,423,442

739,026,537

688,423,020

636,387,263

586,547,742

547,110,065

12,114,462

4,998,362

7,116,100

41,328,407

10,527,270

30,801,137

27,592,268

16,282,817

32,710,265

6,602,235

1,743,799

6,388,273

20,990,033

14,539,018

26,321,992

0.27

0.26

0.56

0.22

0.22

0.49

1.19

1.16

0.55

1.06

1.06

0.48

0.78

0.77

0.54

0.69

0.69

0.47

0.56

0.55

0.53

0.49

0.49

0.46

1.04

1.02

0.51

0.94

0.94

0.46

BALANCE SHEET DATA AT YEAR END

Total investments

Total assets

Debt obligations

Stockholders’ equity

Book value per share

$ 1,005,869,705

$ 945,519,655

$ 900,822,274

$ 832,941,077

$ 791,808,307

1,737,919,778

1,623,131,037

1,537,834,415

1,458,654,644

1,385,410,502

64,000,000

74,000,000

86,000,000

58,500,000

63,000,000

448,696,104

438,615,320

408,388,568

416,134,643

396,877,111

15.95

16.21

15.66

15.40

15.02

1

TOTAL REVENUES
[ in millions ]

NET INCOME
[ in millions ]

STOCKHOLDERS’ EQUITY
[ in millions ]

$ 750

$ 700

$ 650

$ 600

$ 30

$ 20

$ 10

$ 450

$ 400

$ 350

$ 300

$ 550

13 14 15 16 17

$ 0

13 14 15 16 17

$ 250

13 14 15 16 17

Donegal Group

TO OUR STOCKHOLDERS

We made progress during 2017 toward achieving a number of our core objectives
while our industry faced a difﬁcult set of challenges. Our long-term goal at Donegal
Group has always been to outperform the property and casualty insurance industry
in terms of service, proﬁtability and book value growth.

WEATHER IMPACT IN 2017
The underwriting results of the property and casualty insurance industry as a
whole for the year 2017 reﬂected the combined impacts of several major natural
catastrophes. Experts have projected that over $100 billion in insured losses resulted
from catastrophic events throughout the United States, including massive hurricanes
and devastating wildﬁres. That projection represents a level of losses the industry
has not experienced since 2011.

Our long-standing strategy to minimize concentrations in geographic areas prone
to natural catastrophes limited our exposure to the large 2017 loss events. However,
extreme weather conditions throughout our marketing regions did prevent us from
attaining our proﬁt objectives for the year. Our losses related to severe weather
totaled $58.4 million in 2017, signiﬁcantly exceeding the $37.1 million of weather-
related losses we incurred in 2016 as well as our prior ﬁve-year average
weather-related losses of $35.5 million.

AUTOMOBILE LINES OF BUSINESS
In addition to weather challenges, our personal and commercial automobile
results did not reﬂect the level of improvement we anticipated during 2017. Over
the past several years, we have implemented numerous rate increases and
underwriting adjustments. We expect our underwriting results will reﬂect these
changes over time, and we anticipate gradual improvements in our personal
and commercial automobile results beginning in 2018.

2

6.0

PERCENT

COMMERCIAL
LINES GROWTH

In the latter part of 2017, we began taking more aggressive steps designed to curtail new business
growth in underperforming states and to improve our loss experience in our personal and commercial
automobile lines. We are taking measures in 2018 to mitigate the adverse loss trends we, along with many
of our peer companies, have experienced as a result of a combination of factors, such as increasing repair
costs, distracted driving and an increase in driving activity. While we recognize that these efforts will
require focused attention and resolve in 2018, we are committed to taking the necessary actions
to restore our automobile business lines to proﬁtability.

FINANCIAL PERFORMANCE
Our net premiums earned increased 7.1 percent and drove the 7.4 percent growth in our total revenues
for 2017 to $739.0 million, compared to $688.4 million for 2016. We were pleased to maintain steady growth
during the year, and we remain focused on optimizing our business mix. Net premiums earned generally
reﬂect increases or decreases in the net premiums written of our insurance subsidiaries compared
to the previous year.

Our net premiums written for 2017 increased 6.9 percent compared to the prior year. Due to an increase
in competition for quality small to medium-sized business accounts, our commercial lines net premiums
written growth was 6.0 percent for 2017, slightly lower than our target for the year. The commercial growth
represented a combination of new accounts and a continuation of modest renewal premium increases.
Our personal lines growth of 7.6 percent exceeded our expectations and serves as an indicator of our
need to implement more aggressive personal lines premium rate increases in the future.

Income tax expense for 2017 included $4.8 million, or 17 cents per share of our Class A common stock
on a diluted basis, related to our revaluation of our net deferred tax assets under the provisions of the Tax
Cuts and Jobs Act of December 2017. While the impact of this revaluation reduced our 2017 net income,
we anticipate that the lower enacted corporate tax rate will be beneﬁcial to our ﬁnancial results
beginning in 2018.

Our combined ratio for 2017 was 103.0 percent, an increase from our 2016 combined ratio of 98.1
percent. We are working diligently on a number of initiatives to address the factors that led to the decrease
in our underwriting proﬁtability in 2017, and we expect improved results as those actions begin
to take effect in 2018.

The combination of increased loss activity and the impact of the federal income tax law change contributed
to the decline in our 2017 net income to $7.1 million, or 26 cents per share of our Class A common stock
on a diluted basis, compared to $30.8 million, or $1.16 per share of our Class A common stock on
a diluted basis, for 2016.

DONEGAL MUTUAL COMPLETED ACQUISITION – ENTERED THE SOUTHWEST
In May 2017, Donegal Mutual completed the merger of Mountain States Mutual Casualty Company
with and into Donegal Mutual. Donegal Mutual and its two insurance subsidiaries market their commercial
insurance products in New Mexico, Colorado, Texas and Utah as the Mountain States Insurance Group.

While Donegal Group has no ﬁnancial interest in or impact from the Mountain States Insurance Group
at this time, Donegal Mutual’s entrance into the Southwestern region of the country through this merger
represents a future growth opportunity for Donegal Group.

3

LOOKING AHEAD TO 2018
Our ability to achieve our long-term goals rests on our strong ﬁnancial condition and
our sustained operating discipline. We continue to evaluate our long-term performance
in terms of achieving solid underwriting results to achieve book value appreciation
over time while continuing to distribute dividends to our stockholders.

In 2018, we will continue to take proactive measures to address the trends our
industry has experienced as a result of the combination of factors we discussed above.
We view current market conditions as favorable in terms of reﬁning our underwriting
guidelines and making necessary premium rate adjustments.

CONCLUSION
Our book value was $15.95 per share of our common stock at December 31, 2017,
compared to $16.21 per share of our common stock at December 31, 2016. We
attribute the decrease in our book value primarily to our net underwriting loss, the
income tax impact we mentioned previously and cash dividend payments to our
stockholders during the year.

7.4

PERCENT

TOTAL
REVENUES

In closing, we extend our sincere gratitude to all of the dedicated employees and
loyal members of our agency network across our regions who have contributed to our
success in 2017. As we enter 2018, we will rise to the challenges before us and pursue
solid opportunities we see for proﬁtable commercial lines growth. We thank you for
your support as we work diligently to increase the value of your investment in us.

Kevin G. Burke
PRESIDENT AND CHIEF
EXECUTIVE OFFICER

4

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to _________________

Commission file number 0-15341

DONEGAL GROUP INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of
incorporation or organization)

1195 River Road, Marietta, Pennsylvania
(Address of principal executive offices)

23-2424711

(I.R.S. Employer
Identification No.)

17547
(Zip code)

Securities registered pursuant to Section 12(b) of the Act:

Registrant’s telephone number, including area code: (800) 877-0600

Title of Each Class

Name of Each Exchange on Which Registered

Class A Common Stock, $.01 par value

Class B Common Stock, $.01 par value

The NASDAQ Global Select Market

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 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 of Regulation 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 Form 10-K or any 
amendment to this Form 10-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 

Emerging growth company 

Accelerated filer 

Non-accelerated filer 
(Do not check if a smaller reporting company)

Smaller reporting company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any 
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

.

Indicate by check mark whether the registrant is a shell company. 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. $187,725,762.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 22,623,231 shares of 
Class A common stock and 5,576,775 shares of Class B common stock outstanding on March 1, 2018.

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 19, 2018 into Part III of this report.

Documents Incorporated by Reference

 
 
 
 
 
 
 
DONEGAL GROUP INC.
INDEX TO FORM 10-K REPORT

PART I

Item 1.

Business

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2.

Item 3.

Properties

Legal Proceedings

Item 4. Mine Safety Disclosures

Executive Officers of the Registrant

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity 

Securities

Item 6.

Selected Financial Data

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8.
Item 9.

Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14.

Principal Accounting Fees and Services

PART IV  

Item 15. Exhibits, Financial Statement Schedules

Page

1

23

34

34

34

34

35

36

38

39

55

57
101

101

101

103

103

103

103

103

104

(i)

 
 
 
 
 
 
 
 
 
 
 
 
PART I

Item 1.     Business.

Introduction

Donegal Group Inc., or DGI, is an insurance holding company whose insurance subsidiaries offer personal and commercial 

lines of property and casualty insurance to businesses and individuals in 22 Mid-Atlantic, Midwestern, New England and 
Southern states. As used in this Form 10-K Report, the terms “we,” “us” and “our” refer to Donegal Group Inc. and its 
subsidiaries.

Donegal Mutual Insurance Company, or Donegal Mutual, organized us as an insurance holding company on August 26, 

1986. At December 31, 2017, Donegal Mutual held approximately 44% of our outstanding Class A common stock and 
approximately 83% of our outstanding Class B common stock. Donegal Mutual’s ownership provides Donegal Mutual with 
approximately 72% 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 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. 

We have four segments: our investment function, our personal lines of insurance, our commercial lines of insurance and our 

investment in Donegal Financial Services Corporation, or DFSC. 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. 

Our insurance subsidiaries and Donegal Mutual provide their policyholders with a selection of insurance products at 

competitive rates, while pursuing 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 national property and casualty insurers. Our downstream 
holding company structure, with Donegal Mutual holding approximately 72% of the combined voting power of our common 
stock, has proven its effectiveness and success over the 31 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, and we expect 

to pursue opportunities to acquire other insurance companies to expand our business in a given region or to commence 
operations in a new region. Since 1995, we have completed six acquisitions of property and casualty insurance companies or 
began to participate in their business 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, 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 
Insurance Company, or Atlantic States, one of our insurance subsidiaries.  As a result, our consolidated financial results will 
exclude the results of Donegal Mutual’s operations in those Southwestern states.

-1-

 
We own 48.2% of DFSC. DFSC is a grandfathered unitary savings and loan holding company that owns all of the 

outstanding capital stock of Union Community Bank, a state savings bank, or UCB. UCB has 15 banking offices, substantially 
all of which are located in Lancaster County, Pennsylvania. Donegal Mutual owns the remaining 51.8% of DFSC. For further 
information regarding DFSC, we refer to "Business - Donegal Financial Services Corporation" in this Form 10-K Report. 

Available Information

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.

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 implement a downstream holding company structure as one of its 
business strategies.  Thus, in 1986, Donegal Mutual formed us as a downstream holding company. 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 DGI entered into a proportional reinsurance agreement, or pooling agreement, that became 
effective October 1, 1986.  Under the pooling agreement, Donegal Mutual and Atlantic States pool substantially all of their 
respective premiums, losses and loss expenses to the reinsurance pool, and the reinsurance pool, acting through Donegal 
Mutual, then cedes a portion of the pooled business, currently 80%, to Atlantic States. Donegal Mutual and Atlantic States share 
the underwriting results 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 Donegal Insurance Group, Donegal Mutual and 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 Donegal Mutual and our insurance subsidiaries 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 Donegal Mutual and 
our insurance subsidiaries offer generally relate to specific risk profiles within similar classes of business, such as preferred tier 
products versus standard tier products.  Donegal Mutual and we 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 Donegal Mutual and Atlantic States write directly.  
We receive 80% of 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.

-2-

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. 

The following chart depicts our organizational structure, including all of our property and casualty insurance subsidiaries, 

Southern Mutual and our interest in DFSC:

Because of the different relative voting power of our Class A common stock and our Class B common stock, our public 

(1) 
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.

Relationship with Donegal Mutual

Donegal Mutual provides facilities, personnel and other services to us and our insurance subsidiaries. Donegal Mutual 
allocates certain related expenses to Atlantic States in relation to the relative participation of Donegal Mutual and Atlantic 
States in the underwriting pool they maintain. Our insurance subsidiaries other than Atlantic States reimburse Donegal Mutual 
for their respective personnel costs and bear their proportionate share of information services costs based on each subsidiaries’  
respective percentage of the total net premiums written of the Donegal Insurance Group. Charges for these services to Atlantic 
States and our other insurance subsidiaries totaled $125.0 million, $122.4 million and $108.5 million for 2017, 2016 and 2015, 
respectively.

Our insurance subsidiaries have various reinsurance arrangements with Donegal Mutual. These agreements include: 

• 

• 

• 

excess of loss reinsurance agreements with Le Mars, MICO, Peninsula, Sheboygan and Southern;

catastrophe reinsurance agreements with Atlantic States, Le Mars and Southern; and

quota-share reinsurance agreements with MICO and Peninsula.

The purpose of the excess of loss and catastrophe reinsurance agreements is to lessen the effects of a single large loss, or an 

accumulation of smaller losses arising from one event, to levels that are appropriate given each subsidiary’s size, underwriting 
profile and amount of surplus.

-3-

The purpose of the quota-share reinsurance agreement with Peninsula is 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. Donegal Mutual places its 
assumed business from Peninsula into the underwriting pool.

The purpose of the quota-share reinsurance agreement with MICO is to transfer to Donegal Mutual 25% of the premiums 

and losses related to MICO’s business. Donegal Mutual places its assumed business from MICO into the underwriting pool.

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 annual 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. These agreements are ongoing in nature and 
will continue in effect throughout 2018 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. Bolinger and Richard 
D. Wampler, II. Donegal Mutual’s members on the coordinating committee as of such date are Dennis J. Bixenman and John E. 
Hiestand. We refer to our proxy statement for our annual meeting of stockholders to be held on April 19, 2018 for further 
information about the members of the coordinating committee. 

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 Donegal 
Mutual and our insurance subsidiaries;

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;

-4-

 
• 

• 

providing opportunities for growth because of the ability of Donegal Mutual to enter into reinsurance agreements with 
other mutual insurance companies and place the business it assumes into the pooling agreement; 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 2018, 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.

Business Strategy

Our strategy is 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 providing value to the 
policyholders of our insurance subsidiaries and, ultimately, providing value to our stockholders. The annual net premiums 
earned of our insurance subsidiaries have increased from $301.5 million in 2006 to $702.5 million in 2017, a compound annual 
growth rate of 8.0%. 

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 2013 through 2017 are shown in the following table:

Our GAAP combined ratio

Our SAP combined ratio
Industry SAP combined ratio (1)

(1)  As reported (projected for 2017) by A.M. Best Company.

2017
103.0%

101.7

105.1

2016
98.1%

96.8

100.9

2015
99.0%

97.4

98.3

2014
101.7%

100.5

97.4

2013
98.8%

97.4

96.4

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.

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.

Our insurance subsidiaries seek to achieve a combined ratio of less than 100%. We remain committed to achieving 

consistent underwriting profitability. We believe that 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;

-5-

• 

carefully selecting the individual risks they underwrite;

•  minimizing their individual exposure to 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 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.

We believe that 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 their 
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 for our insurance subsidiaries. Our insurance subsidiaries 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;

training programs;

•  marketing support;

• 

• 

availability of a service center that provides comprehensive service for our personal lines policyholders; and

field visitations by 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, 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 

in existing markets and to expand into new geographic regions.

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 or to commence operations in a new 
region. 

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 up to $100.0 million; and

fair and reasonable transaction terms.

-6-

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 its 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 clearly 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 on an almost continuous basis and are so engaged at the date of this Form 10-K Report, 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.

-7-

The following table highlights our history of insurance company acquisitions and affiliations since 1988:

Company Name

Southern Mutual Insurance

Company and now Southern
Insurance Company of Virginia

Pioneer Mutual Insurance 

Company and then Pioneer 
Insurance Company (1)(2)

State of Domicile
Virginia

Year Control
Acquired
1984

Ohio

1992

Delaware Mutual Insurance 

Delaware

1993

Company and then Delaware 
Atlantic Insurance Company (1)(2)

New York

1995

Pioneer Mutual Insurance 

Company and then Pioneer 
Insurance Company (1)(2)

Southern Heritage Insurance 

Company (2)

Method of Acquisition/Affiliation
Surplus note investment by Donegal Mutual in 1984;
demutualization in 1988; acquisition of stock by us in
1988.

Surplus note investment by Donegal Mutual in 1992;
demutualization in 1993; acquisition of stock by us in
1997.

Surplus note investment by Donegal Mutual in 1993;
demutualization in 1994; acquisition of stock by us in
1995.

Surplus note investment by Donegal Mutual in 1995;
demutualization in 1998; acquisition of stock by us in
2001.

Georgia

1998

Purchase of stock by us in 1998.

Le Mars Mutual Insurance 

Company of Iowa and now Le 
Mars Insurance Company (1)

Iowa

Peninsula Insurance Group

Sheboygan Falls Mutual Insurance 
Company and now Sheboygan 
Falls Insurance Company (1)

Maryland

Wisconsin

Southern Mutual Insurance 

Company (3)

Georgia

Michigan Insurance Company

Michigan

2002

2004

2007

2009

2010

Surplus note investment by Donegal Mutual in 2002;
demutualization in 2004; acquisition of stock by us in
2004.

Purchase of stock by us in 2004.

Contribution note investment by Donegal Mutual in
2007; demutualization in 2008; acquisition of stock
by us in 2008.

Surplus note investment by Donegal Mutual and
quota-share reinsurance in 2009.

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.

•  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 for claims reporting;

-8-

• 

• 

• 

availability of a secure website 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.

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 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 activities of our insurance subsidiaries to realize operating synergies and better 
expense control. Our insurance subsidiaries utilize technology to automate much of their underwriting and to facilitate agency 
and policyholder communications on an efficient, timely 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 use to evaluate their operations, from approximately $470,000 in 1999 to approximately $1.1 million in 2017.

Our insurance subsidiaries 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 underwriting and policy issuance system called “WritePro®.” WritePro® is a web-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 a web-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 a web-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 further re-entry of information. These systems also interface with the policy 
management systems of the independent agents of our insurance subsidiaries.

•  Maintaining a conservative investment approach.

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 
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 

-9-

respective businesses. Our insurance subsidiaries maintain a small percentage (5.0% at December 31, 2017) of their portfolios 
in equity securities. 

Competition

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.

Products and Underwriting

We report the results of our insurance operations in two segments: personal lines of insurance and commercial 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. We describe these lines of insurance in greater detail below:

Personal

• 

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 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.

-10-

     
     
The following table sets forth the net premiums written of our insurance subsidiaries by line of insurance for the periods 

indicated:

(dollars in thousands)

Personal lines:

Automobile

Homeowners

Other

Total personal lines

Commercial lines:

Automobile

Commercial multi-peril

Workers’ compensation

Other

Total commercial lines

Total business

Year Ended December 31,

2017

2016

2015

Amount

%

Amount

%

Amount

%

$ 255,297

35.0% $ 229,789

33.7% $ 214,610

34.1%

125,054

19,672

400,023

99,333

110,313

109,884

9,586

329,116

17.2

2.7

54.9

13.6

15.1

15.1

1.3

45.1

122,811

19,057

371,657

87,849

104,728

108,349

9,451

310,377

18.0

2.8

54.5

12.9

15.4

15.9

1.3

45.5

119,541

18,176

352,327

76,729

94,219

98,079

7,483

276,510

19.0

2.9

56.0

12.2

15.0

15.6

1.2

44.0

$ 729,139

100.0% $ 682,034

100.0% $ 628,837

100.0%

The personal lines and commercial 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. 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 research and development department in the 
development of quality products at competitive prices to promote growth and profitability.

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 risks and a substantial number of personal lines property risks; 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-

 
 
 
 
 
 
 
 
 
 
 
 
 
Distribution

Our insurance subsidiaries market their products primarily in the Mid-Atlantic, Midwestern, New England and Southern 
regions through approximately 2,400 independent insurance agencies. At December 31, 2017, the Donegal Insurance Group 
actively wrote business in 22 states (Alabama, Delaware, Georgia, Illinois, Indiana, Iowa, Maine, Maryland, Michigan, 
Nebraska, New Hampshire, New York, North Carolina, Ohio, Pennsylvania, South Carolina, South Dakota, Tennessee, 
Vermont, Virginia, West Virginia and Wisconsin). Donegal Mutual and its 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, this business has no impact on our results 
of operations. 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, in each of the states where they conducted a significant portion of 
their business in 2017:

Pennsylvania

Michigan

Maryland

Virginia

Georgia

Delaware

Wisconsin

Ohio

Iowa

Nebraska

Tennessee

South Dakota

Other

Total

34.4%

14.9

8.8

8.4

7.6

5.5

3.7

3.2

2.8

2.6

2.4

1.2

4.5

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 plan for their 
independent agents, 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. 

