Providing peace of mind to our policyholders. ANNUAL REPORT20221195 River Road, P.O. Box 302Marietta, PA 17547-0302(800) 877-0600www.donegalgroup.comDG22 Report Cover_030323 PRESS.indd 1DG22 Report Cover_030323 PRESS.indd 13/3/23 3:38 PM3/3/23 3:38 PM Donegal Group Inc. is an insurance holding company that offers property and casualty insurance through its wholly owned insurance subsidiaries. Our Class A common stock and Class B common stock trade on the NASDAQ Global Select Market under the symbols DGICA and DGICB, respectively.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 commercial and personal insurance products through a network of independent insurance agencies in 24 states.We are focused on several primary strategies, including achieving sustained excellent financial performance, strategically modernizing our operations and processes to transform our business, capitalizing on opportunities to grow profitably and delivering a superior experience to our agents and customers.DONEGAL GROUP INC ANNUAL REPORTBeing there when it matters most.BOARD OF DIRECTORSKevin G. Burke Chairman of the Board and a DirectorScott A. Berlucchi DirectorDennis J. Bixenman DirectorJack L. Hess DirectorBarry C. Huber DirectorDavid C. King DirectorKevin M. Kraft, Sr. DirectorJon M. Mahan DirectorS. Trezevant Moore, Jr. DirectorAnnette B. Szady DirectorRichard D. Wampler, II DirectorOFFICERS Kevin G. Burke President and Chief Executive OfficerJeffrey D. Miller Executive Vice President and Chief Financial OfficerKristi S. Altshuler Senior Vice President and Chief Analytics Officer W. Daniel DeLamater Senior Vice President William A. Folmar Senior Vice President Jeffery T. Hay Senior Vice President Christina M. Hoffman Senior Vice President and Chief Risk OfficerMatthew T. Hudnall Senior Vice PresidentRobert R. Long, Jr. Senior Vice President and General Counsel Sanjay Pandey Senior Vice President and Chief Information OfficerDavid W. Sponic Senior Vice PresidentV. Anthony Viozzi Senior Vice President and Chief Investment OfficerDaniel J. Wagner Senior Vice President and TreasurerDavid B. Bawel Vice President Jason M. Crumbling Vice President and ControllerKaren L. Groff Vice President and Assistant Treasurer Sheri O. Smith Vice President and SecretaryJennifer R. Miller Assistant Secretary ANNUAL MEETINGApril 20, 2023 at 10:00 a.m. Virtual meeting via online webcast at: www.virtualshareholdermeeting.com/DGICA2023CORPORATE OFFICES1195 River Road P.O. Box 302 Marietta, Pennsylvania 17547-0302 (800) 877-0600 E-mail Address: investors@donegalgroup.com Donegal Web Site: www.donegalgroup.comTRANSFER AGENTComputershare Trust Company, N.A. P.O. Box 43006 Providence, Rhode Island 02940-3006 (800) 317-4445 Web Site: www.computershare.com Hearing Impaired: TDD: 800-952-9245DIVIDEND REINVESTMENT AND STOCK PURCHASE PLANWe 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 43006 Providence, Rhode Island 02940-3006STOCKHOLDERSThe following represent the number of our common stockholders of record as of December 31, 2022: Class A common stock 1,657 Class B common stock 225Corporate Information2022DG22 Report Cover_030323 PRESS.indd 2DG22 Report Cover_030323 PRESS.indd 23/3/23 3:38 PM3/3/23 3:38 PM 2022
Financial
Highlights
YEAR ENDED DECEMBER 31,
2022
2021
2020
2019
2018
INCOME STATEMENT DATA
Premiums earned
Investment income, net
Investment gains (losses)
Total revenues
$ 822,489,450
$ 776,015,201
$ 742,040,339
$ 756,078,400
$ 741,290,873
34,016,112
31,125,631
29,504,466
29,514,955
26,907,656
(10,184,797)
6,477,286
2,777,919
21,984,617
(4,801,509)
848,220,546
816,465,791
777,819,910
812,451,471
771,828,320
Income (loss) before income tax expense (benefit)
(3,638,099)
30,338,508
63,272,503
57,081,030
(48,236,849)
Income tax expense (benefit)
(1,678,694)
5,084,334
10,457,251
9,929,286
(15,476,509)
Net income (loss)
(1,959,405)
25,254,174
52,815,252
47,151,744
(32,760,340)
Basic earnings (loss) per share - Class A
Diluted earnings (loss) per share - Class A
Cash dividends per share - Class A
Basic earnings (loss) per share - Class B
Diluted earnings (loss) per share - Class B
Cash dividends per share - Class B