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.

Technology

Donegal Mutual owns the majority of the technology systems our insurance subsidiaries use. The technology systems 
consist primarily of an integrated central processing computer system, a series of server-based computer networks and various 
communication systems that allow the home office of our insurance subsidiaries and their branch offices to utilize the same 
systems for the processing of business. Donegal Mutual maintains 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 

-12-

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.

The business strategy of our insurance subsidiaries depends on the use, development and implementation of integrated 

technology systems. These systems enable our insurance subsidiaries to provide a high level of service to agents and 
policyholders by processing business in a timely and efficient manner, communicating and sharing data with agents, providing 
a variety of methods for the payment of premiums and allowing for the accumulation and analysis of information for the 
management of our insurance subsidiaries.

We believe the availability and use of these technology systems has resulted in improved service to agents and 

policyholders, increased efficiencies in processing the business of our insurance subsidiaries and lower operating costs. Key 
components of these integrated technology systems are the agency interface system, the WritePro®, WriteBiz® and WriteFarm® 
systems, a claims processing system and an imaging system. The agency interface system provides our insurance subsidiaries 
with a high level of 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® 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 
imaging system eliminates the need to handle paper files, while providing greater access to the same information by a variety of 
personnel. We believe our technology systems compare favorably to those of many national property and casualty insurance 
carriers in terms of quality and service levels.

Claims

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. 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 private adjusters and 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 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.

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. 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 

-13-

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 a decrease in claims frequency on workers’ compensation claims 
during the past several years while the severity of these claims has gradually increased. These trend changes give rise to greater 
uncertainty as to the pattern of future loss settlements on workers’ compensation 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, 2017. 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 $3.8 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.  Our insurance subsidiaries recognized an increase in their 
liability for losses and loss expenses of prior years of $6.6 million, $3.0 million and $7.2 million in 2017, 2016 and 2015, 
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 these years. 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 automobile liability 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.  The 2015 development represented 2.5% 
of the December 31, 2014 net carried reserves and resulted primarily from higher-than-expected severity in the private 
passenger automobile liability, commercial multiple peril and commercial automobile lines of business in accident years prior 
-14-

to 2015. The majority of the 2015 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 a slight downward trend in 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.

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 $18.0 million, $16.8 million and $15.3 million at December 31, 2017, 
2016 and 2015, 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:

(in thousands)

Year Ended December 31,

2017

2016

2015

Gross liability for unpaid losses and loss expenses at beginning of year

$

606,665

$

578,205

$

Less reinsurance recoverable

Net liability for unpaid losses and loss expenses at beginning of year

Provision for net losses and loss expenses for claims incurred in the

current year

Change in provision for estimated net losses and loss expenses for claims

incurred in prior years

Total incurred

Net losses and loss expense payments for claims incurred during:

The current year

Prior years

Total paid

Net liability for unpaid losses and loss expenses at end of year

Plus reinsurance recoverable
Gross liability for unpaid losses and loss expenses at end of year

$

259,147

347,518

256,151

322,054

538,258

245,957

292,301

480,647

420,327

391,167

6,621

487,268

288,380

163,005

451,385

383,401

293,271
676,672

$

2,989

423,316

248,106

149,746

397,852

347,518

259,147
606,665

$

7,200

398,367

236,835

131,779

368,614

322,054

256,151
578,205

The following table sets forth the development of the liability for net unpaid losses and loss expenses of our insurance 
subsidiaries from 2007 to 2017. 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 2007 liability has developed a 
deficiency after ten years because we expect the re-estimated net losses and loss expenses to be $2.5 million more than the 
estimated liability we initially established in 2007 of $150.2 million.

The “Cumulative deficiency (excess)” shows the cumulative deficiency or excess at December 31, 2017 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 2007 column 
indicates that at December 31, 2017 payments equal to $149.3 million of the currently re-estimated ultimate liability for net 
losses and loss expenses of $152.7 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-

 
 
 
 
(in thousands)

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Year Ended December 31,

Net liability at end of
year for unpaid
losses and loss
expenses

Net liability re-

estimated as of:

$150,152

$161,307

$180,262

$217,896

$243,015

$250,936

$265,605

$292,301

$322,054

$347,518

$383,401

One year later

152,836

171,130

177,377

217,728

250,611

261,294

280,074

299,501

325,043

354,139

Two years later

154,435

167,446

177,741

217,355

255,612

268,877

281,782

299,919

329,115

Three years later

152,315

166,756

178,403

218,449

257,349

270,473

281,666

304,855

Four years later

151,120

166,852

179,909

218,514

256,460

270,794

284,429

Five years later

151,287

166,788

179,961

218,202

255,660

271,954

Six years later

151,739

166,964

179,858

217,430

256,388

Seven years later

151,790

167,425

179,996

217,703

Eight years later

152,240

167,732

180,130

Nine years later

152,760

167,508

Ten years later

152,680

Cumulative

deficiency
(excess)

Cumulative amount
of liability paid
through:

2,528

6,201

(132)

(193)

13,373

21,018

18,824

12,554

7,061

6,621

One year later

$ 71,950

$ 79,592

$ 84,565

$ 96,202

$119,074

$126,677

$131,766

$131,779

$149,746

$163,005

Two years later

105,576

116,035

123,204

148,140

181,288

191,208

194,169

206,637

228,506

Three years later

124,659

136,837

147,165

178,073

217,138

225,956

233,371

251,654

Four years later

135,392

148,243

161,363

195,948

234,392

245,094

255,451

Five years later

140,280

155,331

169,452

203,633

241,538

254,502

Six years later

143,778

160,324

173,153

206,731

245,774

Seven years later

146,491

162,531

174,376

209,527

Eight years later

148,235

163,432

175,662

Nine years later

149,013

163,870

Ten years later

149,341

(in thousands)

2009

2010

2011

2012

2013

2014

2015

2016

2017

Year Ended December 31,

Gross liability at end

of year

Reinsurance

recoverable

Net liability at end of

year

Gross re-estimated

liability

Re-estimated

recoverable
Net re-estimated

liability

$263,599

$383,317

$442,408

$458,827

$495,619

$538,258

$578,205

$606,665

$676,672

83,337

165,421

199,393

207,891

230,014

245,957

256,151

259,147

293,271

180,262

217,896

243,015

250,936

265,605

292,301

322,054

347,518

383,401

270,771

341,095

470,727

497,106

525,946

564,997

591,748

616,465

90,641

123,392

214,339

225,152

241,517

260,142

262,633

262,326

180,130

217,703

256,388

271,954

284,429

304,855

329,115

354,139

Gross cumulative
deficiency
(excess)

7,172

(42,222)

28,319

38,279

30,327

26,739

13,543

9,800

Third-Party Reinsurance

Our insurance subsidiaries and Donegal Mutual purchase certain third-party reinsurance on a combined basis. Le Mars, 
Peninsula, Sheboygan and MICO also have separate reinsurance programs that provide certain coverage that is 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:

• 

• 

excess of loss reinsurance, under which the losses of Donegal Mutual and our insurance subsidiaries are automatically 
reinsured, through a series of contracts, over a set retention (generally $1.0 million); and

catastrophe reinsurance, under which Donegal Mutual and our insurance subsidiaries recover, through a series of 
reinsurance agreements, 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 ($1.0 million 
in 2017, $975,000 in 2016 and $1.5 million in 2015) up to aggregate losses of $170.0 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 have excess of loss treaties that provide for coverage of $4.0 million per 

loss over a set retention of $1.0 million. For liability insurance, our insurance subsidiaries have excess of loss treaties that 
provide for coverage of $49.0 million per occurrence over a set retention of $1.0 million. For workers’ compensation insurance, 
our insurance subsidiaries have excess of loss treaties that provide for coverage of $9.0 million on any one life over a set 
retention of $1.0 million and after exceeding an annual aggregate deductible ($1.2 million in 2017 and 2016 and $1.0 million in 
2015).

Our insurance subsidiaries and Donegal Mutual also purchase facultative reinsurance to cover exposures from property and 

casualty losses that exceed the limits provided by their respective treaty reinsurance.

For policies effective through December 31, 2014, MICO maintained a quota-share reinsurance agreement with third-party 

reinsurers to reduce its net exposures. Effective January 1, 2015, MICO no longer maintains a quota-share reinsurance 
agreement with third-party reinsurers. 

Investments

At December 31, 2017, 99.8% 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, 2017.

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, 2017:

(dollars in thousands)

(1)

Rating
U.S. Treasury and U.S. agency securities(2)
Aaa or AAA

Aa or AA

A

BBB
B

    Total

December 31, 2017

Amount

Percent

$

422,139

46.7%

17,203

212,031

155,844

96,379
2,005

1.9

23.4

17.2

10.6
0.2

$

905,601

100.0%

(1)  Ratings assigned by Moody’s Investors Services, Inc. or Standard & Poor’s Corporation.
(2)  Includes mortgage-backed securities of $306.4 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 approximately 24.3%, 32.2% and 40.9% of the fixed-maturity securities in the 
combined investment portfolios of our insurance subsidiaries at December 31, 2017, 2016 and 2015, respectively.

-18-

The following table shows the classification of our investments and the investments of our insurance subsidiaries at 

December 31, 2017, 2016 and 2015 (at carrying value):

2017

December 31,

2016

2015

Percent of

Percent of

Percent of

Amount

Total

Amount

Total

Amount

Total

(dollars in thousands)
Fixed maturities(1):
Held to maturity:

U.S. Treasury securities and obligations of

U.S. government corporations and agencies $

71,736

7.1% $

61,382

6.5% $

51,194

5.7%

Obligations of states and political subdivisions

Corporate securities

Mortgage-backed securities

Total held to maturity

Available for sale:

U.S. Treasury securities and obligations of

U.S. government corporations and agencies

Obligations of states and political subdivisions

Corporate securities
Mortgage-backed securities

Total available for sale

Total fixed maturities
Equity securities(2)
Investment in affiliate(3)
Short-term investments(4)
    Total investments

137,581

108,025

49,313

366,655

44,049

132,117

105,740
257,040

538,946

905,601

50,445

38,774

11,050

13.7

10.7

4.9

36.4

4.4

13.1

10.5
25.6

53.6

90.0

5.0

3.9

1.1

122,793

91,555

60,371

336,101

38,588

186,083

87,456
202,948

515,075

851,176

47,088

37,885

9,371

13.0

9.6

6.4

35.5

4.1

19.7

9.2
21.5

54.5

90.0

5.0

4.0

1.0

119,115

65,307

74,643

310,259

37,189

236,556

72,812
154,836

501,393

811,652

37,261

38,477

13,432

13.2

7.2

8.3

34.4

4.1

26.3

8.1
17.2

55.7

90.1

4.1

4.3

1.5

$1,005,870

100.0% $ 945,520

100.0% $ 900,822

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 $380.5 million at December 31, 2017, $344.6 million at December 31, 2016 and 
$322.8 million at December 31, 2015. The amortized cost of fixed maturities we classified as available for sale was $538.4 million 
at December 31, 2017, $511.6 million at December 31, 2016 and  $489.0 million at December 31, 2015.

(2)  We value equity securities at fair value. Total cost of equity securities was $44.2 million at December 31, 2017, $42.4 million at 

December 31, 2016 and $35.8 million at December 31, 2015.

(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, 2017, 2016 and 2015:

(dollars in thousands)
Due in(1):
One year or less

Over one year through three years

Over three years through five years

Over five years through ten years

Over ten years through fifteen years

Over fifteen years

Mortgage-backed securities

2017

Percent
of

Total

Amount

December 31,

2016

Percent
of

Total

Amount

2015

Percent
of

Total

Amount

$

53,826

6.0% $

44,120

5.2% $

20,990

2.6%

74,140

82,476

221,904

131,531

35,371

306,353

8.2

9.1

24.5

14.5

3.9

33.8

90,018

67,640

197,967

148,959

39,153

263,319

10.6

7.9

23.3

17.5

4.6

30.9

66,505

66,410

202,122

172,429

53,717

229,479

8.2

8.2

24.9

21.2

6.6

28.3

$ 905,601

100.0% $ 851,176

100.0% $ 811,652

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 

$306.4 million at December 31, 2017. The mortgage-backed securities consist primarily of investments in governmental agency 
balloon pools with stated maturities between one and 40 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, 2017, 

2016 and 2015:

(dollars in thousands)
Invested assets(1)
Investment income(2)
Average yield

Average tax-equivalent yield

Year Ended December 31,

$

2017
975,695

23,527

$

2016
923,171

22,633

$

2015
866,882

20,950

2.4%

2.8

2.5%

3.0

2.4%

3.1

(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 realized investment gains or losses or provision for income 

taxes.

A.M. Best Rating

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-

 
 
 
 
 
 
 
 
 
 
Regulation

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, 2017, our insurance subsidiaries and Donegal Mutual each exceeded by a substantial margin the minimum levels 
of statutory capital the RBC rules require.

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.

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 
-21-

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, 2017. 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 $13.0 million, 
$13.0 million and $3.9 million in 2017, 2016 and 2015, respectively. At December 31, 2017, the amount of ordinary dividends 
our insurance subsidiaries could pay to us during 2018, 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

$ 22,317,084

Le Mars

MICO

Peninsula

Sheboygan

Southern

Total

2,343,480

5,279,638

1,653,263

—

5,450,358

$ 37,043,823

Donegal Mutual Insurance Company

Donegal Mutual organized as a mutual fire insurance company in Pennsylvania in 1889. At December 31, 2017, Donegal 

Mutual had admitted assets of $614.0 million and policyholders’ surplus of $298.1 million. At December 31, 2017, Donegal 
Mutual had total liabilities of $315.9 million, including reserves for net losses and loss expenses of $154.7 million and 
unearned premiums of $71.1 million. Donegal Mutual’s investment portfolio of $383.2 million at December 31, 2017 consisted 
primarily of investment-grade bonds of $125.7 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, 2017, Donegal Mutual owned 9,851,025 shares, or 
approximately 44%, of our Class A common stock, which Donegal Mutual carried on its books at $134.2 million, and 
4,647,338 shares, or approximately 83%, of our Class B common stock, which Donegal Mutual carried on its books at 
$63.3 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.

Donegal Financial Services Corporation

We and Donegal Mutual own DFSC, a unitary thrift holding company that owns UCB. UCB is a state savings bank with 15 

banking offices, substantially all of which are located in Lancaster County, Pennsylvania, and approximately $567.7 million in 
assets at December 31, 2017.

Because Donegal Mutual and we together own all of the outstanding capital stock of DFSC, the Board of Governors of the 

Federal Reserve System, or the FRB, regulates Donegal Mutual, DFSC and us as grandfathered savings and loan holding 
companies. As a result, Donegal Mutual, DFSC and we are subject to regulation by the FRB under the holding company 
provisions of the federal Home Owners’ Loan Act, or HOLA. However, if any of Donegal Mutual, DFSC or we were to lose 
this grandfathered status, they or we would become a bank holding company regulated by the FRB under the Bank Holding 
Company Act. UCB, as a state-chartered stock savings bank, is subject to regulation and supervision by the Pennsylvania 
Department of Banking and by the Federal Deposit Insurance Corporation. The primary purpose of the statutory and regulatory 
supervision of financial institutions is to protect depositors, the financial institutions and the financial system as a whole rather 
than the stockholders of financial institutions or their holding companies. 

-22-

 
 
 
Sections 23A and 23B of the Federal Reserve Act impose quantitative and qualitative restrictions on transactions between a 

savings association and its “affiliates.” Affiliates of a savings association include, among other entities, the savings 
association’s holding company and non-banking companies under common control with the savings association such as 
Donegal Mutual and us and our respective subsidiaries. These restrictions on transactions with affiliates apply to transactions 
between DFSC and UCB, on the one hand, and Donegal Mutual and us and our insurance subsidiaries, on the other hand. These 
restrictions also apply to transactions among DFSC, UCB and Donegal Mutual.  Because DFSC directly controls UCB and 
Donegal Mutual and we indirectly control UCB, DFSC, Donegal Mutual and we are subject to the Change in Bank Control Act.

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 2017 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.

Item 1A.     Risk Factors.

Risk Factors

Risks Relating to Us and Our Business

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;

•  We 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. 

-23-

     
     
   
Donegal Mutual has sufficient voting power to determine the outcome of 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% of the combined voting power of our 
Class A common stock and our Class B common stock and has sufficient voting control 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 only one-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;

our by-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.

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.     

-24-

    
   
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, 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.

Because we are a grandfathered unitary savings and loan holding company, no person can acquire or seek to acquire 
more than a 10% interest in either class of our common stock without first obtaining approval of, or an exemption from, the 
FRB.

We own 48.2% of the outstanding stock of DFSC, which owns all of the outstanding stock of UCB. As a result of our 

ownership interest in DFSC, we are a grandfathered unitary savings and loan holding company regulated by the FRB under 
HOLA.  No person may lawfully acquire more than 10% of any class of voting security of a unitary savings and loan holding 
company registered under the Exchange Act, as we are, without first filing specified information with the FRB and obtaining 
the FRB’s prior approval of the proposed acquisition or an exemption from the FRB for such acquisition.

Our insurance subsidiaries currently conduct business in a limited number of states, with a concentration of business in 

Pennsylvania, Michigan, Maryland and Virginia. 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 conduct business in 22 states located primarily in the Mid-Atlantic, Midwestern, New England 

and Southern states. A substantial portion of their business consists of private passenger and commercial automobile, 
homeowners and workers’ compensation insurance in Pennsylvania, Michigan, Maryland and Virginia. 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, fires, explosions and 
severe winter storms. 

If the independent agents who market the products of our insurance subsidiaries do not maintain their current levels of 
premium writing with us, fail to comply with established underwriting guidelines of our insurance subsidiaries or otherwise 
inappropriately market the products of our insurance subsidiaries, the business, financial condition and results of 
operations of our insurance subsidiaries could be adversely affected.

Our insurance subsidiaries market their insurance products solely through a network of approximately 2,400 independent 
insurance agencies. This agency distribution system is one of the most important components of the competitive profile of our 
insurance subsidiaries. As a result, our insurance subsidiaries depend to a material extent upon their independent agents, each of 
whom has the authority to bind one or more of our insurance subsidiaries 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 to unacceptable insurance risks, fail to comply with the established underwriting guidelines of our 
insurance subsidiaries or otherwise inappropriately market the products of our insurance subsidiaries, the business, financial 
condition and results of operations of our insurance subsidiaries could suffer.

The business of our insurance subsidiaries may not continue to grow and may be materially adversely affected if our 
insurance subsidiaries cannot retain existing, and attract new, independent agents or if insurance consumers increase their 
use of insurance marketing systems other than independent agents.

Our insurance subsidiaries’ ability to retain existing, and to attract new, independent agents is essential to the continued 
growth of the business of our insurance subsidiaries. If independent agents find it easier to do business with the competitors of 
our insurance subsidiaries, our insurance subsidiaries could find it difficult to retain their existing business or to attract new 
business. While our insurance subsidiaries believe they maintain good relationships with the independent agents they have 
appointed, our insurance subsidiaries cannot be certain that these independent agents will continue to sell the products of our 

-25-

     
    
     
insurance subsidiaries to the consumers these independent agents represent. Some of the factors that could adversely affect the 
ability of our insurance subsidiaries to retain existing, and attract new, independent agents include:

• 

• 

• 

• 

the significant competition among insurance companies to attract independent agents;

the labor-intensive and time-consuming process of selecting new independent agents;

the insistence of our insurance subsidiaries that independent agents adhere to consistent underwriting standards; and

the ability of our insurance subsidiaries to pay competitive and attractive commissions, bonuses and other incentives 
to independent agents.

While our insurance subsidiaries sell insurance to policyholders solely through their network of independent agencies, 
many competitors of our insurance subsidiaries 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 system 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 2018 without prior regulatory approval is approximately $37.0 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. Currently, Donegal Mutual and our insurance subsidiaries each have an A 
(Excellent) rating from A.M. Best. 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.

Our strategy to grow in part through acquisitions of smaller 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, 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;

-26-

     
     
     
• 

• 

the need of the other insurer for additional capital that we did not anticipate at the time of the acquisition or affiliation; 
and

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 will 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 the competitors 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.

The property and casualty insurance industry is intensely competitive. Competition can be based on many factors, 

including:

• 

• 

• 

• 

• 

• 

the perceived financial strength of the insurer;

premium rates;

policy terms and conditions;

policyholder service;

reputation; and

experience.

Our insurance subsidiaries 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, have substantially greater 
financial, technical and operating resources and have equal or higher ratings from A.M. Best than our insurance subsidiaries. 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 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. Our insurance subsidiaries 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 are prepared to offer. Moreover, if these competitors lower the price of their products and 
our insurance subsidiaries meet their pricing, the profit margins and revenues of our insurance subsidiaries 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.