(0.06)
(0.06)
0.66
(0.07)
(0.07)
0.59
0.83
0.83
0.64
0.74
0.74
0.57
1.84
1.83
0.60
1.65
1.65
0.53
1.68
1.67
0.58
1.51
1.51
0.51
(1.18)
(1.18)
0.57
(1.09)
(1.09)
0.50
BALANCE SHEET DA TA AT YEAR END
Total investments
Total assets
Debt obligations
Stockholders’ equity
Book value per share
$ 1,304,657,242 $ 1,276,845,897 $ 1,221,201,784 $ 1,110,553,363 $ 1,030,798,566
2,243,349,335
2,255,175,399 2,160,520,324
1,923,161,131
1,832,078,267
35,000,000
35,000,000
90,000,000
40,000,000
65,000,000
483,593,012
531,036,087
517,774,120
451,015,519
398,869,901
14.79
16.95
17.13
15.67
14.05
TOTAL REVENUES
[ in millions ]
TOTAL ASSETS
[ in billions ]
STOCKHOLDERS’ EQUITY
[ in millions ]
$ 850
$ 750
$ 650
$ 550
$ 2.25
$ 2.00
$ 1.75
$ 1.50
$ 535
$ 485
$ 435
$ 385
$ 450
22
21
20
19
18
$ 1.25
22
21
20
19
18
$ 335
22
21
20
19
18
1
DG22 Report Text_030323 PRESS.indd 1
DG22 Report Text_030323 PRESS.indd 1
3/3/23 3:49 PM
3/3/23 3:49 PM
To Our Stockholders: A Look at 2022DONEGAL GROUP INC ANNUAL REPORTThe year 2022 was a challenging one for the property and casualty insurance industry. The impact of economic inflation on costs to settle property and automobile claims accelerated to heights not seen in 40 years. Ongoing supply chain disruption and labor short-ages drove repair and replacement costs upward. Higher energy costs and interest rates also contributed to elevated costs of materials and services. Severe weather events throughout the year increased demand for supplies and labor, putting additional pressure on the duration of repairs and costs to resolve claims. Insurance companies have generally respond- ed by increasing premium rates and tightening underwriting guidelines to catch up to, and keep pace with, the historic cost increases.Donegal recognized the spike in loss costs beginning in late 2021 and began to respond with substantial rate increases across nearly all of our lines of business. The pace and magnitude of those rate increases accelerated as loss trends deteriorated during 2022. We also tightened underwriting controls to enhance our risk selec-tion. While it will take time for those actions to show up in our results, our substantial invest-ments in data analytics and actuarial talent are providing substantial insights and empowering data-driven decisions at a much faster velocity than just a few years ago. As our revenues reflect rate increases and loss costs stabilize, we believe we will be well positioned to take advantage of favorable market opportunities and to generate sustained excellent financial results.DG22 Report Text_030323 PRESS.indd 2DG22 Report Text_030323 PRESS.indd 23/3/23 3:49 PM3/3/23 3:49 PM 3Financial Summary2022Total revenues increased 3.9% for 2022 compared to 2021, reflecting a 6.0% increase in net premiums earned and a 9.3% increase in net investment income. Net investment losses of $10.2 million for 2022, compared to net in-vestment gains of $6.5 million for 2021, were primarily related to a decrease in the market value of equity securities we held at December 31, 2022. The combined ratio increased to 103.3% for 2022, compared to 101.0% for 2021, primarily due to higher claim frequency and severity during 2022 compared to 2021. Net favorable reserve development for losses incurred in prior accident years partially offset the increased loss activity. Net favorable development totaled $44.8 million for 2022, reduc-ing the loss ratio by 5.4 percentage points, compared to $31.2 million for 2021 that reduced the loss ratio by 4.0 percentage points. We attribute the 2022 development primarily to lower-than-expected loss emergence for the 2020 and 2021 accident years, with primary favorable impact in the commercial automobile and personal automobile lines of business.We had a net loss of $2.0 million, or 6 cents per Class A share, for 2022, compared to net income of $25.3 million, or 83 cents per diluted Class A share, for 2021. Our book value per share was $14.79 at December 31, 2022, compared to $16.95 at year-end 2021. After-tax unrealized losses with-in our available-for-sale fixed-maturity portfolio due to a spike in market interest rates reduced our book value by $1.39 per share during 2022.Commercial Lines Segment Commercial lines net premiums written grew by $18.0 million, or 3.6%, compared to 2021 due to solid premium increases and strong renewal premi-um retention. Our commercial lines segment gener-ated a statutory combined ratio of 103.7% for 2022, compared to 104.9% for 2021. We experienced significant improvement in the performance of our commercial automobile line of business in 2022, due to a multi-year effort to substantially increase pricing and reduce exposures in unprofitable states. Our commercial multi-peril line of business perfor-mance reflected continuing inflationary pressures on loss costs and higher large fire loss severity in 2022. While workers’ compensation loss trends continued to remain fairly stable throughout 2022, our loss ratio increased modestly as mandated rate reductions lowered our overall premium base. Our 2023 commercial growth strategy will focus primarily on states we have identified as favorable opportunities to achieve targeted risk-adjusted returns, and we are aggressively implementing pric-ing increases and taking permissible non-renewal actions to decrease our exposures in underper-forming classes and states. Personal Lines Segment After several years of declining premiums due to intentional actions, we experienced a 7.0% increase in personal lines net premiums written. We primar-ily attribute this growth to the successful launch of new products with enhanced pricing segmentation, modernized rating methodology, application of predictive analytical models and utilization of third-party data to augment pricing and risk selection. The personal lines statutory combined ratio of 102.8% for 2022, compared to 94.4% for 2021, reflected higher claim frequency and severity in the personal automobile line of business. We also experienced an increase in the severity of large fire losses within our homeowners line of business. We are closely monitoring our new business flow and profitability of the personal lines segment and plan to continue implementing rate increases throughout 2023 to offset the higher loss trends we and our peers have experienced.To Our Stockholders: A Look at 2022DG22 Report Text_030323 PRESS.indd 3DG22 Report Text_030323 PRESS.indd 33/3/23 3:49 PM3/3/23 3:49 PM Intentional Strategies for Our BusinessDONEGAL GROUP INC ANNUAL REPORTState-Specific Action Plans Data-Driven AnalyticsIntelligent Technology2022State-Specific Action Plans We executed numerous action plans in 2022 that related to state-specific strategies for growth or reduction of premiums, optimal agency distri-bution and enhanced profit generation. While we expect to benefit from many of those actions gradually over several years, we noted more favorable 2022 underwriting performance for the states where we emphasized growth versus those we focused on for profit improvement. We continue to align resources to ensure higher-than-average growth in profitable states in 2023, while taking aggressive actions to improve profit in underperforming states. We are refining our geographic strategy by categorizing growth and profit improvement markets at a sub-state level to further optimize our geographic risk profile. We expect that our continuing emphasis on geographic differentiation and diversification will favorably impact our underwriting results with increasing magnitude over the next few years. DG22 Report Text_030323 PRESS.indd 4DG22 Report Text_030323 PRESS.indd 43/3/23 3:49 PM3/3/23 3:49 PM Data-Driven Analytics We continue to expand our Enter-prise Analytics capabilities to integrate data and analytics into strategy and decision-making at all levels of our organization. As internal and external demands for data and analytics con-tinue to grow, Donegal Mutual will be investing in underlying cloud-based data infrastructure, data management and tools that will be critical for the future application of analytics. Our Enterprise Analytics team provides reporting and analyses that enable us to draw insights from data and take appropriate actions. We have also made significant strides in enhancing our products through