-27-

     
     
Because the investment portfolios of our insurance subsidiaries consist primarily of fixed-income securities, their 

investment income and the fair value of their investment portfolios 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 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 
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 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 five-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, 2017, our insurance subsidiaries had approximately $119.4 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 lifetime 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, 2017, MICO had approximately $54.0 million 
of reinsurance receivables from MCCA relating to paid and unpaid losses. The MCCA has generated significant operating 
deficits in recent years.  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.
-28-

     
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.

Our equity investment in DFSC subjects us to certain risks inherent to community banking organizations.

Our equity in the earnings of DFSC primarily reflects the underlying results of operations of UCB. UCB is subject to a 

number of risks, which include, but are not limited to, the following:

• 

• 

• 

• 

• 

• 

variations in interest rates that may negatively affect UCB’s financial performance;

inherent risks associated with UCB’s lending activities;

a significant decline in general economic conditions in the specific markets in which UCB operates;

the potential adverse impact of extensive federal and state regulation and supervision of banking organizations;

potential declines in the value of UCB’s investments that are considered other than temporary;

competition for loans and deposits with numerous regional and national banks and other financial institutions; and

•  UCB’s ability to attract and retain qualified key personnel.

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.

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 integrating new systems with legacy systems, including plans 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. 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, 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.  
Disruption in the availability of Donegal Mutual’s information technology systems could impact the ability of Donegal Mutual 

-29-

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 the Property and Casualty Insurance Industry

Industry trends, such as increased litigation against the insurance industry and individual insurers, the willingness of 

courts to expand covered causes of loss, rising jury awards, escalating medical 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 of the reserves of our insurance subsidiaries.

Loss severity in the property and casualty insurance industry has increased in recent years, principally driven by larger 

court judgments and increasing medical and automobile repair costs. The industry has also experienced increases in the 
frequency of automobile losses due to distracted driving, increases in miles driven due to lower fuel costs and other factors. 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 make the loss reserves of our insurance 
subsidiaries inadequate for current and future losses.

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 questioned whether the 
use of credit scoring unfairly discriminates against people with low incomes, minority groups and the elderly. These consumer 
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;

•  market conduct;

• 

• 

• 

policy forms;

limitations on the nature and amount of certain investments;

claims practices;

•  mandated participation in involuntary markets and guaranty funds;

• 

• 

reserve adequacy;

insurer solvency;

-30-

     
     
     
 
• 

• 

• 

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.

The NAIC and state insurance regulators are re-examining existing laws and regulations, specifically focusing on:

• 

• 

• 

• 

• 

• 

• 

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. 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.

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. These premium rates may not be sufficient to cover the ultimate losses 
-31-

     
     
our insurance subsidiaries 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 payment 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;

changes in operations;

emerging economic and social trends;

inflation; and

changes in the regulatory and litigation environments.

If our insurance subsidiaries have insufficient premium rates or reserves, insurance regulatory authorities may require 
increases to these 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.

The ability to underwrite and set rates effectively is subject to a number of risks and uncertainties, including:

• 

• 

• 

• 

• 

• 

• 

• 

• 

• 

• 

• 

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 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 on 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;

-32-

     
• 

• 

• 

• 

• 

• 

• 

changes in driving patterns for auto exposures;

changes in weather patterns for property exposures;

changes in the medical sector of the economy;

unanticipated changes in auto repair costs, auto parts prices and used car prices;

the impact of emerging technologies, including the advent of autonomous vehicles, on pricing, insurance coverages 
and loss costs;

the impact of inflation and other factors on the cost 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 based 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 volume and competitiveness. In either 
event, underpricing or overpricing risks could adversely impact our operating results, financial condition and cash flows.

The cyclical nature of 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 respect to both individual lines of business and the 
overall insurance industry. Premium rate levels relate to the availability of insurance coverage, which varies according to the 
level of surplus available in the insurance industry. The level of surplus in the industry varies with returns on invested capital 
and regulatory barriers to withdrawal of surplus. Increases in surplus may result in increased price competition among property 
and casualty insurers. If our insurance subsidiaries find it necessary to reduce premiums or limit premium increases due to 
these competitive pressures on pricing, our insurance subsidiaries may experience a reduction in their profit margins and 
revenues, an increase in their ratios of losses and expenses to premiums and, therefore, lower profitability.

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, 2017 was approximately 
32,196 shares and approximately 177 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 Wisconsin 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.

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, 

-33-

     
     
     
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.

Moreover, the DGCL contains provisions that prohibit certain business combination transactions under certain 

circumstances. In addition, state insurance laws and regulations generally prohibit any person from acquiring, or seeking to 
acquire, a 10% or greater interest in an insurance company without the prior approval of the state insurance commissioner of 
the state of domicile of the insurer.  Because of our indirect control of UCB, HOLA also prohibits the acquisition of a 10% or 
greater interest in either our Class A common stock or our Class B common stock without the prior approval of the FRB or the 
granting of an exemption by the FRB.

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.

Item 2.     Properties.

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 and our insurance subsidiaries for an appropriate portion 
of the building expenses under an inter-company 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, Peninsula owns a facility of approximately 14,600 square feet 
in Salisbury, Maryland 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.

Not applicable.

-34-

 
 
Executive Officers of the Registrant

The following table sets forth information regarding the executive officers of Donegal Mutual and the Registrant as of 

December 31, 2017, each of whom has served with us for more than 10 years:

Name
Kevin G. Burke

Cyril J. Greenya

Jeffrey D. Miller

Donald H. Nikolaus

Sanjay Pandey

Robert G. Shenk

Daniel J. Wagner

Age
52

73

53

75

51

64

57

Position
President and Chief Executive Officer of us since 2015; Executive Vice President
and Chief Operating Officer of Donegal Mutual since 2014; 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.

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.

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.

President and Chief Executive Officer of Donegal Mutual since 1981 (currently on
medical leave of absence); President and Chief Executive Officer of us from 1986
to 2015. Chairman of our board of directors since April 2012.

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.
Senior Vice President, Claims, of Donegal Mutual and us since 1997; other
positions from 1986 to 1997.

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.

-35-

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. The following table shows the dividends declared per share and the stock price range for 
both classes of stock for each quarter during 2017 and 2016: 

Quarter

2017 - Class A

1st

2nd

3rd

4th

2017 - Class B

1st

2nd

3rd

4th

2016 - Class A

1st

2nd

3rd

4th

2016 - Class B

1st

2nd

3rd

4th

High

Low

Cash
Dividend
Declared
Per Share

$ 18.20

17.72

16.68

18.25

$ 16.24   $

—
15.36   0.1400
14.51   0.1400
15.85   0.2800

$ 17.94

16.65

15.90

15.91

$ 15.30   $

—
14.30   0.1225
13.40   0.1225
13.35   0.2450

$ 15.00

16.50

16.85

18.55

$ 12.69   $

—
13.30   0.1375
15.48   0.1375
14.49   0.2750

$ 16.15

15.99

22.88

20.55

$ 13.51   $

—
12.56   0.1200
14.88   0.1200
15.30   0.2400

At the close of business on March 1, 2018, we had approximately 1,869 holders of record of our Class A common stock 

and approximately 286 holders of record of our Class B common stock.

We declared dividends of $0.56 per share on our Class A common stock and $0.49 per share on our Class B common stock 
in 2017, compared to $0.55 per share on our Class A common stock and $0.48 per share on our Class B common stock in 2016.

-36-

 
   
   
 
   
   
 
   
   
 
   
   
Stock Performance Chart.

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, 2012 and ending on December 31, 2017, compared to the 
Russell 2000 Index and a peer group comprised of seven 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, 
Selective Insurance Group Inc., State Auto Financial Corp. and United Fire and Casualty Co.  The graph shows the change in 
value of an initial $100 investment on December 31, 2012, assuming reinvestment of all dividends.

Donegal Group Inc. Class A

Donegal Group Inc. Class B

Russell 2000 Index

Peer Group

2012
$100.00

100.00

100.00

100.00

2013
$117.27

134.16

137.00

142.99

2014
$122.00

124.35

141.84

153.25

2015
$111.36

97.80

133.74

178.46

2016
$143.31

97.05

159.78

228.46

2017
$146.74

95.91

180.79

249.12

Value Line Publishing LLC prepared the foregoing performance graph and data. The performance graph and 

accompanying data shall not be deemed "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.

-37-

Item 6.     Selected Financial Data.

Year Ended December 31,

2017

2016

2015

2014

2013

Income Statement Data

Premiums earned

Investment income, net

Realized investment gains

Total revenues

$ 702,514,755   $ 656,204,797   $ 605,640,728   $ 556,497,535   $ 515,291,944

23,527,304  

22,632,730  

20,949,698  

18,344,382  

18,795,239

5,705,255  

2,525,575  

1,934,424  

3,134,081  

2,423,442

739,026,537  

688,423,020  

636,387,263  

586,547,742  

547,110,065

Income before income taxes

12,114,462  

41,328,407  

27,592,268  

16,282,817  

32,710,265

Income taxes

Net income

4,998,362  

10,527,270  

6,602,235  

1,743,799  

6,388,273

7,116,100  

30,801,137  

20,990,033  

14,539,018  

26,321,992

Basic earnings per share - Class A

Diluted earnings per share -
Class A

Cash dividends per share - Class A

Basic earnings per share - Class B

Diluted earnings per share -
Class B

Cash dividends per share - Class B

Balance Sheet Data at Year End

0.27  

0.26  

0.56  

0.22  

0.22  

0.49  

1.19  

1.16  

0.55  

1.06  

1.06  

0.48  

0.78  

0.77  

0.54  

0.69  

0.69  

0.47  

0.56  

0.55  

0.53  

0.49  

0.49  

0.46  

1.04

1.02

0.51

0.94

0.94

0.46

Total investments

Total assets

Debt obligations

Stockholders’ equity

Book value per share

$1,005,869,705   $ 945,519,655   $ 900,822,274   $ 832,941,077   $ 791,808,307

1,737,919,778   1,623,131,037   1,537,834,415   1,458,654,644   1,385,410,502

64,000,000  

74,000,000  

86,000,000  

58,500,000  

63,000,000

448,696,104  

438,615,320  

408,388,568  

416,134,643  

396,877,111

15.95  

16.21  

15.66  

15.40  

15.02

-38-

 
 
 
 
 
 
   
   
   
   
 
   
   
   
   
 
 
 
 
Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations 

Overview

Donegal Mutual Insurance Company (“Donegal Mutual”) organized us as an insurance holding company on August 26, 

1986. See “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”) write personal and commercial 
lines of property and casualty coverages exclusively through a network of independent insurance agents in certain Mid-
Atlantic, Midwest, New England and Southern 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. We also 
own 48.2% of the outstanding stock of Donegal Financial Services Corporation (“DFSC”), a grandfathered unitary savings and 
loan holding company. Donegal Mutual owns the remaining 51.8% of the outstanding stock of DFSC. 

 At December 31, 2017, Donegal Mutual held approximately 44% of our outstanding Class A common stock and 

approximately 83% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately 
72% 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 into a proportional reinsurance agreement, or pooling agreement, effective 

October 1, 1986. Under this pooling agreement, Donegal Mutual and Atlantic States pool and then share proportionately 
substantially all of their respective premiums, losses and expenses. Atlantic States’ participation in the pool has been 80%  
since March 1, 2008. 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 
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. See “Business - History and Organizational Structure” for more information regarding 
the pooling agreement and other transactions with our affiliates. 

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 not purchase any 
shares of our Class A common stock under this program during 2017 or 2016. We have purchased a total of 57,658 shares of 
our Class A common stock under this program from its inception through December 31, 2017.

On December 18, 2015, we and Donegal Mutual entered into a Stock Purchase and Standstill Agreement (the “Purchase 
Agreement”) with Gregory M. Shepard (“Mr. Shepard”).  Under the terms of the Purchase Agreement, we purchased 2,000,000 
shares of our Class A common stock from Mr. Shepard on December 22, 2015 for a price of $33.0 million, or $16.50 per share, 
representing a premium of approximately $5.8 million from the market price of our Class A common stock on the date of the 
Purchase Agreement.  We reported this premium in excess of the market price as an expense in our consolidated statements of 
income and comprehensive income for 2015 that we include in this Form 10-K Report.  We borrowed $33.0 million under our 
existing line of credit with M&T Bank to fund the purchase.  The Purchase Agreement contains a number of typical “standstill” 
provisions pursuant to which Mr. Shepard and any affiliate of Mr. Shepard shall not take a number of “control-seeking” actions 
with respect to us for a period of 25 years from the date of the Purchase Agreement.

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, valuation of investments and determination of other-than-
temporary investment impairments and the policy acquisition costs of our insurance subsidiaries. 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.

-39-

 
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 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 a decrease in claims frequency on workers’ compensation claims 
during the past several years while the severity of these claims has gradually increased. These trend changes give rise to greater 
uncertainty as to the pattern of future loss settlements on workers’ compensation 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, 2017. 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 $3.8 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.  Our insurance subsidiaries recognized an increase in their 
liability for losses and loss expenses of prior years of $6.6 million, $3.0 million and $7.2 million in 2017, 2016 and 2015, 
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 these years. 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 
-40-

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 automobile liability 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.  The 2015 development represented 2.5% 
of the December 31, 2014 net carried reserves and resulted primarily from higher-than-expected severity in the private 
passenger automobile liability, commercial multiple peril and commercial automobile lines of business in accident years prior 
to 2015. The majority of the 2015 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 a slight downward trend in 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.

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. 

-41-

 
Our insurance subsidiaries’ liability for losses and loss expenses by major line of business at December 31, 2017 and 2016 

consisted of the following:

Commercial lines:

Automobile

Workers’ compensation

Commercial multi-peril

Other

Total commercial lines

Personal lines:

Automobile

Homeowners

Other

Total personal lines

Total commercial and personal lines

Plus reinsurance recoverable

2017

2016

(in thousands)

$

74,299

$

58,615

103,318

71,011

4,119

252,747

110,512

18,508

1,634

130,654

383,401

293,271

104,446

60,887

3,868

227,816

100,498

17,286

1,918

119,702

347,518

259,147

       Total liability for losses and loss expenses

$ 676,672

$ 606,665

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, 2017

Percentage Change in
Equity at
December 31, 2017(1)

(dollars in thousands)

Adjusted Loss and Loss
Expense Reserves Net of
Reinsurance at
December 31, 2016

Percentage Change in
Equity at
December 31, 2016(1)

-10.0%

$345,061

6.8%

$312,766

5.1%

-7.5

-5.0

-2.5

Base

2.5

5.0

7.5

10.0

354,646

364,231

373,816

383,401

392,986

402,571

412,156

421,741

5.1

3.4

1.7

—

-1.7

-3.4

-5.1

-6.8

321,454

330,142

338,830

347,518

356,206

364,894

373,582

382,270

3.9

2.6

1.3

—

-1.3

-2.6

-3.9

-5.1

(1)  Net of income tax effect (21% at December 31, 2017 and 35% at December 31, 2016).

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 

-42-

                                
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 number their actuaries determine. For the year ended December 31, 2017, the actuaries developed a range from a 
low of $353.0 million to a high of $416.5 million and with a most-likely number of $383.4 million. The actuaries’ range of 
estimates for commercial lines in 2017 was $232.8 million to $274.5 million, and the actuaries selected the most-likely number 
of $252.7 million. The actuaries’ range of estimates for personal lines in 2017 was $120.2 million to $142.0 million, and the 
actuaries selected the most-likely number of $130.7 million. For the year ended December 31, 2016, the actuaries developed a 
range from a low of $318.6 million to a high of $379.0 million and with a most-likely number of $347.5 million. The actuaries’ 
range of estimates for commercial lines in 2016 was $208.9 million to $248.4 million, and the actuaries selected the most-likely 
number of $227.8 million. The actuaries’ range of estimates for personal lines in 2016 was $109.7 million to $130.6 million, 
and the actuaries selected the most-likely number of $119.7 million. 

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 2017 and 2016 claim count and payment amount information for workers’ compensation. 

Workers’ compensation losses primarily consist of indemnity and medical costs for injured workers. 

Number of claims pending, beginning of period

(dollars in thousands)

Number of claims reported

Number of claims settled or dismissed

Number of claims pending, end of period

Losses paid

Loss expenses paid

Investments

For the Year Ended December 31,

2017

2016

2,710  

6,348  

6,152  

2,906  

2,694

6,343

6,327

2,710

$

41,970   $

9,474  

39,718

9,326

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, when we consider a decline in the value of an individual investment to be other 
than temporary, we write down the investment to its fair value and reflect the amount of the write-down as a realized loss in our 
results of operations. We individually monitor all investments for other-than-temporary declines in value. Generally, we assume 
there has been an other-than-temporary decline in value if an individual equity security has depreciated in value by more than 
20% of original cost and has been in such an unrealized loss position for more than six months. We held five equity securities 
that were in an unrealized loss position at December 31, 2017. Based upon our analysis of general market conditions and 
underlying factors impacting these equity securities, we considered these declines in value to be temporary. 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 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 

-43-

 
 
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 280 debt securities that were in an unrealized loss position at 
December 31, 2017. 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 not recognize any impairment losses in 2017, 2016 or 
2015. 

We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at 

December 31, 2017 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

Mortgage-backed securities

Equity securities

    Totals

35,203,959  

253,241  

31,560,591  

1,003,047

100,533,516  

817,315  

124,061,502  

2,666,650

4,291,875  

279,141  

—  

—

$ 174,277,178   $ 1,756,291   $ 203,736,737   $ 4,955,013

We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at 

December 31, 2016 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

$ 37,729,947   $ 1,279,510   $

—   $

Obligations of states and political subdivisions

40,739,099  

802,311  

710,280  

—

8,936

Corporate securities

Mortgage-backed securities

Equity securities

    Totals

80,181,238  

2,127,451  

4,706,945  

472,044

168,771,543  

2,727,720  

416,828  

5,420,875  

132,071  

—  

2,602

—

$ 332,842,702   $ 7,069,063   $ 5,834,053   $

483,582

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 their general knowledge of the market, their research findings related to unusual 
fluctuations in value and their comparison of such values to execution prices for similar securities. Our investment personnel 
monitor the market and are familiar with current trading ranges for similar securities and pricing of specific investments. Our 
investment personnel review all pricing estimates that we receive from the pricing services against the expectations of our 
investment personnel 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, 2017, we received two estimates per security from the pricing services, 
and we priced substantially all of our Level 1 (quoted prices in active markets for identical assets and liabilities) and Level 2 

-44-

 
 
 
 
(directly or indirectly observable inputs other than Level 1 quoted prices) investments using those prices. In our review of the 
estimates the pricing services provided at December 31, 2017, we did not identify any material discrepancies, and we did not 
make any adjustments to the estimates the pricing services provided.

We had no sales or transfers from the held to maturity portfolio in 2017, 2016 or 2015.

Policy Acquisition Costs 

We defer our insurance subsidiaries’ policy acquisition costs, consisting primarily of commissions, premium taxes and 

certain other underwriting costs, reduced by ceded commissions, that vary with and relate directly to the production of 
business. We amortize these costs over the period in which our insurance subsidiaries earn the premiums on that business. The 
method our insurance subsidiaries 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. 

Management Evaluation of Operating Results 

Despite economic uncertainty, challenging insurance market conditions and unusually adverse weather conditions that 

affected our results in recent years, we believe that our focused business strategy, including our insurance subsidiaries’ 
disciplined underwriting practices, have positioned us well for 2018 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 personal lines and commercial lines segments utilizing statutory accounting 
practices (“SAP”), which include financial measures that reflect the growth trends and underwriting results of our insurance 
subsidiaries. 

-45-

 
We use the following financial data to monitor and evaluate our operating results:

(in thousands)

Net premiums written:

Personal lines:

Automobile

Homeowners

Other

Total personal lines

Commercial lines:

Automobile

Workers’ compensation

Commercial multi-peril

Other

Total commercial lines

Year Ended December 31,

2017

2016

2015

$ 255,297

  $ 229,789

  $ 214,610

125,054

19,672

400,023

99,333

109,884

110,313

9,586

329,116

122,811

19,057

371,657

87,849

108,349

104,728

9,451

310,377

119,541

18,176

352,327

76,729

98,079

94,219

7,483

276,510

Total net premiums written

$ 729,139

  $ 682,034

  $ 628,837

Components of GAAP combined ratio:

Loss ratio

Expense ratio

Dividend ratio

GAAP combined ratio

Revenues:

Premiums earned:

Personal lines

Commercial lines

GAAP premiums earned

Net investment income

Realized investment gains

Equity in earnings of DFSC

Other

Total revenues

69.4%

32.9

0.7

103.0%

64.5%

33.0

0.6

98.1%

65.8%

32.6

0.6

99.0%

$ 384,124

  $ 361,128

  $ 344,355

318,391

702,515

23,527

5,705

1,622

5,658

295,077

656,205

22,633

2,526

1,086

5,973

261,286

605,641

20,950

1,934

1,277

6,585

$ 739,027

  $ 688,423

  $ 636,387

-46-

 
 
   
   
 
   
   
 
 
 
 
 
 
   
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)

Components of net income:

Underwriting (loss) income:

Personal lines

Commercial lines

SAP underwriting (loss) income

GAAP adjustments

GAAP underwriting (loss) income

Net investment income

Realized investment gains

Equity in earnings of DFSC

Premium paid on purchase of treasury stock

Other

Income before income tax

Income tax

Net income

$

$

Year Ended December 31,

2017

2016

2015

(39,042) $
13,263
(25,779)
4,408
(21,371)
23,527

5,705

1,622

—

2,631

12,114
(4,998)
7,116

(10,745) $
18,284

7,539

4,642

12,181

22,633

2,526

1,086

—

2,902

41,328
(10,527)
30,801

$

$

(6,414)
9,259

2,845

3,344

6,189

20,950

1,934

1,277
(5,780)
3,022

27,592
(6,602)
20,990

Non-GAAP Information

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, so 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.