utili-zation of external data, refined pricing and robust product management. The team also supports our product teams, providing advanced predictive models and actuarial methods to develop refined, risk-based pricing and underwriting guidance.Intelligent TechnologyThe ongoing Donegal Mutual systems modernization project progressed well in 2022. Following the successful systems deployment and launch of new personal lines products in three states in late 2021, we completed the phased rollout of new personal lines products in six of the remaining seven states throughout 2022. We expect to release these products in Michigan in the second quarter of 2023 upon receipt of regulatory ap-provals. We look forward to deploying the next major release of new systems in late March 2023 that include three additional commercial lines of business (business-owners, commercial automobile and commercial umbrella) to complement the workers’ compen-sation line already on the new platform. We have planned for an expedited rollout to accommodate new business and renewal conversion for policies in these business lines in 24 states. In addition to a new sophisticated businessowners product, the deployment will enable increased ease-of- doing-business for our agents with greatly enhanc- ed straight-through-processing capabilities. We expect these new and enhanced capabilities will help us compete more effectively for smaller commercial accounts that we expect will generate more predictable and consistent margins relative to larger accounts. We also plan to introduce a new commercial lines service center in late 2023, which will represent an optional service enhance-ment for agencies who prefer that we interact directly with their customers for mid-term policy coverage changes and other service requests.Our technology and business teams have already begun to plan for the next major deployment that will allow migration of remaining personal lines policies from our legacy systems to the new platform beginning in early 2024. This personal lines-focused effort will progress in parallel with the commercial product migration throughout 2023, allowing our commercial lines team to closely monitor and manage the success of the products and straight-through processing enhancements before commencing work in 2024 to migrate our remaining legacy commercial products to the new systems platform. This final commercial release will include development of a new modernized commercial package product that will allow us to serve a broader array of commercial policyholders in the future.5Intentional Strategies for Our BusinessDG22 Report Text_030323 PRESS.indd 5DG22 Report Text_030323 PRESS.indd 53/3/23 3:49 PM3/3/23 3:49 PM A Look AheadDONEGAL GROUP INC ANNUAL REPORTWhile we continue to work to combat the economic and market headwinds that have impacted our recent profitability, we are pleased with the execution and initial benefits of our various strategic initiatives. We added experienced leadership talent to augment our team, and we are making great strides toward transforming and modernizing the Donegal organization at many levels. We are confident that the substantial improvements we are making to our operations will allow us to better serve our agents and policyholders for many years to come, while our unrelenting focus on improving our results will lead to sustainable profitability over time.Kevin G. Burke PRESIDENT AND CHIEF EXECUTIVE OFFICER2022DG22 Report Text_030323 PRESS.indd 6DG22 Report Text_030323 PRESS.indd 63/3/23 3:49 PM3/3/23 3:49 PM (cid:40)(cid:33)(cid:29)(cid:39)(cid:25)(cid:24)(cid:1)(cid:38)(cid:39)(cid:21)(cid:39)(cid:25)(cid:38)
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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
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Item 6.
Securities
[Reserved]
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
Item 16.
Form 10-K Summary
Page
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41
54
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95
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97
98
100
(i)
PART I
Item 1. Business.