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 2017, 2016 and 

2015:

Year Ended December 31,

2017

2016

2015

Net premiums earned
Change in net unearned premiums
Net premiums written

$702,514,755
26,624,163
$729,138,918

$656,204,797
25,829,042
$682,033,839

$605,640,728
23,196,122
$628,836,850

-47-

 
 
 
 
 
 
 
 
 
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 realized 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, 2017, 2016 and 2015:

GAAP Combined Ratios (Total Lines)
Loss ratio (non-weather)
Loss ratio (weather-related)
Expense ratio
Dividend ratio
Combined ratio

Statutory Combined Ratios
Commercial lines:

Automobile
Workers’ compensation
Commercial multi-peril

Total commercial lines

Personal lines:

Automobile
Homeowners

Total personal lines
Total commercial and personal lines

Year Ended December 31,

2017

2016

2015

61.1%
8.3
32.9
0.7
103.0%

115.0%
79.0
96.7
93.6

109.3
109.9
108.5
101.7

58.8%
5.7
33.0
0.6
98.1%

110.8%
83.8
87.7
90.7

106.7
95.5
101.8
96.8

59.7%
6.1
32.6
0.6
99.0%

109.5%
87.6
90.8
92.8

104.3
97.6
100.9
97.4

Results of Operations

YEAR ENDED DECEMBER 31, 2017 COMPARED TO YEAR ENDED DECEMBER 31, 2016 

Net Premiums Earned

Our insurance subsidiaries’ net premiums earned increased to $702.5 million for 2017, an increase of $46.3 million, or 
7.1%, over 2016, reflecting increases in net premiums written during 2016 and 2017. 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. 

-48-

  
 
Net Premiums Written 

Our insurance subsidiaries’ 2017 net premiums written increased 6.9% to $729.1 million, compared to $682.0 million for 

2016. We attribute the increase primarily to the impact of premium rate increases and an increase in the writing of new 
accounts in both personal and commercial lines of insurance. Commercial lines net premiums written increased $18.7 million, 
or 6.0%, for 2017 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. Personal 
lines net premiums written increased $28.4 million, or 7.6%, for 2017 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. 

Investment Income 

For 2017, our net investment income increased to $23.5 million, an increase of $894,574, or 4.0%, over 2016. We attribute 

the increase primarily to an increase in average invested assets.

Installment Payment Fees 

Our insurance subsidiaries’ installment fees decreased primarily as a result of their customers’ increased usage of payment 

plans that have lower installment payment fees during 2017. 

Net Realized Investment Gains 

Our net realized investment gains in 2017 and 2016 were $5.7 million and $2.5 million, respectively. The net realized 

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 in equity securities. The net realized investment gains in 2016 resulted 
from normal turnover within our investment portfolio.  We did not recognize any impairment losses during 2017 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.

Losses and Loss Expenses 

Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 
69.4% in 2017, compared to 64.5% in 2016. Our insurance subsidiaries’ commercial lines loss ratio increased to 62.0% in 
2017, compared to 59.6% in 2016. This increase resulted primarily from the commercial automobile loss ratio increasing to 
80.3% in 2017, compared to 78.7% in 2016, and the commercial multi-peril loss ratio increasing to 64.6% in 2017, compared 
to 54.4% in 2016. The personal lines loss ratio was 75.5% in 2017 compared to 68.5% in 2016. Our insurance subsidiaries 
experienced unfavorable loss reserve development of approximately $6.6 million during 2017 in their reserves for prior 
accident years, compared to approximately $3.0 million during 2016. The unfavorable loss reserve development 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 line of business.

Underwriting Expenses 

Our insurance subsidiaries’ expense ratio, which is the ratio of policy acquisition and other underwriting expenses to 
premiums earned, was 32.9% in 2017, compared to 33.0% in 2016. We attribute the decrease to lower underwriting-based 
incentive compensation in 2017. 

Combined Ratio 

Our insurance subsidiaries’ combined ratio was 103.0% and 98.1% in 2017 and 2016, 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 our loss 
ratio.

-49-

Interest Expense 

Our interest expense in 2017 decreased to $1.6 million, compared to $1.7 million in 2016. We attribute the decrease to 

lower average borrowings during 2017 compared to 2016.

Income Taxes 

Our income tax expense was $5.0 million in 2017, compared to $10.5 million in 2016.  Our effective tax rate for 2017 was 
41.3%, compared to 25.5% for 2016.  The increase in our 2017 effective tax rate was primarily due to additional tax expense of 
$4.8 million related to the revaluation of our net deferred tax assets pursuant to the Tax Cuts and Jobs Act (the “TCJA”).  
Excluding the impact of the TCJA, our effective tax rate for 2017 was 2.0% due to tax-exempt interest income representing a 
greater proportion of income before income tax expense in 2017 compared to 2016.

Net Income and Earnings Per Share 

Our net income in 2017 was $7.1 million, or $.26 per share of Class A common stock on a diluted basis and $.22 per share 
of Class B common stock, compared to $30.8 million, or $1.16 per share of Class A common stock on a diluted basis and $1.06 
per share of Class B common stock, in 2016. We had 22.6 million and 21.5 million Class A shares outstanding at December 31, 
2017 and 2016, 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 million in 2017. Our book value per share decreased to $15.95 at 

December 31, 2017, compared to $16.21 a year earlier. Our return on average equity was 1.6% for 2017, compared to 7.3% for 
2016. 

YEAR ENDED DECEMBER 31, 2016 COMPARED TO YEAR ENDED DECEMBER 31, 2015 

Net Premiums Earned

Our insurance subsidiaries’ net premiums earned increased to $656.2 million for 2016, an increase of $50.6 million, or 
8.3%, over 2015, reflecting increases in net premiums written during 2015 and 2016. 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. 

Net Premiums Written 

Our insurance subsidiaries’ 2016 net premiums written increased 8.5% to $682.0 million, compared to $628.8 million for 
2015. We primarily attribute the increase to the impact of premium rate increases and an increase in the writing of commercial 
lines of insurance. Commercial lines net premiums written increased $33.9 million, or 12.2%, for 2016 compared to 2015. 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. Personal lines net premiums written 
increased $19.3 million, or 5.5%, for 2016 compared to 2015. The increase was primarily attributable to premium rate 
increases. 

Investment Income 

For 2016, our net investment income increased to $22.6 million, an increase of $1.7 million, or 8.0%, over 2015. We 

attribute the increase primarily to an increase in average invested assets.

Installment Payment Fees 

Our insurance subsidiaries’ installment fees decreased primarily as a result of their customers’ increased usage of payment 

plans that have lower installment payment fees during 2016. 

-50-

Net Realized Investment Gains 

Our net realized investment gains in 2016 and 2015 were $2.5 million and $1.9 million, respectively. The net realized 
investment gains in 2016 and 2015 resulted from normal turnover within our investment portfolio.  We did not recognize any 
impairment losses during 2016 or 2015.

Equity in Earnings of DFSC

Our equity in the earnings of DFSC in 2016 and 2015 was $1.1 million and $1.3 million, respectively. 

Losses and Loss Expenses 

Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 
64.5% in 2016, compared to 65.8% in 2015. Our insurance subsidiaries’ commercial lines loss ratio decreased to 59.6% in 
2016, compared to 62.3% in 2015. This decrease resulted primarily from the workers’ compensation loss ratio decreasing to 
52.1% in 2016, compared to 56.7% in 2015, and the commercial multi-peril loss ratio decreasing to 54.4% in 2016, compared 
to 58.2% in 2015. The personal lines loss ratio was 68.5% in 2016 and 2015. Our insurance subsidiaries experienced 
unfavorable loss reserve development of approximately $3.0 million during 2016 in their reserves for prior accident years, 
improved from unfavorable loss reserve development of approximately $7.2 million during 2015. The change in loss reserve 
development patterns occurred primarily within our insurance subsidiaries’ private passenger automobile liability, workers’ 
compensation and homeowners lines of business. 

Underwriting Expenses 

Our insurance subsidiaries’ expense ratio, which is the ratio of policy acquisition and other underwriting expenses to 
premiums earned, was 33.0% in 2016, compared to 32.6% in 2015. We attribute the increase to higher underwriting-based 
incentives in 2016. 

Combined Ratio 

Our insurance subsidiaries’ combined ratio was 98.1% and 99.0% in 2016 and 2015, 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 decrease in our combined ratio primarily to the decrease in our loss 
ratio.

Interest Expense 

Our interest expense in 2016 increased to $1.7 million, compared to $1.1 million in 2015. We attribute the increase to 

higher average borrowings during 2016 compared to 2015.

Income Taxes 

Our income tax expense was $10.5 million in 2016, compared to $6.6 million in 2015. Our effective tax rate for 2016 was 

25.5%, compared to 23.9% for 2015. The increase in our 2016 effective tax rate was primarily due to tax-exempt interest 
income representing a smaller proportion of income before income tax expense in 2016 compared to 2015.

Net Income and Earnings Per Share 

Our net income in 2016 was $30.8 million, or $1.16 per share of Class A common stock on a diluted basis and $1.06 per 
share of Class B common stock, compared to $21.0 million, or $.77 per share of Class A common stock on a diluted basis and 
$.69 per share of Class B common stock, in 2015. We had 21.5 million and 20.5 million Class A shares outstanding at 
December 31, 2016 and 2015, 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.

-51-

Book Value Per Share and Return on Equity 

Our stockholders’ equity increased by $30.2 million in 2016. Our book value per share increased to $16.21 at 

December 31, 2016, compared to $15.66 a year earlier. Our return on average equity was 7.3% for 2016, compared to 5.1% for 
2015. 

Financial Condition 

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 2017, 2016 and 2015 
were $81.0 million, $60.0 million and $68.2 million, respectively. 

In July 2017, 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. The line of credit now expires in July 2020. We have the right to extend 
the term of the credit agreement for one year as of each anniversary date of the agreement. At December 31, 2017, we had 
$24.0 million in outstanding borrowings and had the ability to borrow an additional $36.0 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. At December 31, 2017, the interest rate on our outstanding borrowings was 3.82%. We pay a fee of 0.25% 
per annum on the loan commitment amount regardless of usage. The 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. We complied with all requirements of the credit agreement during 2017.

MICO has an agreement with the FHLB of Indianapolis. Through its membership, MICO has the ability to issue debt to 

the FHLB of Indianapolis in exchange for cash advances. There were no outstanding borrowings at December 31, 2017 or 
2016. 

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 had $35.0 million in outstanding advances at 
December 31, 2017. The interest rate on the advances was 1.25% at December 31, 2017. 

The following table shows expected payments for our significant contractual obligations at December 31, 2017: 

(in thousands)

Net liability for unpaid losses and loss expenses of our

insurance subsidiaries

Subordinated debentures

Borrowings under lines of credit

    Total contractual obligations

Total

Less than 1
year

1-3 years

4-5 years

After 5
years

$ 383,401   $ 178,369   $ 176,980   $

13,642   $

14,410

5,000  

—  

—  

59,000  

35,000  

24,000  

—  

—  

5,000

—

$ 447,401   $ 213,369   $ 200,980   $

13,642   $

19,410

We estimated the timing of the amounts for the net liability for unpaid losses and loss expenses of our insurance 
subsidiaries based on historical experience and expectations of future payment patterns. We have shown the liability net of 
reinsurance recoverable on unpaid losses and loss expenses to reflect expected future cash flows related to such liability. 

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Assumed amounts from the underwriting pool with Donegal Mutual represent a substantial portion of our insurance 
subsidiaries’ gross liability for unpaid losses and loss expenses, and ceded amounts to the underwriting pool represent a 
substantial portion of our insurance subsidiaries’ reinsurance recoverable on unpaid losses and loss expenses. We include cash 
settlements of Atlantic States’ assumed liability from the pool in our monthly settlements of pooled activity. In these monthly 
settlements, we net amounts ceded to and assumed from the pool. Donegal Mutual and Atlantic States do not anticipate any 
further changes in the pool participation levels in the foreseeable future. However, any such change would be prospective in 
nature and therefore would not impact the timing of expected payments for Atlantic States’ proportionate liability for 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, 2017, our annual interest cost associated with our 
borrowings under our lines of credit is approximately $1.5 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 $590,000. 

The cash dividends we declared to our stockholders totaled $15.0 million, $14.2 million and $14.5 million in 2017, 2016 
and 2015, 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, 2017. Amounts available for distribution to us as ordinary dividends from our insurance subsidiaries without prior approval 
of insurance regulatory authorities in 2018 are $22.3 million from Atlantic States, $5.5 million from Southern, $2.3 million 
from Le Mars, $1.6 million from Peninsula, $0 from Sheboygan and $5.3 million from MICO, or a total of approximately 
$37.0 million.

Investments 

At December 31, 2017 and 2016, our investment portfolio of primarily investment-grade bonds, common stock, short-term 

investments and cash totaled $1.0 billion and $970.1 million, respectively, representing 60.1% and 59.8%, respectively, of our 
total assets. See “Business - Investments” for more information. 

December 31,

2017

2016

Percent of

Percent of

Amount

Total

Amount

Total

(dollars in thousands)

Fixed maturities:

  Total held to maturity

$

366,655

36.4% $ 336,101

35.5%

  Total available for sale

Total fixed maturities

Equity securities

Investment in affiliate

Short-term investments

538,946

905,601

50,445

38,774

11,050

53.6

90.0

5.0

3.9

1.1

515,075

851,176

47,088

37,885

9,371

54.5

90.0

5.0

4.0

1.0

    Total investments

$ 1,005,870

100.0% $ 945,520

100.0%

The carrying value of our fixed maturity investments represented 90.0% of our total invested assets at December 31, 2017 

and 2016. 

Our fixed maturity investments consisted of high-quality marketable bonds, of which 99.8% were rated at investment-

grade levels at December 31, 2017 and 2016. 

At December 31, 2017, the net unrealized gain on our available-for-sale fixed maturity investments, net of deferred taxes, 

amounted to $420,053, compared to $2.2 million at December 31, 2016. 

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At December 31, 2017, the net unrealized gain on our equity securities, net of deferred taxes, amounted to $4.9 million, 

compared to $3.0 million at December 31, 2016. 

Impact of Inflation 

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 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 will replace most existing GAAP revenue recognition guidance, the scope of the guidance excludes insurance 
contracts. The new standard is 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 the 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 is effective for annual and interim reporting periods beginning after December 15, 2017. As a result of 
this guidance, we will reflect changes in the fair value of our equity investments in our results of operations beginning January 
1, 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. We do not expect the adoption of this guidance to have a significant impact on our financial 
position, results of operations or cash flows.

In March 2016, the FASB issued guidance that simplifies and improves several aspects of the accounting for share-based 

payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and 
classification on the statement of cash flows. The guidance was effective for annual and interim reporting periods beginning 
after December 15, 2016. The adoption of this guidance did not have a significant impact on our financial position, results of 
operations or cash flows.

In June 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. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. 
We do not expect the adoption of this guidance to have a significant impact on our financial position, results of operations or 
cash flows.

In March 2017, the FASB issued guidance that amends previous guidance on the amortization period for certain purchased 

callable debt securities held at a premium. This new guidance shortens the amortization period to the earliest call date. The 
intent of the new guidance is to align interest income recognition with the expectations incorporated in the market pricing on 
the underlying securities. The new standard is effective for annual and interim reporting periods beginning after December 15, 
2018, with early adoption permitted. We adopted this guidance effective January 1, 2017. The adoption of this guidance did not 
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 
accumulated other comprehensive income (“AOCI”) resulting from 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 

-54-

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 guidance did not have a significant impact on our financial position, results of operations or cash flows.

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. 

Interest Rate Risk 

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. 

Principal cash flows and related weighted-average interest rates by stated maturity dates for the financial instruments we 

held at December 31, 2017 that are sensitive to interest rates are as follows: 

(in thousands)

Fixed-maturity and short-term investments:

2018

2019

2020

2021

2022

Thereafter

Total

Fair value

Debt:

2018

2019

Thereafter

Total

Fair value

Principal
Cash Flows

Weighted-
Average
Interest Rate

$

64,824  

3.97%

3.28

2.62

3.36

3.00

3.36

1.25%

3.82

5.00

40,113  

35,311  

44,350  

44,046  

679,066  

907,710  

930,446  

35,000

24,000  

5,000  

64,000  

64,000  

$

$

$

$

$

Actual cash flows from investments may differ from those depicted above as a result of calls and prepayments. 

Equity Price Risk 

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. 

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Credit Risk 

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 a run-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. The amount of assets required to be held in trust adjusts monthly based upon 
the remaining net obligations of West Bend. West Bend may terminate the trust agreement on the earlier of December 1, 2020 
or the date on which the obligations of West Bend are equal to or less than $5.0 million. As of December 31, 2017, West Bend’s 
net obligations under the reinsurance agreements were approximately $6.1 million, and the fair value of assets held in trust was 
approximately $6.6 million. 

-56-

Item 8.     Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements and Schedule

Consolidated Balance Sheets

Consolidated Statements of Income and Comprehensive Income

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm 

Schedule:

Schedule III — Supplementary Insurance Information

58

59

60

61

62

100

108

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Donegal Group Inc.
Consolidated Balance Sheets 

December 31,

2017

2016

Assets
Investments

Fixed maturities

Held to maturity, at amortized cost (fair value $380,450,428 and $344,647,138 ). . . . . $ 366,655,077
538,946,050
Available for sale, at fair value (amortized cost $538,414,337 and $511,629,644) . . . .
50,445,243
Equity securities, available for sale, at fair value (cost $44,219,097 and $42,431,695). . .
38,773,420
Investment in Donegal Financial Services Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments, at cost, which approximates fair value . . . . . . . . . . . . . . . . . . . .
11,049,915
1,005,869,705
Total investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,833,435
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,553,121
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
160,406,432
Premiums receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
298,342,563
Reinsurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,289,860
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,128,843
Deferred tax asset, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135,032,641
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,280,415
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
180,525
Accounts receivable - securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,935,105
Federal income taxes recoverable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Due from affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,625,354
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
958,010
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,483,769
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,737,919,778

$ 336,100,948
515,074,940
47,087,842
37,884,918
9,371,007
945,519,655
24,587,214
6,295,513
159,389,667
263,028,008
56,309,196
19,043,413
124,255,495
6,668,489
—
1,108,250
9,204,910
5,625,354
958,010
1,137,863
$ 1,623,131,037

Liabilities and Stockholders’ Equity
Liabilities

Losses and loss expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 676,671,727
503,456,541
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,033,776
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,116,159
Reinsurance balances payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59,000,000
Borrowings under lines of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,841,820
Cash dividends declared to stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,000,000
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,314,368
Due to affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,789,283
1,289,223,674
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 606,664,590
466,055,228
28,246,691
4,369,528
69,000,000
3,622,821
5,000,000
—
1,556,859
1,184,515,717

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

25,564,481 and 24,483,377 shares and outstanding 22,561,893and 21,480,789 shares .
Class B common stock, $.01 par value, authorized 10,000,000 shares, issued 5,649,240
shares and outstanding 5,576,775 shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

56,492
255,401,558
(2,684,275)
236,893,041
(41,226,357)
448,696,104
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,737,919,778

56,492
236,851,709
(2,254,271)
244,942,913
(41,226,357)
438,615,320
$ 1,623,131,037

—

—

255,645

244,834

See accompanying notes to consolidated financial statements.

-58-

 
 
 
 
 
 
 
 
 
 
 
 
Donegal Group Inc.
Consolidated Statements of Income and Comprehensive Income 

Years Ended December 31,
2016

2015

2017

Statements of Income

Revenues

Net premiums earned (includes affiliated reinsurance of $190,924,704,

$184,656,732 and $175,024,905 - see note 3). . . . . . . . . . . . . . . . . . . . . . $ 702,514,755
23,527,304

Investment income, net of investment expenses . . . . . . . . . . . . . . . . . . . . . .
Installment payment fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains (includes $5,705,255, $2,525,575 and

$ 656,204,797

$ 605,640,728

22,632,730

20,949,698

5,157,163

5,302,896

5,834,897

500,455

670,865

750,287

$1,934,424 accumulated other comprehensive income reclassification) .
Equity in earnings of Donegal Financial Services Corporation . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,705,255

1,621,605

2,525,575

1,086,157

1,934,424

1,277,229

739,026,537

688,423,020

636,387,263

Expenses

Net losses and loss expenses (includes affiliated reinsurance of

$114,865,113, $102,124,332 and $100,110,773 - see note 3) . . . . . . . . . .
Amortization of deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . .
Other underwriting expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policyholder dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium paid on purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before income tax expense  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (includes $1,939,787, $883,951 and $677,048 income

tax expense from reclassification items) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

487,268,054

423,315,903

398,366,874

115,065,000

107,876,000

99,513,000

116,538,431

108,458,742

97,709,656

5,014,624

1,593,437

—

4,373,377

1,657,647

—

1,432,529

1,412,944

3,862,606

1,111,441

5,780,000

2,451,418

726,912,075

647,094,613

608,794,995

12,114,462

41,328,407

27,592,268

4,998,362

10,527,270

6,602,235

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

7,116,100

$ 30,801,137

$ 20,990,033

Basic earnings per common share:

Class A common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Class B common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Diluted earnings per common share:

Class A common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Class B common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

0.27

0.22

0.26

0.22

$

$

$

$

1.19

1.06

1.16

1.06

$

$

$

$

0.78

0.69

0.77

0.69

Statements of Comprehensive Income
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss),  net of tax

Unrealized gain (loss) on securities:

7,116,100

$ 30,801,137

$ 20,990,033

Unrealized holding gain (loss) arising during the period, net of income

tax expense (benefit) of $1,964,385, ($746,518) and  ($1,788,852) . . .

Reclassification adjustment for gains included in net income, net of

income tax of $1,939,787, $883,951 and $677,048. . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

3,811,151

(1,386,391)

(3,322,149)

(3,765,468)
45,683

7,161,783

(1,641,624)
(3,028,015)
$ 27,773,122

(1,257,376)
(4,579,525)
$ 16,410,508

See accompanying notes to consolidated financial statements. 

-59-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Donegal Group Inc.
Consolidated Statements of Stockholders’ Equity 

Common Stock

Class A
Shares

Class B
Shares

Class A
Amount

Class B
Amount

Additional
Paid-In
Capital

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings

Treasury
Stock

Total
Stockholders’
Equity

22,389,369

5,649,240

$223,894

$56,492

$200,348,783

$

5,353,269

$ 223,253,887

$ (13,101,682) $416,134,643

129,066

983,370

1,290

9,834

1,836,067

16,620,676

719,775

20,990,033

(14,499,775)

(719,775)

1,837,357

16,630,510

20,990,033

(14,499,775)

—

(28,124,675)

(28,124,675)

(4,579,525)

(4,579,525)

23,501,805

5,649,240

$235,018

$56,492

$219,525,301

$

773,744

$ 229,024,370

$ (41,226,357) $408,388,568

149,105

832,467

1,491

8,325

2,118,471

14,522,217

30,801,137

(14,196,874)

(685,720)

685,720

(3,028,015)

2,119,962

14,530,542

30,801,137

(14,196,874)

—

(3,028,015)

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

157,085

924,019

1,571

9,240

2,486,762

15,462,479

600,608

7,116,100

(15,041,051)

(600,608)

(475,687)

475,687

45,683

2,488,333

15,471,719

7,116,100

(15,041,051)

—

—

45,683

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

See accompanying notes to consolidated financial statements.

Balance, January 1,
2015 . . . . . . . . . .

Issuance of

common stock
(stock
compensation
plans) . . . . . . . . .

Stock-based

compensation . . .

Net income . . . . . . .

Cash dividends . . . .
Grant of stock

options . . . . . . . .

Purchase of treasury
stock . . . . . . . . . .

Other

comprehensive
loss . . . . . . . . . . .

Balance,

December 31,
2015 . . . . . . . . . .

Issuance of

common stock
(stock
compensation
plans) . . . . . . . . .

Stock-based

compensation . . .

Net income . . . . . . .

Cash dividends . . . .

Grant of stock

options . . . . . . . .

Other

comprehensive
loss . . . . . . . . . . .

Balance,

December 31,
2016 . . . . . . . . . .

Issuance of

common stock
(stock
compensation
plans) . . . . . . . . .

Stock-based

compensation . . .

Net income . . . . . . .

Cash dividends . . . .

Grant of stock

options . . . . . . . .

Reclassification of

tax effects . . . . . .

Other

comprehensive
income . . . . . . . .

Balance,

December 31,
2017 . . . . . . . . . .

-60-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Donegal Group Inc.
Consolidated Statements of Cash Flows

Cash Flows from Operating Activities:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating

activities:
Depreciation, amortization and other non-cash items . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings of Donegal Financial Services Corporation . . . . . . . . .

Changes in Assets and Liabilities:

Losses and loss expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premiums receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts due from affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance balances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dividends received from Donegal Financial Services Corporation

Net adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash Flows from Investing Activities:

Purchases of fixed maturities:

Years Ended December 31,
2016

2015

2017

7,116,100

$ 30,801,137

$ 20,990,033

6,109,869
(5,705,255)
(1,621,605)

6,587,282
(2,525,575)
(1,086,157)

6,740,346
(1,934,424)
(1,277,229)

70,007,137
37,401,313
(212,915)
(1,016,765)
(3,980,664)
11,889,970
(35,314,555)
(257,608)
16,519,278
(253,369)
(10,777,146)
(9,826,855)
(113,482)
1,036,750
73,884,098
81,000,198

28,459,481
36,562,025
5,786,216
(18,122,256)
(4,200,808)
2,030,865
(3,299,895)
(304,316)
(12,762,087)
889,122
(10,732,990)
379,406
(22,628)
1,591,300
29,228,985
60,030,122

39,946,703
20,846,840
3,030,848
(7,960,450)
(3,809,780)
168,395
(6,092,223)
(239,821)
1,147,830
(4,360,766)
2,349,278
(906,179)
(2,235,228)
1,783,700
47,197,840
68,187,873

Held to maturity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of fixed maturities:

(51,049,152)
(138,675,907)
(17,033,093)

(44,907,210)
(161,873,868)
(15,222,724)

(31,310,026)
(181,106,519)
(14,759,861)

Available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,081,785

55,731,299

40,321,838

Maturity of fixed maturities:

Held to maturity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (purchases) sales of short-term investments. . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20,577,326
99,544,479
20,880,814
(1,090,726)
(1,678,908)
(58,443,382)

19,488,644
82,586,588
9,201,657
(384,207)
4,061,475
(51,318,346)

28,575,153
66,744,045
8,761,474
(151,536)
6,861,166
(76,064,266)

Cash Flows from Financing Activities:

Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings under lines of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . .

15,511,457
(14,822,052)
—
(10,000,000)
—
(9,310,595)

13,822,228
(14,085,934)

(12,000,000)
—
(12,263,706)

15,516,870
(14,455,167)
— (28,124,675)
(9,500,000)
37,000,000
437,028

13,246,221
Net increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,587,214
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,833,435

(3,551,930)
28,139,144
$ 24,587,214

(7,439,365)
35,578,509
$ 28,139,144

See accompanying notes to consolidated financial statements. 

-61-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Donegal Group Inc.
Notes to Consolidated Financial Statements 

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”), write personal and commercial lines of property and casualty coverages exclusively through a 
network of independent insurance agents in certain Mid-Atlantic, Midwestern, New England and Southern states. We also own 
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 15 banking offices, substantially 
all of which are located in Lancaster County, Pennsylvania. Donegal Mutual owns the remaining 51.8% of the outstanding stock 
of DFSC. 

We have four 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. The  commercial  lines  products  of  our  insurance  subsidiaries  consist  primarily  of  commercial 
automobile, commercial multi-peril and workers’ compensation policies. 

At December 31, 2017, Donegal Mutual held approximately 44% of our outstanding Class A common stock and 

approximately 83% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately 
72% 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 pooling agreement with Donegal Mutual. Under the pooling 
agreement, the two companies pool their insurance business and each company receives an allocated percentage of the pooled 
business. Atlantic States has an 80% share of the results of the pooled business, and Donegal Mutual has a 20% share of the 
results of the pooled business. 

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, as the risk characteristics of all business Donegal Mutual and Atlantic States write directly are homogenized 
within 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 predominant percentage of the net underwriting activity of 
both Donegal Mutual and Atlantic States. We refer to Note 3 - Transactions with Affiliates for more information regarding the 
pooling agreement. 

Basis of Consolidation 

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. 

-62-

Use of Estimates 

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, valuation of investments and determination of other-than-temporary 
impairment of investment securities and our insurance subsidiaries’ policy acquisition costs. 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. 

Reclassification 

We have made certain reclassifications in our prior period financial statements to conform to the current year presentation.

Investments 

We classify our debt and equity securities into the following categories: 

Held to Maturity - Debt securities that we have the positive intent and ability to hold to maturity; reported at amortized 
cost. 

Available for Sale - Debt and equity 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 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 write down the investment to its fair value and we reflect the amount of the 
write-down as a realized loss in our results of operations when we consider the decline in value of an individual investment to 
be other than temporary. We individually monitor all of our investments for other-than-temporary declines in value. Generally, 
we assume there has been an other-than-temporary decline in value if an individual equity security has depreciated in value by 
more than 20% of original cost and has been in such an unrealized loss position for more than six months. 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 amortize premiums and discounts on debt securities over the life of the security as an adjustment to yield using the 

effective interest method. We compute realized investment gains and losses using the specific identification method. 

We amortize premiums and discounts for mortgage-backed debt securities using anticipated prepayments. 

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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 - 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 - 
Fair Value Measurements for more information regarding our methods and assumptions in estimating fair values. 

Cash and Short-Term Investments - The carrying amounts we report in the balance sheet for these instruments approximate 

their fair values. 

Premiums and Reinsurance Receivables and 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 - The carrying amounts we report in the balance sheet for these instruments approximate their 

fair values. 

Revenue Recognition 

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.  

Policy Acquisition Costs 

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 relate directly to the production of 
business. 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. 

Property and Equipment 

We report property and equipment at depreciated cost that we compute using the straight-line method based upon estimated 

useful lives of the assets. 

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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 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 a decrease in claims frequency on workers’ compensation claims 
during the past several years while the severity of these claims has gradually increased. These trend changes give rise to greater 
uncertainty as to the pattern of future loss settlements on workers’ compensation 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.

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.  

Income Taxes 

We currently file a consolidated federal income tax return. 

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. 

Credit Risk 

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 

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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 - Reinsurance for more information regarding the reinsurance agreements of our insurance subsidiaries. 

Stock-Based Compensation 

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 2017, 2016 and 2015, we realized $873,515, $788,700 and $437,474, respectively, in tax benefits upon the exercise of 

stock options. 

Earnings Per Share 

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. 

-66-

 
 
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 will replace most existing GAAP revenue recognition guidance, the scope of the guidance excludes insurance 
contracts. The new standard is 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 the 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 is effective for annual and interim reporting periods beginning after December 15, 2017. As a result of 
this guidance, we will reflect changes in the fair value of our equity investments in our results of operations beginning January 
1, 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. We do not expect the adoption of this guidance to have a significant impact on our financial 
position, results of operations or cash flows.

In March 2016, the FASB issued guidance that simplifies and improves several aspects of the accounting for share-based 

payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and 
classification on the statement of cash flows. The guidance was effective for annual and interim reporting periods beginning 
after December 15, 2016. The adoption of this guidance did not have a significant impact on our financial position, results of 
operations or cash flows.

In June 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. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. 
We do not expect the adoption of this guidance to have a significant impact on our financial position, results of operations or 
cash flows.

In March 2017, the FASB issued guidance that amends previous guidance on the amortization period for certain purchased 

callable debt securities held at a premium. This new guidance shortens the amortization period to the earliest call date. The 
intent of the new guidance is to align interest income recognition with the expectations incorporated in the market pricing on 
the underlying securities. The new standard is effective for annual and interim reporting periods beginning after December 15, 
2018, with early adoption permitted. We adopted this guidance effective January 1, 2017. The adoption of this guidance did not 
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 
accumulated other comprehensive income (“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 guidance did not have a significant impact on our financial position, results of operations or cash 
flows.

3 - Transactions with Affiliates 

Our insurance subsidiaries conduct business and have various agreements with Donegal Mutual that we describe in the 

following subparagraphs: 

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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. 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 2017, 2016 and 2015: 

Premiums earned

Losses and loss expenses

Prepaid reinsurance premiums

Liability for losses and loss expenses

2017

2016
$ 200,752,599   $ 185,444,009   $ 170,418,931

2015

140,015,950  

115,371,839  

115,029,244

103,991,861  

95,469,329  

87,780,338

136,786,070  

120,434,535  

108,672,769

The following amounts represent reinsurance Atlantic States assumed from the pool during 2017, 2016 and 2015: 

Premiums earned

Losses and loss expenses

Unearned premiums

Liability for losses and loss expenses

2017

2016
$ 451,470,894   $ 422,985,921   $ 396,098,036

2015

289,503,373  

240,394,302  

240,197,659

228,988,598  

214,372,048  

199,966,888

252,263,547  

230,543,393  

216,194,945

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 2017, 2016 and 2015: 

Premiums earned

Losses and loss expenses

Unearned premiums

2017

2016

$

(271)   $

(1,512)   $

(690,268)  
—  

(378,199)  
—  

2015
880,787

1,492,673

—

Liability for losses and loss expenses

827,193  

3,222,100  

5,722,000

Donegal Mutual and MICO have a quota-share reinsurance agreement under which Donegal Mutual assumes 25% of the 

premiums and losses related to the business of MICO. Donegal Mutual and Peninsula have a quota-share reinsurance 
agreement under which Donegal Mutual assumes 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 between Donegal Mutual and Atlantic States. 

-68-

 
 
 
The following amounts represent reinsurance ceded to Donegal Mutual pursuant to these quota-share reinsurance 

agreements during 2017, 2016 and 2015: 

Premiums earned

Losses and loss expenses

Prepaid reinsurance premiums

Liability for losses and loss expenses

2017

2016
$ 42,578,047   $ 39,917,800   $ 37,299,760

2015

24,978,631  

21,524,856  

19,735,479

19,827,115  

19,180,421  

17,172,112

36,396,109  

31,881,756  

29,968,948

Atlantic States, Southern and Le Mars each have a catastrophe reinsurance agreement with Donegal Mutual that provides 

coverage under any one catastrophic occurrence above a set retention ($2,000,000, $1,500,000 and $750,000 for Atlantic 
States, Southern and Le Mars, respectively, for 2017, 2016 and 2015), with a combined retention of $4,000,000 for a 
catastrophe involving a combination of these subsidiaries, up to the amount Donegal Mutual and our insurance subsidiaries 
retain under catastrophe reinsurance agreements with unaffiliated reinsurers. Donegal Mutual and Southern have an excess of 
loss reinsurance agreement in which Donegal Mutual assumes 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 2017, 2016 and 2015: 

Premiums earned

Losses and loss expenses

Liability for losses and loss expenses

2017

2016
$ 17,215,273   $ 12,965,868   $ 14,235,227

2015

8,953,411  

995,076  

3,399,207  

3,136,438  

6,814,836

4,485,201

The following amounts represent the effect of affiliated reinsurance transactions on net premiums our insurance 

subsidiaries earned during 2017, 2016 and 2015: 

Assumed

Ceded

    Net

2017
$ 451,470,623
(260,545,919)
$ 190,924,704

2016
$ 422,984,409
(238,327,677)
$ 184,656,732

2015
$ 396,978,823
(221,953,918)
$ 175,024,905

The following amounts represent the effect of affiliated reinsurance transactions on net losses and loss expenses our 

insurance subsidiaries incurred during 2017, 2016 and 2015: 

Assumed

Ceded

    Net

b. Expense Sharing

2017

2016
$ 288,813,105   $ 240,016,103   $ 241,690,332
(141,579,559)
(137,891,771)
$ 114,865,113   $ 102,124,332   $ 100,110,773

(173,947,992)

2015

Donegal Mutual provides facilities, management and other services to us 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 their 
personnel costs and bear their proportionate share of information services costs based on their percentage of the total written 
premiums of the Donegal Insurance Group. Charges for these services totalled $124,999,770, $122,428,117 and $108,473,146 
for 2017, 2016 and 2015, respectively. 

c. Lease Agreement 

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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d. Legal Services 

Donald H. Nikolaus, our Chairman of the Board and one of our directors, is a partner in the law firm of Nikolaus & 
Hohenadel. Such firm has served as our general counsel since 1986, principally in connection with the defense of claims 
litigation arising in Lancaster, Dauphin and York counties of Pennsylvania. We pay such firm its customary fees for such 
services. 

e. Union Community Bank 

At December 31, 2017 and 2016, we had $32,373,544 and $16,981,744, respectively, in checking accounts with UCB, a 
wholly owned subsidiary of DFSC. We earned $286,410, $87,941 and $3,317 in interest on these accounts during 2017, 2016 
and 2015, respectively.

4 - Investments 

The amortized cost and estimated fair values of our fixed maturities and equity securities at December 31, 2017 and 2016 

are as follows: 

Held to Maturity

U.S. Treasury securities and obligations of U.S.

government corporations and agencies

2017

Amortized Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated Fair
Value

$ 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

Mortgage-backed securities

    Totals

108,024,776  

2,860,255  

730,843  

110,154,188

49,312,701

515,976

156,638

49,672,039

$ 366,655,077

$ 15,341,893

$

1,546,542

$ 380,450,428

Available for Sale

U.S. Treasury securities and obligations of U.S.

government corporations and agencies

2017

Amortized Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated Fair
Value

$ 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

Mortgage-backed securities

Fixed maturities

Equity securities

    Totals

Held to Maturity

U.S. Treasury securities and obligations of U.S.

government corporations and agencies

105,254,120  

1,010,744  

525,445  

105,739,419

259,922,761  

444,603  

3,327,327  

257,040,037

538,414,337  

5,417,334  

4,885,621  

538,946,050

44,219,097  

6,505,287  

279,141  

50,445,243

$ 582,633,434   $ 11,922,621   $

5,164,762   $ 589,391,293

2016

Amortized Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated Fair
Value

$ 61,381,605

$

1,255,480

$

674,371

$ 61,962,714

Obligations of states and political subdivisions

122,793,411

8,403,996

368,530

130,828,877

Corporate securities

Mortgage-backed securities

    Totals

91,555,136  

1,172,002  

1,678,133  

91,049,005

60,370,796

545,812

110,066

60,806,542

$ 336,100,948

$ 11,377,290

$

2,831,100

$ 344,647,138

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Available for Sale

U.S. Treasury securities and obligations of U.S.

government corporations and agencies

2016

Amortized Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated Fair
Value

$ 39,093,734   $

99,429   $

605,139   $ 38,588,024

Obligations of states and political subdivisions

179,889,661  

6,635,941  

442,717  

186,082,885

Corporate securities

Mortgage-backed securities

Fixed maturities

Equity securities

    Totals

87,715,049  

662,132  

921,362  

87,455,819

204,931,200  

637,268  

2,620,256  

202,948,212

511,629,644  

8,034,770  

4,589,474  

515,074,940

42,431,695  

4,788,218  

132,071  

47,087,842

$ 554,061,339   $ 12,822,988   $

4,721,545   $ 562,162,782

At December 31, 2017, our holdings of obligations of states and political subdivisions included general obligation bonds 

with an aggregate fair value of $190.7 million and an amortized cost of $181.4 million. Our holdings also included special 
revenue bonds with an aggregate fair value of $90.0 million and an amortized cost of $84.7 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. 
Education bonds and water and sewer utility bonds represented 53% and 26%, respectively, of our total investments in special 
revenue bonds based on their carrying values at December 31, 2017. Many of the issuers of the special revenue bonds we held 
at December 31, 2017 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, 2016, our holdings of obligations of states and political subdivisions included general obligation bonds 

with an aggregate fair value of $220.1 million and an amortized cost of $211.0 million. Our holdings also included special 
revenue bonds with an aggregate fair value of $96.8 million and an amortized cost of $91.7 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, 2016. 
Education bonds and water and sewer utility bonds represented 62% and 23%, respectively, of our total investments in special 
revenue bonds based on their carrying values at December 31, 2016. Many of the issuers of the special revenue bonds we held 
at December 31, 2016 have the authority to impose ad valorem taxes. In that respect, many of the special revenue bonds we 
held are similar to general obligation bonds.

We have segregated within accumulated other comprehensive loss the net unrealized losses of $15.1 million arising 

prior to the November 30, 2013 reclassification date for fixed maturities reclassified from available for sale to held to maturity.  
We will amortize 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 2017, we recorded amortization of $1.2 million in 
accumulated other comprehensive income. At December 31, 2017 and 2016, net unrealized losses of $9.8 million and $11.0 
million, respectively, remained within accumulated other comprehensive loss.

-71-

 
 
We set forth below the amortized cost and estimated fair value of fixed maturities at December 31, 2017 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. 