Introduction
Donegal Group Inc., or DGI, is an insurance holding company whose insurance subsidiaries and affiliates offer property
and casualty insurance in 24 Mid-Atlantic, Midwestern, New England, Southern and Southwestern states. DGI has no
significant business operations and is separate and distinct from its insurance subsidiaries. As used in this Form 10-K Report,
the terms “we,” “us” and “our” refer to Donegal Group Inc. and its insurance subsidiaries. Our Class A common stock and our
Class B common stock trade on the NASDAQ Global Select Market under the symbols “DGICA” and “DGICB,” respectively.
Donegal Mutual Insurance Company, or Donegal Mutual, organized us as an insurance holding company on August 26,
1986. At December 31, 2022, Donegal Mutual held approximately 43% of our outstanding Class A common stock and
approximately 84% of our outstanding Class B common stock. Donegal Mutual’s ownership provides Donegal Mutual with
approximately 71% 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 conduct business together with Donegal Mutual and its insurance subsidiaries as the Donegal Insurance Group. The
Donegal Insurance Group is not a legal entity, is not an insurance company and does not issue or administer insurance policies.
Rather, it is a trade name that refers to the group of insurance companies that are affiliated with Donegal Mutual.
At December 31, 2022, we had three segments: our investment function, our commercial lines of insurance and our
personal lines of insurance. We set forth financial information about these segments in Note 19 of the Notes to Consolidated
Financial Statements. The commercial lines products of our insurance subsidiaries consist primarily of commercial automobile,
commercial multi-peril and workers’ compensation policies. The personal lines products of our insurance subsidiaries consist
primarily of homeowners and private passenger automobile policies.
Our insurance subsidiaries and Donegal Mutual provide their policyholders with a selection of insurance products and
pursue profitability by adhering to a strict underwriting discipline. Our insurance subsidiaries derive a substantial portion of
their insurance business from smaller to mid-sized regional communities. We believe this focus provides our insurance
subsidiaries with competitive advantages in terms of local market knowledge, marketing, underwriting, claims servicing and
policyholder service. At the same time, we believe our insurance subsidiaries have cost advantages over many smaller regional
insurers that result from economies of scale our insurance subsidiaries realize through centralized accounting, administrative,
data processing, investment and other services.
We believe we have a substantial opportunity, as a well-capitalized regional insurance holding company with a solid
business strategy, to grow profitably and compete effectively with larger national property and casualty insurers. Our
downstream holding company structure, with Donegal Mutual holding approximately 71% of the combined voting power of our
common stock, has proven its effectiveness and success over the 36 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. While we are
currently placing less emphasis on pursuing acquisitions due to several ongoing major initiatives to enhance our technology
infrastructure as well as our analytical and processing capabilities, we expect to continue to acquire other insurance companies
to expand our business in a given region over time. Since 1998, we and Donegal Mutual have completed seven transactions
involving acquisitions of property and casualty insurance companies or participation in the business of property and casualty
insurance companies through Donegal Mutual’s entry into quota-share reinsurance agreements with them.
Donegal Mutual completed the merger of Mountain States Mutual Casualty Company, or Mountain States, with and into
Donegal Mutual effective May 25, 2017. Donegal Mutual was the surviving company in the merger, and Mountain States’
insurance subsidiaries, Mountain States Indemnity Company and Mountain States Commercial Insurance Company
(collectively, the "Mountain States insurance subsidiaries"), became insurance subsidiaries of Donegal Mutual upon completion
of the merger. Upon completion of the merger, Donegal Mutual assumed all of the policy obligations of Mountain States and
began to market its products together with the Mountain States insurance subsidiaries as the Mountain States Insurance Group
in four Southwestern states. Donegal Mutual also entered into a 100% quota-share reinsurance agreement with the Mountain
States insurance subsidiaries on the merger date. Beginning with policies effective in 2021, Donegal Mutual began to place the
-1-
business of the Mountain States Insurance Group into the underwriting pool we describe in “History and Organizational
Structure.” As a result, our consolidated financial results through December 31, 2020 excluded the results of the Mountain
States Insurance Group operations in those Southwestern states.