Held to maturity

Due in one year or less

Due after one year through five years

Due after five years through ten years

Due after ten years

Mortgage-backed securities

Total held to maturity

Available for sale

Due in one year or less

Due after one year through five years

Due after five years through ten years

Due after ten years

Mortgage-backed securities

Total available for sale

Amortized Cost

Estimated Fair
Value

$

4,096,270   $

4,090,120

57,702,099

58,997,125

118,294,836  

121,747,801

137,249,171  

145,943,343

49,312,701  

49,672,039

$ 366,655,077   $ 380,450,428

$ 49,257,873   $ 49,729,548

97,814,378  

98,914,332

103,015,782  

103,609,213

28,403,543  

29,652,920

259,922,761  

257,040,037

$ 538,414,337   $ 538,946,050

The amortized cost of fixed maturities on deposit with various regulatory authorities at December 31, 2017 and 2016 

amounted to $9,646,390 and $9,632,126, respectively. 

Our investment in DFSC represented our 48.2% investment in the amount of $38,773,420 and $37,884,918 at 

December 31, 2017 and 2016, respectively. We account for our investment in DFSC using the equity method of accounting. 
Under this method, we record 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 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, 2017 and 2016 from the financial statements of DFSC. 

Balance sheets:

Total assets

Total liabilities

Stockholders’ equity

December 31,

2017

2016

$ 567,935,408

$ 535,590,133

$ 487,603,999

$ 457,101,287

80,331,409

78,488,846

    Total liabilities and stockholders’ equity

$ 567,935,408

$ 535,590,133

Income statements:

Net income

Year Ended December 31,

2017

2016

2015

$ 3,362,861

$ 2,252,456

$ 2,372,650

Other comprehensive income (loss) in our statements of comprehensive income includes net unrealized gains (losses) of 

$112,053, ($103,331) and ($263,991) for 2017, 2016 and 2015, respectively, representing our share of DFSC’s unrealized 
investment gains or losses.  

We received distributions from DFSC of $1.0 million and $1.6 million during 2017 and 2016, respectively.  Based on the 
nature of the activities that generated these distributions, we made an accounting policy election to classify these distributions 
as a return on our investment in DFSC.

-72-

 
 
   
 
   
We derive net investment income, consisting primarily of interest and dividends, from the following sources: 

Fixed maturities

Equity securities

Short-term investments

Other

Investment income

Investment expenses

Net investment income

2017
$ 26,143,924

2016
$ 25,066,582

2015
$ 23,636,468

999,335

407,580

33,316

1,187,814

115,763

108,003

707,703

181,154

33,450

27,584,155
(4,056,851)
$ 23,527,304

26,478,162
(3,845,432)
$ 22,632,730

24,558,775
(3,609,077)
$ 20,949,698

We present below gross realized 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:

Gross realized gains:

Fixed maturities

Equity securities

Gross realized losses:

Fixed maturities

Equity securities

2017

2016

2015

$

168,855

$ 2,161,108

$ 2,259,045

6,197,253

6,366,108

1,378,548

3,539,656

1,088,467

3,347,512

98,723

562,130

660,853

281,131

732,950

1,014,081

105,432

1,307,656

1,413,088

Net realized gains

$ 5,705,255

$ 2,525,575

$ 1,934,424

Change in difference between fair value and cost of

investments:

Fixed maturities

Equity securities

    Totals

$ 2,335,578

1,569,999

$ 3,905,577

$(12,932,470) $(10,787,772)
659,597
$ (9,772,114) $(10,128,175)

3,160,356

We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at 

December 31, 2017 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

Mortgage-backed securities

Equity securities

    Totals

35,203,959  

253,241  

31,560,591  

1,003,047

100,533,516

817,315   124,061,502  

2,666,650

4,291,875  

279,141  

—  

—

$174,277,178   $ 1,756,291   $203,736,737   $ 4,955,013

-73-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at 

December 31, 2016 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

$ 37,729,947   $ 1,279,510   $

—   $

Obligations of states and political subdivisions

40,739,099  

802,311  

710,280  

—

8,936

Corporate securities

Mortgage-backed securities

Equity securities

    Totals

80,181,238  

2,127,451  

4,706,945  

472,044

168,771,543

2,727,720  

416,828  

5,420,875  

132,071  

—  

2,602

—

$332,842,702   $ 7,069,063   $ 5,834,053   $

483,582

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 write down the investment to its fair value, and we reflect the amount of the 
write-down as a realized loss in our results of operations when we consider the decline in value of an individual investment to 
be other than temporary. We individually monitor all investments for other-than-temporary declines in value. Generally, we 
assume there has been an other-than-temporary decline in value if an individual equity security has depreciated in value by 
more than 20% of original cost and has been in such an unrealized loss position for more than six months. We held five equity 
securities that were in an unrealized loss position at December 31, 2017. Based upon our analysis of general market conditions 
and underlying factors impacting these equity securities, we considered these declines in value to be temporary. 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 280 debt securities that were in an unrealized loss position at 
December 31, 2017. 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 not recognize any impairment losses in 2017, 2016 or 2015. We had no sales or transfers from our held to maturity 

portfolio in 2017, 2016 or 2015. We had no derivative instruments or hedging activities during 2017, 2016 or 2015.

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. 

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 

-74-

 
 
 
price estimates we obtain from independent pricing services. We classify our fixed maturity investments 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, 2017, 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, 2017, we did not identify any material discrepancies, and we did not make any adjustments to the 
estimates the pricing services provided. 

We present our cash and short-term investments at estimated fair value. The carrying values in our balance sheet for 
premium receivables and reinsurance receivables and payables for premiums and paid losses and loss expenses 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, 2017 and 2016.

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

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

Significant
Other
Observable
Inputs (Level 2)

Significant
Unobservable
Inputs (Level 3)

Fair Value

U.S. Treasury securities and obligations of U.S.

government corporations and agencies

Obligations of states and political subdivisions

Corporate securities

Mortgage-backed securities

Equity securities

$ 44,049,424   $

—   $ 44,049,424   $

132,117,170  

105,739,419  

257,040,037  

—  

132,117,170  

— 105,739,419  

—  

257,040,037  

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   $

—

—

—

—

—

—

—

—

-75-

 
 
The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and 

equity securities at December 31, 2016: 

Fair Value Measurements Using

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

Significant
Other
Observable
Inputs (Level 2)

Significant
Unobservable
Inputs (Level 3)

Fair Value

U.S. Treasury securities and obligations of U.S.

government corporations and agencies

Obligations of states and political subdivisions

Corporate securities

Mortgage-backed securities

Equity securities

$ 38,588,024   $

—   $ 38,588,024   $

186,082,885  

87,455,819  

202,948,212  

—  

186,082,885  

—

87,455,819  

—  

202,948,212  

35,922,337  

35,922,337  

—  

    Total investments in the fair value hierarchy

550,997,277

35,922,337

515,074,940

Investment measured at net asset value

11,165,505

—

—

    Totals

$ 562,162,782   $ 35,922,337   $ 515,074,940   $

—

—

—

—

—

—

—

—

6 - Deferred Policy Acquisition Costs 

Changes in our insurance subsidiaries’ deferred policy acquisition costs are as follows: 

Balance, January 1

Acquisition costs deferred

Amortization charged to earnings

Balance, December 31

7 - Property and Equipment 

2017
$ 56,309,196

2016
$ 52,108,388

2015
$ 48,298,608

119,045,664
(115,065,000)
$ 60,289,860

112,076,808
(107,876,000)
$ 56,309,196

103,322,780
(99,513,000)
$ 52,108,388

Property and equipment at December 31, 2017 and 2016 consisted of the following:

Office equipment

Automobiles

Real estate

Software

Accumulated depreciation

2017
9,918,045   $

2016
9,129,318  

$

Estimated Useful
Life
3-15 years

779,357  

1,334,385  

5 years

7,971,590  

7,685,228  

5-50 years

2,794,864  

2,794,864  

5 years

21,463,856  
(14,183,441)

20,943,795    
(14,275,306)

$

7,280,415   $

6,668,489    

Depreciation expense for 2017, 2016 and 2015 amounted to $478,800, $742,861 and $792,733, respectively. 

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. 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 

-76-

 
 
 
 
 
 
 
 
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.

We summarize activity in our insurance subsidiaries’ liability for losses and loss expenses as follows: 

Balance at January 1

Less reinsurance recoverable

Net balance at January 1

Incurred related to:

Current year

Prior years

Total incurred

Paid related to:

Current year

Prior years

Total paid

Net balance at December 31

Plus reinsurance recoverable

Balance at December 31

2017
$ 606,664,590
(259,147,147)
347,517,443

2016
$ 578,205,109
(256,150,860)
322,054,249

2015
$ 538,258,406
(245,957,364)
292,301,042

480,646,641

420,327,164

391,166,740

6,621,413

2,988,739

7,200,134

487,268,054

423,315,903

398,366,874

288,379,600

248,106,788

236,834,666

163,005,427

149,745,921

131,779,001

451,385,027

397,852,709

368,613,667

383,400,470

347,517,443

322,054,249

293,271,257

259,147,147

256,150,860

$ 676,671,727

$ 606,664,590

$ 578,205,109

Our insurance subsidiaries recognized an increase in their liability for losses and loss expenses of prior years of $6.6 
million, $3.0 million and $7.2 million in 2017, 2016 and 2015, 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 those years. 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 automobile liability 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.  
The 2015 development represented 2.5% of the December 31, 2014 net carried reserves and resulted primarily from higher-than-
expected severity in the private passenger automobile liability, commercial multiple peril and commercial automobile lines of 
business in accident years prior to 2015. The majority of the 2015 development related to increases in the liability for losses and 
loss expenses of prior years for Atlantic States and Southern.

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 2017. 

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 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 

-77-

 
 
 
 
 
 
 
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. 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, 2017, 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, 2008 through 2016, 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.

-78-

 
Personal
Automobile

Accident
Year

(in thousands)

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Personal
Automobile

Accident
Year

(in thousands)

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Unaudited

At December 31, 2017

Total IBNR
Plus
Expected
Development
on Reported
Claims

Cumulative
Number of
Reported
Claims

$ 98,139

$ 101,937

$ 100,782

$ 101,388

$ 101,119

$100,819

$ 100,984

$ 100,923

$ 100,918

$

100,915

$

105,707

106,313

106,841

107,589

107,190

106,705

106,549

106,499

117,967

117,552

118,562

118,876

118,916

118,587

118,385

127,929

131,678

132,987

133,229

133,617

133,218

130,415

133,201

135,592

136,493

136,552

124,965

130,737

131,594

132,643

124,426

124,806

124,210

137,569

139,334

150,215

106,713

118,289

133,145

136,463

132,604

126,200

139,181

153,937

166,690

Total

$ 1,314,137

9

15

45

97

249

438

905

2,713

7,327

26,640

61

65

70

74

69

66

71

70

73

77

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Unaudited

$ 66,648

$ 85,262

$ 93,325

$ 97,134

$ 99,110

$100,153

$ 100,642

$ 100,712

$ 100,778

$

100,790

69,585

89,089

75,889

97,349

102,332

104,779

105,577

105,922

106,017

96,749

107,662

113,243

116,748

117,812

117,978

87,191

110,249

121,621

127,545

131,319

132,479

87,517

111,941

124,652

130,862

133,428

84,241

109,051

120,118

125,946

85,377

104,736

114,893

93,611

116,303

102,433

106,477

118,054

132,714

134,581

130,026

120,491

128,395

129,507

111,964

All outstanding liabilities before 2008, net of reinsurance

Total

1,212,999

540

Liabilities for claims and claims adjustment expenses, net of reinsurance

$

101,678

-79-

Homeowners

Accident
Year

(in thousands)

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Homeowners

Accident
Year

(in thousands)

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Unaudited

At December 31, 2017

Total IBNR
Plus
Expected
Development
on Reported
Claims

Cumulative
Number of
Reported
Claims

$ 40,989

$ 42,790

$ 42,944

$ 42,700

$ 42,839

$ 42,897

$ 42,862

$ 42,852

$ 42,844

$

42,833

$

51,054

50,621

60,315

50,333

60,729

71,256

49,998

60,248

70,461

53,962

50,137

59,972

70,436

54,794

50,887

50,405

60,355

70,381

54,468

51,121

56,916

50,419

60,440

70,297

54,351

51,122

58,378

63,359

50,433

60,443

70,351

54,281

50,874

57,680

63,925

62,443

50,435

60,542

70,479

54,381

50,988

57,332

63,053

64,064

79,283

Total

$

593,390

—

—

—

(3)

44

47

6

157

833

4,166

18

18

25

27

19

13

18

14

13

17

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Unaudited

$ 32,548

$ 40,037

$ 41,582

$ 42,095

$ 42,511

$ 42,699

$ 42,797

$ 42,817

$ 42,812

$

42,833

39,961

49,180

47,419

49,827

57,334

57,588

50,021

59,283

69,345

46,566

50,301

59,875

70,125

53,619

40,949

50,430

60,239

70,351

54,028

49,410

45,823

All outstanding liabilities before 2008, net of reinsurance

50,429

60,486

70,541

54,298

50,210

56,255

51,885

50,433

60,501

70,626

54,317

50,478

56,990

61,542

50,125

Total

50,435

60,525

70,648

54,356

51,043

57,195

62,204

61,145

67,077

577,461

15

Liabilities for claims and claims adjustment expenses, net of reinsurance

$

15,944

-80-

 
Commercial
Automobile

Accident
Year

(in thousands)

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Commercial
Automobile

Accident
Year

(in thousands)

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Unaudited

At December 31, 2017

Total IBNR
Plus
Expected
Development
on Reported
Claims

Cumulative
Number of
Reported
Claims

$ 18,164

$ 17,889

$ 17,719

$ 17,941

$ 17,960

$ 18,158

$ 18,063

$ 18,054

$ 18,051

$

18,049

$

18,735

18,549

19,315

18,998

19,913

26,642

19,015

19,346

19,569

19,430

19,461

20,695

21,477

21,490

21,756

21,746

27,157

28,570

28,893

29,112

29,107

26,557

27,720

30,606

31,435

31,278

32,902

33,749

34,751

35,240

42,760

44,544

47,326

46,526

48,323

54,302

19,449

21,713

29,487

31,648

36,404

48,213

51,412

57,353

61,484

Total

$

375,212

—

3

5

1

12

196

747

2,639

4,793

17,554

6

6

7

9

8

9

11

12

13

13

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Unaudited

$

9,204

$ 12,330

$ 14,115

$ 16,077

$ 17,110

$ 17,548

$ 18,052

$ 18,051

$ 18,051

$

18,049

9,309

12,872

10,778

15,479

14,180

13,876

17,160

18,696

19,389

19,386

19,408

16,426

19,030

20,804

21,014

21,482

19,106

24,267

26,973

28,014

28,758

13,642

20,240

23,718

27,417

29,873

16,306

23,557

26,879

31,053

22,707

31,089

39,436

23,875

35,342

27,033

Total

All outstanding liabilities before 2008, net of reinsurance

19,413

21,549

28,836

30,402

34,083

44,374

41,678

38,237

28,707

305,328

10

Liabilities for claims and claims adjustment expenses, net of reinsurance

$

69,894

-81-

 
 
Commercial
Multi-Peril

Accident
Year

(in thousands)

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Commercial
Multi-Peril

Accident
Year

(in thousands)

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Unaudited

At December 31, 2017

Total IBNR
Plus
Expected
Development
on Reported
Claims

Cumulative
Number of
Reported
Claims

$ 26,868

$ 27,693

$ 26,796

$ 26,906

$ 27,286

$ 27,023

$ 27,182

$ 27,258

$ 27,184

$

26,998

$

26,712

26,454

28,745

27,357

29,656

33,054

27,357

27,739

27,959

27,625

27,484

29,390

29,169

29,373

29,453

29,463

35,411

35,942

37,576

37,385

38,270

29,789

30,716

32,449

34,117

35,755

35,683

35,679

37,292

37,205

48,204

50,135

51,843

42,070

43,874

43,005

27,508

29,779

38,105

36,214

37,981

52,336

44,728

46,988

56,185

Total

$

396,822

—

—

—

13

33

155

608

3,028

4,991

13,847

5

6

6

7

6

6

7

6

6

6

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Unaudited

$ 16,128

$ 21,645

$ 22,991

$ 24,161

$ 25,154

$ 25,983

$ 26,760

$ 26,956

$ 27,017

$

26,996

13,675

19,356

17,007

21,560

22,017

18,773

24,977

26,212

26,780

27,287

27,357

24,749

26,832

27,768

28,681

28,906

24,767

30,286

33,526

36,722

37,759

16,666

23,384

26,634

29,370

33,327

19,875

26,216

29,159

33,614

27,920

35,520

40,936

21,837

29,419

19,660

Total

All outstanding liabilities before 2008, net of reinsurance

27,409

29,632

38,240

35,331

35,104

47,021

34,323

29,402

27,399

330,857

266

Liabilities for claims and claims adjustment expenses, net of reinsurance

$

66,231

-82-

 
 
Workers’
Compensation

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,

Accident Year

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Unaudited

At December 31, 2017

Total IBNR
Plus
Expected
Development
on Reported
Claims

Cumulative
Number of
Reported
Claims

(in thousands)

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Workers’
Compensation

$ 24,034

$ 26,361

$ 27,037

$ 26,791

$ 26,471

$ 26,226

$ 25,941

$ 25,963

$ 25,713

$

25,797

$

21,571

22,497

27,304

21,894

21,826

22,848

22,278

22,172

22,114

27,859

27,010

26,637

26,944

27,121

27,037

32,490

35,757

36,614

36,369

35,670

35,039

39,142

39,516

38,827

37,926

37,163

46,325

47,027

44,289

42,828

51,508

51,553

49,288

53,332

49,615

58,814

22,079

26,984

35,194

36,468

42,327

48,537

45,991

49,802

60,450

Total

$

393,629

61

65

98

138

211

447

996

2,470

6,741

21,116

5

4

5

6

6

6

6

6

6

6

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,

Accident Year

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Unaudited

(in thousands)

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

$

6,562

$ 14,776

$ 19,199

$ 21,933

$ 23,782

$ 24,551

$ 24,880

$ 25,017

$ 25,112

$

25,250

6,490

12,627

16,516

18,329

19,665

20,476

20,939

21,117

8,066

15,937

21,176

23,137

24,539

25,337

25,804

9,157

21,450

27,517

31,905

32,394

33,067

11,097

22,963

28,812

31,244

33,196

13,052

26,043

32,783

36,351

13,932

28,513

36,284

13,071

27,531

14,709

Total

All outstanding liabilities before 2008, net of reinsurance

21,400

26,050

33,577

34,177

38,877

40,393

34,192

30,344

15,581

299,841

3,445

Liabilities for claims and claims adjustment expenses, net of reinsurance

$

97,233

-83-

 
 
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:

(in thousands)

Net outstanding liabilities:

                      Personal automobile

                      Homeowners

                      Commercial automobile

                      Commercial multi-peril

                      Workers’ compensation

                      Other

Reinsurance recoverable:

                      Personal automobile

                      Homeowners
                      Commercial automobile

                      Commercial multi-peril

                      Workers’ compensation

                      Other

Unallocated loss adjustment expenses

Gross liability for unpaid losses and loss expenses

At December 31,

2017

$

101,678

15,944

69,894

66,231

97,233

5,404

356,384

94,091

11,465
45,201

40,685

85,528

3,831

280,801

39,487

676,672

$

$

$

The following table presents supplementary information about average historical claims duration as of December 31, 2017:

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

65.7%

17.5%

8.5%

4.4%

2.5%

0.9%

0.3%

0.1%

0.2%

—%

Homeowners

Commercial automobile

Commercial multi-peril

Workers’ compensation

80.6

47.1

50.7

28.4

16.6

18.8

17.9

31.1

1.7

12.6

9.3

16.7

0.6

10.6

9.0

8.9

0.6

6.9

5.8

5.2

0.3

2.2

3.3

2.8

0.1

1.3

1.7

1.6

—

0.1

1.1

0.7

—

—

0.2

0.8

—

—

—

0.5

9 - Borrowings 

Lines of Credit 

In July 2017, 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. The line of credit now expires in July 2020. We have the right to extend 
the term of the credit agreement for one year as of each anniversary date of the agreement. At December 31, 2017, we had 
$24.0 million in outstanding borrowings and had the ability to borrow an additional $36.0 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. At December 31, 2017, the interest rate on our outstanding borrowings was 3.82%. We pay a fee of 0.25% 
per annum on the loan commitment amount regardless of usage. The credit agreement requires our compliance with certain 

-84-

 
covenants. These covenants include minimum levels of our net worth, leverage ratio, statutory surplus and the A.M. Best 
ratings of our insurance subsidiaries. We complied with all requirements of the credit agreement during 2017.

MICO has an agreement with the Federal Home Loan Bank (“FHLB”) of Indianapolis. Through its membership, MICO 
has the ability to issue debt to the FHLB of Indianapolis in exchange for cash advances. There were no outstanding borrowings 
at December 31, 2017 or 2016. The table below presents the amount of FHLB of Indianapolis stock MICO purchased, 
collateral pledged and assets related to MICO’s agreement at December 31, 2017.

FHLB stock purchased and owned as part of the agreement

$

267,700

Collateral pledged, at par (carrying value $2,751,398)

Borrowing capacity currently available

2,850,000

2,592,075

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 had $35.0 million in outstanding advances at 
December 31, 2017. The interest rate on the advances was 1.25% at December 31, 2017. 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, 2017.

FHLB stock purchased and owned as part of the agreement

$

1,599,700

Collateral pledged, at par (carrying value $36,850,815)

Borrowing capacity currently available

37,322,954

576,324

Subordinated Debentures 

In January 2002, West Bend purchased a surplus note from MICO for $5.0 million to increase MICO’s statutory surplus. 
On December 1, 2010, Donegal Mutual purchased the surplus note from West Bend at face value. The surplus note carries an 
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 2017, 2016 and 2015.

10 - Reinsurance

Unaffiliated Reinsurers 

Our insurance subsidiaries and Donegal Mutual purchase certain third-party reinsurance on a combined basis. Le Mars, 

MICO, Peninsula and Sheboygan also have separate third-party reinsurance programs that provide certain coverage that is 
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- rating from A.M. Best. The external reinsurance our insurance subsidiaries and Donegal 
Mutual purchase includes “excess of loss reinsurance,” under which their losses are automatically reinsured, through a series of 
contracts, over a set retention (generally $1.0 million), and “catastrophic reinsurance,” under which they recover, 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 ($1.0 million in 2017, $975,000 in 2016 
and $1.5 million in 2015). For property insurance, our insurance subsidiaries have excess of loss treaties that provide for 
coverage up to $5.0 million per loss. For liability insurance, our insurance subsidiaries have excess of loss treaties that provide 
for coverage up to $50.0 million per occurrence. For workers’ compensation insurance, our insurance subsidiaries have excess 
of loss treaties that provide for coverage up to $10.0 million on any one life. Our insurance subsidiaries and Donegal Mutual 
have property catastrophe coverage through a series of layered treaties up to aggregate losses of $175.0 million for any single 
event. As many as 27 reinsurers provided coverage for 2017 on any one treaty with no reinsurer taking more than 25% of any 
one treaty. The amount of coverage provided under each of these types of reinsurance depends 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 

-85-

 
the Michigan Catastrophic Claims Association (“MCCA”).  The MCCA provides reinsurance to MICO for personal automobile 
and commercial automobile personal injury claims in the State of Michigan over a set retention.

Through December 1, 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 agreed to terminate the 
reinsurance agreement in effect at November 30, 2010 on a run-off basis. West Bend’s obligations related to all past reinsurance 
agreements with MICO remain in effect for all policies effective prior to December 1, 2010. 

For policies effective through December 31, 2014, MICO maintained a quota-share reinsurance agreement with third-party 

reinsurers to reduce its net exposures. Effective January 1, 2015, MICO no longer maintains a quota-share reinsurance 
agreement with third-party reinsurers. 

The following amounts represent ceded reinsurance transactions with unaffiliated reinsurers during 2017, 2016 and 2015:

Premiums written

Premiums earned

Losses and loss expenses

Prepaid reinsurance premiums

Liability for losses and loss expenses

Total Reinsurance

2017

2016
$ 51,241,267   $ 45,354,233   $ 40,997,351

2015

49,633,348  

44,318,542  

49,758,371

44,575,268  

18,588,114  

30,722,807

11,213,665  

9,605,746  

8,570,055

116,689,871  

103,694,418  

113,023,942

The following amounts represent total ceded reinsurance transactions with both affiliated and unaffiliated reinsurers during 

2017, 2016 and 2015: 

Premiums earned

Losses and loss expenses

Prepaid reinsurance premiums

Liability for losses and loss expenses

2017

2016
$ 310,179,267   $ 282,646,219   $ 271,712,289

2015

218,523,260  

156,479,885  

172,302,366

135,032,641  

124,255,495  

113,522,505

293,271,257  

259,147,147  

256,150,860

The following amounts represent the effect of reinsurance on premiums written for 2017, 2016 and 2015: 

Direct

Assumed

Ceded

    Net premiums written

2017

2016
$ 584,007,351   $ 537,880,237   $ 492,073,587

2015

466,087,983  
(320,956,412)

437,532,812  
406,126,275
(269,363,012)
(293,379,217)
$ 729,138,922   $ 682,033,832   $ 628,836,850

The following amounts represent the effect of reinsurance on premiums earned for 2017, 2016 and 2015: 

Direct

Assumed

Ceded

    Net premiums earned

2017
$ 561,178,447

2016
  $ 515,721,745

2015
  $ 480,210,534

451,515,575
(310,179,267)
$ 702,514,755

  423,129,271
(282,646,219)
  $ 656,204,797

  397,142,483
(271,712,289)
  $ 605,640,728

Percentage of assumed premiums earned to net premiums earned

64.3%

64.5%

65.6%

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, the 
one-time transition tax related to the transition of U.S. international tax from a worldwide tax system to a territorial tax system, 

-86-

 
 
 
 
 
 
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. While we cannot reasonably estimate the impact of the 
TCJA on our consolidated financial results for 2018 and subsequent years, we generally expect the reduction of the corporate 
income tax rate to reduce our effective tax rate and income tax expense beginning in 2018.

Our provision for income tax for 2017, 2016 and 2015 consisted of the following:

Current

Deferred

Federal income tax provision

2017

$ (2,139,061)   $
7,137,423

2016
8,496,405   $

2,030,865

2015
5,621,367

980,868

$

4,998,362

$ 10,527,270

$

6,602,235

Our effective tax rate is different from the amount computed at the statutory federal rate of 35% for 2017, 2016 and 2015. 

The reasons for such difference and the related tax effects are as follows: 

Income before income taxes

Computed “expected” taxes
Tax-exempt interest

Proration

Effect of tax reform

Dividends received deduction

Tax benefit on exercise of options

Other, net

Federal income tax provision

2017

2016
$ 12,114,462   $ 41,328,407   $ 27,592,268

2015

4,240,062  
(3,241,530)
518,948

14,464,942  
(3,951,926)
629,697

4,752,547
(508,409)
(873,515)
110,259

—
(691,616)
—

9,657,294
(4,806,855)
737,644

—
(701,658)
—

$

4,998,362

$ 10,527,270

$

6,602,235

76,173

1,715,810

The tax effects of temporary differences that give rise to significant portions of our deferred tax assets and deferred tax 

liabilities at December 31, 2017 and 2016 are as follows: 

Deferred tax assets:

Unearned premium

Loss reserves

Net operating loss carryforward - Le Mars

Alternative minimum tax credit carryforward

2017

2016

$ 15,511,854   $ 23,964,558

4,164,246  

683,979  

6,460,683

1,271,411

—  

7,357,733

Net state operating loss carryforward - DGI Parent

77,132,006

72,049,234

Net unrealized losses

Other

Total gross deferred tax assets

Less valuation allowance

Net deferred tax assets

Deferred tax liabilities:

Deferred policy acquisition costs

Other

Total gross deferred tax liabilities

Net deferred tax asset

-87-

713,549

2,300,595  

100,506,229  
(77,396,473)
23,109,756  

1,213,836

3,307,286

115,624,741
(72,490,012)
43,134,729

12,660,871  

19,708,220

3,320,042  

4,383,096

15,980,913  

24,091,316

$

7,128,843   $ 19,043,413

 
 
 
 
   
 
   
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, 2017 and 2016, we established a valuation allowance of $264,467 and $440,778, 
respectively, 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 $77.1 million and $72.0 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 $23.1 million 
and $43.1 million at December 31, 2017 and 2016, 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 2014 through 2017 remained open for examination by tax authorities at December 31, 2017. The net operating 
loss carryforward of $3.3 million of Le Mars will begin to expire in 2020 if not utilized and is subject to an annual limitation of 
approximately $376,000. 

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 not purchase any 
shares of our Class A common stock under this program during 2017 or 2016. We purchased 57,658 shares of our Class A 
common stock under this program during 2015. We have purchased a total of 57,658 shares of our Class A common stock under 
this program from its inception through December 31, 2017.

On December 18, 2015, we and Donegal Mutual entered into a Stock Purchase and Standstill Agreement (the “Purchase 
Agreement”) with Gregory M. Shepard (“Mr. Shepard”).  Under the terms of the Purchase Agreement, we purchased 2,000,000 
shares of our Class A common stock from Mr. Shepard on December 22, 2015 for a price of $33.0 million, or $16.50 per share, 
representing a premium of approximately $5.8 million from the market price of our Class A common stock on the date of the 
Purchase Agreement.  We reported this premium in excess of the market price as an expense in our consolidated statements of 
income and comprehensive income for 2015 that we include in this Form 10-K Report.  We borrowed $33.0 million under our 
existing line of credit with M&T Bank to fund the purchase.  The Purchase Agreement contains a number of typical “standstill” 
provisions pursuant to which Mr. Shepard and any affiliate of Mr. Shepard shall not take a number of “control-seeking” actions 
with respect to us for a period of 25 years from the date of the Purchase Agreement.

 At December 31, 2017 and 2016, our treasury stock consisted of 3,002,588 and 72,465 shares of Class A common stock 

and Class B common stock, respectively. 

13 - Stock Compensation Plans 

Equity Incentive Plans 

Since 1996, we have maintained an Equity Incentive Plan for Employees. During 2015, 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. 

-88-

      
Since 1996, we have maintained an Equity Incentive Plan for Directors. During 2015, 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 9,000 shares of restricted stock on January 3, 2017 under our director plan. We issued 8,500 
shares of restricted stock on January 4, 2016 under our director plan. We issued 7,200 shares of restricted stock on January 2, 
2015 under our director plan. 

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 
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 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%, an expected life of three years, an expected volatility of 20% and an expected 
dividend yield of 3%.  

The weighted-average grant date fair value of options we granted during 2015 was $1.55. We calculated this fair value 
based upon a risk-free interest rate of 1.86%, an expected life of three years, an expected volatility of 23% and an expected 
dividend yield of 4%.  

We charged compensation expense for our stock compensation plans against income before income taxes of $2.0 million, 

$2.5 million and $2.6 million for the years ended December 31, 2017, 2016 and 2015, respectively, with a corresponding 
income tax benefit of $692,164, $864,210 and $896,753. At December 31, 2017 and 2016, our total unrecognized 
compensation cost related to non-vested share-based compensation granted under our stock compensation plans was $2.9 
million and $3.7 million, respectively. We expect to recognize this cost over a weighted average period of 1.8 years. 

During 2017, we received cash from option exercises under all stock compensation plans of $13.4 million. We realized 
actual tax benefits for the tax deductions from option exercises of share-based compensation of $873,515 for 2017. During 
2016, we received cash from option exercises under all stock compensation plans of $11.2 million. We realized actual tax 
benefits for the tax deductions from option exercises of share-based compensation of $788,700 for 2016. During 2015, we 
received cash from option exercises under all stock compensation plans of $13.7 million. We realized actual tax benefits for the 
tax deductions from option exercises of share-based compensation of $437,474 for 2015. No further shares are available for 
future option grants for plans in effect prior to 2015.

-89-

 
 
Information regarding activity in our stock option plans follows: 

Outstanding at December 31, 2014

Granted - 2015

Exercised - 2015

Forfeited - 2015

Expired - 2015

Outstanding at December 31, 2015

Granted - 2016

Exercised - 2016

Forfeited - 2016

Outstanding at December 31, 2016

Granted - 2017

Exercised - 2017

Forfeited - 2017

Outstanding at December 31, 2017

Exercisable at:

December 31, 2015

December 31, 2016

December 31, 2017

Number of
Options
8,183,430  

Weighted-
Average
Exercise Price
Per Share
$14.69

1,710,500  
(983,370)  
(114,967)  
(641)  
8,794,952  

1,417,500  
(832,467)  
(41,337)  
9,338,648  

943,000  
(924,019)  
(93,167)  
9,264,462  

5,250,338  

6,347,470

6,946,677  

13.64

13.91

15.30

14.00

14.57

16.44

13.44

14.97

14.95

17.58

14.45

15.43

$15.26

$14.42

$14.77

$14.90

Shares available for future option grants at December 31, 2017 totaled 974,001 shares under all plans. 

The following table summarizes information about stock options outstanding at December 31, 2017: 

Grant Date

July 27, 2011

December 20, 2012

December 19, 2013

December 18, 2014

December 17, 2015

December 15, 2016

December 21, 2017

Exercise Price
$12.50

14.50

15.90

15.80

13.64

16.48

17.60

Number of
Options
Outstanding

1,027,606

1,062,319

2,102,006

1,362,415

1,404,174

1,368,942

937,000

Weighted-Average
Remaining
Contractual Life
4.0 years

5.0 years

6.0 years

7.0 years

3.0 years

4.0 years

5.0 years

    Total

9,264,462    

Number of
Options
Exercisable

1,027,606

1,062,319

2,102,006

1,362,415

936,022

456,309

—

6,946,677

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. The plan extends over a 10-year period and 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). 

-90-

 
 
 
 
 
 
A summary of plan activity follows: 

January 1, 2015

July 1, 2015

January 1, 2016

July 1, 2016

January 1, 2017

July 1, 2017

Shares Issued

Price
$12.40

12.95

11.97

11.83

13.76

13.52

Shares
17,662

20,006

18,387

22,418

18,512

25,155

On January 1, 2018, we issued 20,662 shares at a price of $13.34 per share under this plan.

Agency Stock Purchase Plan 

Since 1996, we have maintained an Agency Stock Purchase Plan. During 2015, 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.  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 2017, 2016 and 2015, we issued 104,418, 
99,800 and 84,198 shares, respectively, under this plan. The expense we recognized under the plan was not material.

-91-

 
 
 
 
 
 
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: 

Atlantic States:

Statutory capital and surplus

Statutory unassigned surplus

Statutory net (loss) income

Southern:

Statutory capital and surplus

Statutory unassigned surplus

Statutory net (loss) income

Le Mars:

Statutory capital and surplus

Statutory unassigned surplus

Statutory net (loss) income

Peninsula:

Statutory capital and surplus

Statutory unassigned surplus

Statutory net (loss) income

Sheboygan:

Statutory capital and surplus

Statutory unassigned surplus

Statutory net (loss) income

MICO:

Statutory capital and surplus

Statutory unassigned surplus

Statutory net income

2017

2016

2015

$ 223,170,835   $ 227,907,377   $ 207,636,824

161,760,924  
(312,221)  

167,872,138  

149,257,062

15,750,876  

13,352,784

54,503,581  

63,331,001  

61,742,861

2,914,532  
(3,375,434)

11,881,309  

10,459,840

1,774,299

2,301,009

23,434,801  

25,543,803  

26,168,865

10,394,533  
(1,679,335)

12,614,756  

603,226

13,367,321
(600,608)

39,396,818  

41,977,034  

41,838,137

21,148,253  
(841,119)  

23,826,681  

23,813,003

966,391  

1,976,093

13,823,118  

13,129,143  

13,254,117

554,498
(46,116)

914,773

644,344

1,107,421

1,719,703

52,796,379  

49,863,705  

46,199,534

26,162,540  

23,380,942  

19,894,850

7,931,774  

7,187,213  

3,562,536

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, 2017 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 2018 are $22.3 million from 
Atlantic States, $5.5 million from Southern, $2.3 million from Le Mars, $1.6 million from Peninsula, $0 from Sheboygan and 
$5.3 million from MICO, or a total of approximately $37.0 million.

15 - Reconciliation of Statutory Filings to Amounts Reported Herein 

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. 

-92-

 
 
   
   
 
   
   
 
   
   
 
   
   
 
   
   
 
   
   
Reconciliations of statutory net income and capital and surplus, as determined using SAP, to the amounts included in the 

accompanying GAAP financial statements are as follows: 

Statutory net income of insurance subsidiaries

Increases (decreases):

Deferred policy acquisition costs

Deferred federal income taxes

Salvage and subrogation recoverable

Consolidating eliminations and adjustments

Parent-only net income (loss)

Net income as reported herein

Statutory capital and surplus of insurance subsidiaries

Increases (decreases):

Deferred policy acquisition costs

Deferred federal income taxes
Salvage and subrogation recoverable

Non-admitted assets and other adjustments, net

Fixed maturities

Parent-only equity and other adjustments

Stockholders’ equity as reported herein

16 - Supplementary Cash Flow Information 

Year Ended December 31,

2017
1,677,549

2016
$ 26,926,349

2015
$ 22,311,517

$

3,980,664

1,334,410

1,199,200
(13,534,428)
12,458,705

4,200,808
(2,030,865)
1,502,600
(12,327,517)
12,529,762

$

7,116,100

$ 30,801,137

3,809,780
(168,395)
1,082,800
(3,679,277)
(2,366,392)
$ 20,990,033

December 31,

2017
$ 407,125,532

2016
$ 421,752,063

2015
$ 396,840,338

60,289,860
(14,422,511)
17,976,600

56,309,196
(20,843,506)
16,777,400

1,960,089
(8,748,140)
(15,485,326)
$ 448,696,104

1,689,814
(7,271,932)
(29,797,715)
$ 438,615,320

52,108,388
(16,930,202)
15,274,800

2,441,591

957,401
(42,303,748)
$ 408,388,568

The following table reflects net income taxes and interest we paid during 2017, 2016 and 2015:

Income taxes

Interest

2017
3,050,000   $

2016
7,305,000   $

$

1,341,706  

1,377,247  

2015
7,100,000

870,675

17 - Earnings Per Share 

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. 

-93-

 
 
 
 
 
 
 
 
 
 
 
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: 

(in thousands, except per share amounts)
Basic earnings per share:

Numerator:

Allocation of net income

Denominator:

Weighted-average shares outstanding

Basic earnings per share
Diluted earnings per share:

Numerator:

Allocation of net income

Denominator:

Number of shares used in basic computation
Weighted-average effect of dilutive securities
Add: Director and employee stock options

Number of shares used in per share computations

Year Ended December 31,
2016

2015

2017

$

$

$

5,879   $

24,885   $

17,155

21,799  

20,917  

0.27   $

1.19   $

22,046

0.78

5,879   $

24,885   $

17,155

21,799  

20,917  

22,046

843  
22,642  

613  
21,530  

348
22,394

0.77

Diluted earnings per share

$

0.26   $

1.16   $

We used the following information in the basic and diluted per share computations for our Class B common stock: 

(in thousands, except per share amounts)

Basic and diluted earnings per share:

Numerator:

Allocation of net income

Denominator:

Weighted-average shares outstanding

Basic and diluted earnings per share

Year Ended December 31,

2017

2016

2015

$

$

1,237   $

5,916   $

3,835

5,577  

0.22   $

5,577  

1.06   $

5,577

0.69

During 2017, we did not include options to purchase 937,000 shares of our Class A common stock in the computation of 
diluted earnings per share because the exercise price of the options was greater than the average market price of our Class A 
common stock. 

-94-

 
   
   
 
   
   
 
   
   
 
   
   
 
   
   
 
   
   
 
   
   
 
   
   
 
   
   
 
   
   
18 - Condensed Financial Information of Parent Company 

December 31,
Assets

Condensed Balance Sheets
(in thousands) 

2017

2016

Investment in subsidiaries/affiliates (equity method)

$

509,011   $

510,731

Short-term investments

Cash

Property and equipment

Other

Total assets

Liabilities and Stockholders’ Equity

Liabilities

Cash dividends declared to stockholders

Borrowings under lines of credit

Other

Total liabilities

Stockholders’ equity

Total liabilities and stockholders’ equity

29  

3,237  

994  

1,479  

30

1,820

342

1,010

$

514,750   $

513,933

$

3,842   $

59,000  

3,212  

66,054  

3,623

69,000

2,695

75,318

448,696  

438,615

$

514,750   $

513,933

-95-

 
   
 
   
 
   
Condensed Statements of Income and Comprehensive Income
(in thousands) 

2017

2016

2015

$

13,000

$

13,000

$

2,131

15,131

1,433

—

1,929

3,362

11,769

690

12,459
(5,343)
7,116

1,759

14,759

1,413

—

1,747

3,160

11,599

931

12,530

18,271

3,875

2,028

5,903

2,451

5,780

1,066

9,297

(3,394)
1,028

(2,366)
23,356

$

$

$

30,801

$

20,990

7,116

$

30,801

$

20,990

46

46

$

7,162

$

(3,028)
(3,028)
27,773

$

(4,579)
(4,579)
16,411

Year Ended December 31,
Statements of Income

Revenues

Dividends from subsidiaries

Other

Total revenues

Expenses

Operating expenses

Premium paid on purchase of treasury stock

Interest

Total expenses

Income (loss) before income tax benefit and equity in

undistributed net (loss) income of subsidiaries

Income tax benefit
Income (loss) before equity in undistributed net (loss) income of

subsidiaries

Equity in undistributed net (loss) income of subsidiaries

Net income

Statements of Comprehensive Income

Net income

Other comprehensive income (loss), net of tax

Unrealized gain (loss) - subsidiaries

Other comprehensive income (loss),  net of tax

Comprehensive income

-96-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Statements of Cash Flows
(in thousands)

Year Ended December 31,
Cash flows from operating activities:

Net income

Adjustments:

Equity in undistributed net (loss) income of subsidiaries

Other

Net adjustments

   Net cash provided (used)

Cash flows from investing activities:

Net sale of short-term investments

Net purchase of property and equipment

Investment in subsidiaries

Other

Net cash used

Cash flows from financing activities:

Cash dividends paid

Issuance of common stock

Payments on line of credit

Borrowings under lines of credit

Purchase of treasury stock

Net cash (used) provided

Net change in cash

Cash at beginning of year

Cash at end of year

2017

2016

2015

$

7,116

$

30,801

$

20,990

5,343
(401)
4,942

12,058

1
(788)
(2,992)
(1)
(3,780)

(14,821)
17,960
(10,000)
—

—
(6,861)
1,417

1,820

(18,271)
(27)
(18,298)
12,503

2
(11)
(2,393)
—
(2,402)

(14,085)
16,651
(12,000)
—

—
(9,434)
667

1,153

(23,356)
539
(22,817)
(1,827)

498
(23)
(2,427)
—
(1,952)

(14,454)
18,468
(9,500)
37,000
(28,125)
3,389
(390)
1,543

$

3,237

$

1,820

$

1,153

19 - Segment Information 

We have four reportable segments, which consist of our investment function, our personal lines of insurance, our 
commercial lines of insurance and our investment in DFSC. Using independent agents, our insurance subsidiaries market 
personal lines of insurance to individuals and commercial lines of insurance to small and medium-sized businesses. 

We evaluate the performance of the personal lines and commercial lines primarily based upon our insurance subsidiaries’ 

underwriting results as determined under SAP for our total business. 

We do not allocate assets to the personal and commercial 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. 

-97-

 
 
 
 
 
 
 
 
 
 
 
 
 
Financial data by segment is as follows: 

Revenues:

Premiums earned:

Commercial lines

Personal lines

GAAP premiums earned

Net investment income

Realized investment gains

Equity in earnings of DFSC

Other

Total revenues

Income before income taxes:

Underwriting (loss) income:

Commercial lines

Personal lines

SAP underwriting (loss) income

GAAP adjustments

GAAP underwriting (loss) income

Net investment income

Realized investment gains

Equity in earnings of DFSC

Premium paid on purchase of treasury stock

Other

Income before income taxes

2017

2016

2015

(in thousands)

$

318,391

$

295,077

$

261,286

384,124

702,515

23,527

5,705

1,622

5,658

361,128

656,205

22,633

2,526

1,086

5,973

344,355

605,641

20,950

1,934

1,277

6,585

$

739,027

$

688,423

$

636,387

2017

2016

2015

(in thousands)

$

13,263
(39,042)
(25,779)
4,408
(21,371)
23,527

5,705

1,622

—

2,631

$

$

18,284
(10,745)
7,539

4,642

12,181

22,633

2,526

1,086

—

2,902

9,259
(6,414)
2,845

3,344

6,189

20,950

1,934

1,277
(5,780)
3,022

$

12,114

$

41,328

$

27,592

20 - Guaranty Fund and Other Insurance-Related Assessments

Our insurance subsidiaries’ liabilities for guaranty fund and other insurance-related assessments were $1.6 million and $1.5 

million at December 31, 2017 and 2016, respectively. These liabilities included $562,799 and $447,620 related to surcharges 
collected by our insurance subsidiaries on behalf of regulatory authorities for 2017 and 2016, respectively. 

-98-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21 - Interim Financial Data (unaudited) 

Net premiums earned

Total revenues

Net losses and loss expenses

Net income (loss)

Net earnings (loss) per common share:

Class A common stock - basic

Class A common stock - diluted

Class B common stock - basic and diluted

Net premiums earned

Total revenues

Net losses and loss expenses

Net income

Net earnings per common share:

Class A common stock - basic

Class A common stock - diluted

Class B common stock - basic and diluted

2017

First Quarter

Fourth Quarter
$ 169,156,147   $ 175,014,872   $ 177,283,816   $ 181,059,920

Second Quarter

Third Quarter

178,970,963  

183,580,716  

185,716,027  

190,758,831

114,433,458  

5,104,818  

128,005,914  
(2,318,648)  

114,386,379  

7,108,574  

130,442,303
(2,778,644)

0.19  

0.18

0.17  

(0.09)  
(0.08)
(0.08)  

2016

0.27  

0.26

0.24  

(0.10)
(0.10)
(0.11)

First Quarter

Fourth Quarter
$ 158,475,279   $ 161,942,637   $ 166,809,851   $ 168,977,030

Second Quarter

Third Quarter

166,068,776  

169,846,867  

175,311,263  

177,196,114

95,578,065  

103,193,915  

111,174,963  

113,368,960

11,848,913  

8,584,654  

4,813,404  

5,554,166

0.46  

0.46

0.42  

0.33  

0.32

0.30  

0.19  

0.18

0.16  

0.21

0.20

0.18

-99-

 
 
 
   
   
   
 
 
 
   
   
   
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, 2017 and 2016, the related consolidated statements of income and comprehensive income, stockholders’ 
equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and 
financial statement schedule as listed in the accompanying index to consolidated financial statements and schedule 
(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, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period 
ended December 31, 2017, 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, 2017, based on criteria 
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the 
Treadway Commission, and our report dated March 9, 2018 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 at December 31, 2017 and 2016, was 
$38,773,420 and $37,884,918, respectively, and its equity in earnings of Donegal Financial Services Corporation was 
$1,621,605, $1,086,157, and $1,277,229 for the years 2017, 2016, and 2015, 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. 

Basis for Opinion

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.

We have served as the Company’s auditor since 1986.

Philadelphia, Pennsylvania 
March 9, 2018 

-100-

 
Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

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, 2017 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, 2017, 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 - 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, 2017.

The effectiveness of our internal control over financial reporting at December 31, 2017 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 changes to our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 

15d-15(f) under the Exchange Act) that occurred during the fourth quarter of 2017 that have materially affected, or are 
reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.     Other Information.

None.

-101-

 
     
     
 
 
Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of Donegal Group Inc.: 

Opinion on Internal Control Over Financial Reporting 

We have audited Donegal Group, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of 
December 31, 2017, based on criteria established in Internal 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, 2017, based on criteria established in Internal 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, 2017 and 2016, the related consolidated 
statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year 
period ended December 31, 2017, and the related notes and financial statement schedule as listed in the accompanying index to 
consolidated financial statements and schedule (collectively, the “consolidated financial statements”), and our report dated 
March 9, 2018 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion 

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 in Item 9A. 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 9, 2018

-102-

 
Item 10.     Directors, Executive Officers and Corporate Governance.

PART III

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, 2018 relating to our annual meeting of stockholders that we will hold on April 19, 2018, or our Proxy Statement. We 
respond to this Item with respect to our executive officers by reference to Part I of this Form 10-K Report.

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.

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.

We incorporate the response to this Item 12 by reference to our Proxy Statement.

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.

We incorporate the response to this Item 14 by reference to our Proxy Statement.

-103-

 
 
 
 
 
PART IV

Item 15.     Exhibits, Financial Statement Schedules.

(a)  Financial statements, financial statement schedule and exhibits filed:

(a)  Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firm

Donegal Group Inc. and Subsidiaries:

Consolidated Balance Sheets at December 31, 2017 and 2016

Consolidated Statements of Income and Comprehensive Income for each of the years in the three-year period

ended December 31, 2017, 2016 and 2015

Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended

December 31, 2017, 2016 and 2015

Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31,

2017, 2016 and 2015

Notes to Consolidated Financial Statements

Report and Consent of Independent Registered Public Accounting Firm

(Filed as Exhibit 23.1)

Consent of Independent Registered Public Accounting Firm

(Filed as Exhibit 23.2)

(b)  Financial Statement Schedule

Schedule III — Supplementary Insurance Information

Consolidated Financial Statements of Donegal Financial Services Corporation

Page

100

58

59

60

61

62

108

Filed
herewith

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.

(c)  Exhibits

Description of Exhibits

  Reference

Exhibit No.

3.1

3.2

Certificate of Incorporation of Donegal Group Inc., as amended.

Amended and Restated By-laws of Donegal Group Inc.

Management Contracts and Compensatory Plans or Arrangements

10.1

10.2

10.3

10.4

10.5

10.6

Donegal Group Inc. 2011 Equity Incentive Plan for Employees.

Donegal Group Inc. 2011 Equity Incentive Plan for Directors.

Donegal Group Inc. 2011 Employee Stock Purchase Plan.

Donegal Group Inc. 2013 Equity Incentive Plan for Employees.

Donegal Group Inc. 2013 Equity Incentive Plan for Directors.

Employment Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company,
Donegal Group Inc. and Donald H. Nikolaus.

-104-

(a)

(i)

(c)

(c)

(c)

(d)

(d)

(e)

 
 
 
 
10.7

10.8

10.9

10.10

10.11

10.12

10.13

10.14

10.15

10.16

10.17

10.18

10.19

Consulting Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company,
Donegal Group Inc. and Donald H. Nikolaus.

Employment Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company,
Donegal Group Inc. and Kevin G. Burke.

Employment Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company,
Donegal Group Inc. and Cyril J. Greenya.

Employment Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company,
Donegal Group Inc. and Jeffrey D. Miller.

Employment Agreement dated as of July 18, 2013 among Donegal Mutual Insurance Company,
Donegal Group Inc. and Sanjay Pandey.

Employment Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company,
Donegal Group Inc. and Robert G. Shenk.

Employment Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company,
Donegal Group Inc. and Daniel J. Wagner.

Donegal Mutual Insurance Company 401(k) Plan.

Amendment No. 1 effective January 1, 2000 to Donegal Mutual Insurance Company 401(k) Plan.

Amendment No. 2 effective January 6, 2000 to Donegal Mutual Insurance Company 401(k) Plan.

Amendment No. 3 effective July 23, 2001 to Donegal Mutual Insurance Company 401(k) Plan.

Amendment No. 4 effective January 1, 2002 to Donegal Mutual Insurance Company 401(k) Plan.

Amendment No. 5 effective December 31, 2001 to Donegal Mutual Insurance Company 401(k)
Plan.

10.20

  Amendment No. 6 effective July 1, 2002 to Donegal Mutual Insurance Company 401(k) Plan.

10.21

  Donegal Group Inc. Cash Incentive Bonus Plan.

10.22

10.23

Donegal Group Inc. 2015 Equity Incentive Plan for Employees.

Donegal Group Inc. 2015 Equity Incentive Plan for Directors.

Other Material Contracts

10.24

10.25

10.26

10.27

10.28

10.29

10.30

10.31

Amended and Restated Proportional Reinsurance Agreement dated March 1, 2010 between
Donegal Mutual Insurance Company and Atlantic States Insurance Company.

Amended and Restated Tax Sharing Agreement dated December 1, 2010 among Donegal Group
Inc., Atlantic States Insurance Company, Southern Insurance Company of Virginia, Le Mars
Insurance Company, The Peninsula Insurance Company, Peninsula Indemnity Company and
Michigan Insurance Company.

Amended and Restated Services Allocation Agreement dated December 1, 2010 among Donegal
Group Inc., Atlantic States Insurance Company, Southern Insurance Company of Virginia, Le Mars
Insurance Company, The Peninsula Insurance Company, Peninsula Indemnity Company and
Michigan Insurance Company.

Quota-share Reinsurance Agreement dated December 1, 2010 between Donegal Mutual Insurance
Company and Michigan Insurance Company.

Donegal Group Inc. 2015 Agency Stock Purchase Plan.

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.

Third Amendment to Credit Agreement between Donegal Group Inc. and Manufacturers and
Traders Trust Company dated June 1, 2012 and Fourth Amendment to Credit Agreement dated
December 5, 2012.

Fifth Amendment to Credit Agreement between Donegal Group Inc. and Manufacturers and
Traders Trust Company dated June 1, 2013.

-105-

(e)

(e)

(e)

(e)

(p)

(e)

(e)

(f)

(f)

(b)

(b)

(b)

(b)

(g)

(t)

(q)

(q)

(j)

(k)

(k)

(k)

(l)

(m)

(n)

(o)

 
 
 
 
 
 
 
 
 
 
 
10.32

10.33

10.34

10.35

10.36

14

21

Sixth Amendment to Credit Agreement between Donegal Group Inc. and Manufacturers and
Traders Trust Company dated June 1, 2014.

Seventh Amendment to Credit Agreement between Donegal Group Inc. and Manufacturers and
Traders Trust Company dated June 1, 2015.

Eighth Amendment to Credit Agreement between Donegal Group Inc. and Manufacturers and
Traders Trust Company dated July 1, 2016.

(p)

(s)

(u)

Ninth Amendment to Credit Agreement between Donegal Group Inc. and Manufacturers and
Traders Trust Company dated July 1, 2017.

Filed
herewith

Stock Purchase and Standstill Agreement dated as of December 18, 2015 among Donegal Mutual
Insurance Company, Donegal Group Inc. and Gregory M. Shepard.

Code of Business Conduct and Ethics.

Subsidiaries of Registrant.

23.1

Report and Consent of Independent Registered Public Accounting Firm.

23.2

Consent of Independent Registered Public Accounting Firm.

31.1

Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer.

31.2

Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer.

32.1

Section 1350 Certification of Chief Executive Officer.

32.2

Section 1350 Certification of Chief Financial Officer.

Exhibit 10
1.INS

Exhibit 10
1.SCH

Exhibit 10
1.PRE

Exhibit 10
1.CAL

Exhibit 10
1.LAB

Exhibit 10
1.DEF

XBRL Instance Document

XBRL Taxonomy Extension Schema Document

XBRL Taxonomy Presentation Linkbase Document

XBRL Taxonomy Calculation Linkbase Document

XBRL Taxonomy Label Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

(a)  We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-Q for the quarterly period ended 

March 31, 2013.

(b)  We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended 

December 31, 2001.

(c)  We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated April 22, 2011.
(d)  We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated April 22, 2013.
(e)  We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated August 3, 2011.
(f)  We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended 

December 31, 1999.

(g)  We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended 

December 31, 2002.

(h)  We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended 

December 31, 2003.

-106-

(r)

(h)

Filed
herewith

Filed
herewith

Filed
herewith

Filed
herewith

Filed
herewith

Filed
herewith

Filed
herewith

Filed
herewith

Filed
herewith

Filed
herewith

Filed
herewith

Filed
herewith

Filed
herewith

 
 
 
 
 
 
 
 
(i)  We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated July 18, 2008.
(j)  We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended 

December 31, 2009.

(k)  We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-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 Form S-3 registration statement filed on 

April 28, 2015.

(m)    We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended 

December 31, 2011.

(n)    We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended 

December 31, 2012.

(o)    We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended 

December 31, 2013.

(p)    We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended 

December 31, 2014.

(q)    We incorporate such exhibit by reference to the description 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)    We incorporate such exhibit by reference to the like-described exhibit in Registrant's Form 8-K Report dated December 22, 2015.

        (s)     We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended                                     

December 31, 2015.

(t)     We incorporate such exhibit by reference to the description of such plan in Registrant’s definitive proxy statement for its Annual          

Meeting of Stockholders held on April 20, 2017 filed on March 16, 2017.

(u)     We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended                                     

December 31, 2016.

-107-

DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION

Years Ended December 31, 2017, 2016 and 2015
($ in thousands)

Segment

Year Ended December 31, 2017

Personal lines

Commercial lines

Investments

Year Ended December 31, 2016

Personal lines

Commercial lines

Investments

Year Ended December 31, 2015

Personal lines

Commercial lines

Investments

Net
Premiums
Earned

Net
Investment
Income

Net Losses
and Loss
Expenses

Amortization
of Deferred
Policy
Acquisition
Costs

Other
Underwriting
Expenses

Net
Premiums
Written

$ 384,124

$

— $ 289,924

$

62,916

$

63,721

$ 400,023

318,391

—

197,344

52,149

52,817

329,116

—

23,527

—

—

—

—

$ 702,515

$ 361,128

295,077

—

$ 656,205

$ 344,355

261,286

$

$

$

$

23,527

$ 487,268

$ 115,065

$ 116,538

$ 729,139

— $ 247,323

$

59,367

$

59,688

$ 371,657

—

175,993

48,509

48,771

310,377

22,633

—

—

—

—

22,633

$ 423,316

$ 107,876

$ 108,459

$ 682,034

— $ 235,717

$

56,581

$

55,556

$ 352,327

—

162,650

42,932

42,154

276,510

—

20,950

—

—

—

—

$ 605,641

$

20,950

$ 398,367

$

99,513

$

97,710

$ 628,837

-108-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
($ in thousands)

Segment

2017

Personal lines

Commercial lines

Investments

2016

Personal lines

Commercial lines

Investments

At December 31,

Deferred
Policy
Acquisition
Costs

Liability
For Losses
and Loss
Expenses

Unearned
Premiums

Other Policy
Claims and
Benefits
Payable

$

33,823

$ 239,542

$ 282,439

$

$

$

26,467

437,130

221,018

—

—

—

60,290

$ 676,672

$ 503,457

31,477

$ 217,793

$ 260,525

24,832

388,872

205,530

—

—

—

$

$

$

56,309

$ 606,665

$ 466,055

$

—

—

—

—

—

—

—

—

See accompanying Report and Consent of Independent Registered Public Accounting Firm.

-109-

 
 
 
 
 
 
 
 
 
 
 
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.

SIGNATURES

DONEGAL GROUP INC.
By:   /s/ Kevin G. Burke  

Kevin G. Burke, President and Chief Executive
Officer

Date: March 9, 2018

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

/s/ Kevin G. Burke

Kevin G. Burke

/s/ Jeffrey D. Miller

Jeffrey D. Miller

/s/ Scott A. Berlucchi

Scott A. Berlucchi

/s/ Robert S. Bolinger

Robert S. Bolinger

/s/ Patricia A. Gilmartin

Patricia A. Gilmartin

/s/ Jack L. Hess

Jack L. Hess

/s/ Barry C. Huber

Barry C. Huber

/s/ Kevin M. Kraft, Sr.

Kevin M. Kraft, Sr.

/s/ Jon M. Mahan

Jon M. Mahan

Title

  President, Chief Executive Officer and a Director

(principal executive officer)

  Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)

  Director 

  Director 

Director 

Director 

Director 

Director 

Director 

/s/ S. Trezevant Moore, Jr.

Director 

S. Trezevant Moore, Jr.

Director 

Donald H. Nikolaus

/s/ Richard D. Wampler, II

Director 

Richard D. Wampler, II

-110-

Date

March 9, 2018

March 9, 2018

March 9, 2018

March 9, 2018

March 9, 2018

March 9, 2018

March 9, 2018

March 9, 2018

March 9, 2018

March 9, 2018

March 9, 2018

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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[THIS PAGE INTENTIONALLY LEFT BLANK]

Donegal Group

CORPORATE INFORMATION

ANNUAL MEETING
April 19, 2018 at 10:00 a.m. at the:

Cameron Estate Inn
1855 Mansion Lane
Mount Joy, Pennsylvania 17552

CORPORATE OFFICES
1195 River Road
P.O. Box 302
Marietta, Pennsylvania 17547-0302
(800) 877-0600
E-mail Address:
Donegal Web Site: www.donegalgroup.com

investors@donegalgroup.com

TRANSFER AGENT
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, Kentucky 40233
(800) 317-4445
Web Site: www.computershare.com
Hearing Impaired: TDD: 800-952-9245

DIVIDEND REINVESTMENT
AND STOCK PURCHASE PLAN
We offer a dividend reinvestment and stock
purchase plan through our transfer agent.
For information contact:
Donegal Group Inc.
Dividend Reinvestment and

Stock Purchase Plan

Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, Kentucky 40233

STOCKHOLDERS
The following represent the number
of our common stockholders of record
as of December 31, 2017:

Class A common stock
Class B common stock

1,859
290

BOARD OF DIRECTORS
Donald H. Nikolaus

Chairman of the Board

Scott A. Berlucchi
Robert S. Bolinger
Kevin G. Burke

and a Director

Director
Director
President and Chief
Executive Ofﬁcer
and a Director

Director
Patricia A. Gilmartin
Director
Barry C. Huber
Director
Jack L. Hess
Director
Kevin M. Kraft, Sr.
Jon M. Mahan
Director
S. Trezevant Moore, Jr. Director
Richard D. Wampler, II Director

OFFICERS
Kevin G. Burke

President and Chief
Executive Ofﬁcer

Jeffrey D. Miller

Executive Vice President

Cyril J. Greenya
Christina M. Hoffman
Sanjay Pandey

Robert G. Shenk
V. Anthony Viozzi

and Chief Financial Ofﬁcer

Senior Vice President
Senior Vice President
Senior Vice President and
Chief Information Ofﬁcer

Senior Vice President
Senior Vice President and
Chief Investment Ofﬁcer

Daniel J. Wagner

Senior Vice President

Jason M. Crumbling

and Treasurer
Vice President and

Controller

Sheri O. Smith

Vice President and

Secretary

Michelle M. Post

Assistant Secretary

1195 River Road, P.O. Box 302
Marietta, PA 17547-0302
(717) 426-1931

www.donegalgroup.com