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. In addition to our website, the Securities and Exchange
Commission (the “SEC”) maintains an Internet site at www.sec.gov that contains our reports, proxy and information statements
and other information that we electronically file with, or furnish to, the SEC.
History and Organizational Structure
In the mid-1980’s, Donegal Mutual, as a mutual insurance company, recognized the desirability of developing additional
sources of capital and surplus so it could remain competitive, expand its business and ensure its long-term viability.
Accordingly, Donegal Mutual determined that the implementation of a downstream holding company structure was a viable
business strategy to accomplish that objective. Thus, in 1986, Donegal Mutual formed us as a downstream holding company,
and we incorporated in the state of Delaware as Donegal Group Inc. After Donegal Mutual formed us, we in turn formed
Atlantic States as our wholly owned property and casualty insurance company subsidiary.
In connection with the formation of Atlantic States and the establishment of our downstream insurance holding company
system, Donegal Mutual and Atlantic States entered into a proportional reinsurance agreement, or pooling agreement. Under
the pooling agreement, Donegal Mutual and Atlantic States contribute substantially all of their respective premiums, losses and
loss expenses to the underwriting pool, and the underwriting pool, acting through Donegal Mutual, then allocates 80% of the
pooled business to Atlantic States. Thus, Donegal Mutual and Atlantic States share the underwriting results of the pooled
business in proportion to their respective participation in the underwriting pool.
The member companies of the Donegal Insurance Group, which include our insurance subsidiaries, share a combined
business plan to enhance market penetration and underwriting profitability objectives. We believe Donegal Mutual’s majority
interest in the combined voting power of our Class A common stock and of our Class B common stock fosters our ability to
implement our business philosophies, enjoy management continuity, maintain superior employee relations and provide a stable
environment within which we can grow our businesses.
The products the member companies of the Donegal Insurance Group offer are generally complementary, which permits
the Donegal Insurance Group to offer a broad range of products in a given market and to expand the Donegal Insurance
Group’s ability to service an entire personal lines or commercial lines account. Distinctions within the products the member
companies of the Donegal Insurance Group offer generally relate to specific risk profiles within similar classes of business,
such as preferred tier products versus standard tier products. The member companies of the Donegal Insurance Group do not
allocate all of the standard risk gradients to one company. As a result, the underwriting profitability of the business the
individual companies write directly will vary. However, the underwriting pool homogenizes the risk characteristics of all
business that Donegal Mutual and Atlantic States write directly and all business that Donegal Mutual assumes from its affiliates
and places into the underwriting pool. The business Atlantic States derives from the underwriting pool represents a significant
percentage of our total consolidated revenues.
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, The
Peninsula Insurance Company and its wholly owned subsidiary, Peninsula Indemnity Company, or collectively, Peninsula, and
Michigan Insurance Company, or MICO. Donegal Mutual has a 100% quota-share reinsurance agreement with Southern
Mutual Insurance Company, or Southern Mutual, and Donegal Mutual places its assumed business from Southern Mutual into
the underwriting pool. Donegal Mutual wholly owns and has a 100% quota-share reinsurance agreement with the Mountain
States insurance subsidiaries. Beginning with policies effective in 2021, Donegal Mutual places its assumed business from the
Mountain States insurance subsidiaries into the underwriting pool.
The following chart depicts our organizational structure, including all of our property and casualty insurance subsidiaries
and affiliates:
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 29% of the combined voting power of our Class A common stock and our Class B common stock and
Donegal Mutual holds approximately 71% of the combined voting power of our Class A common stock and our Class B common stock.
-3- Relationship with Donegal Mutual
Donegal Mutual provides facilities, management and other services to us and our insurance subsidiaries. In addition,
Donegal Mutual purchases and maintains the information technology systems that support the business of Donegal Mutual and
our insurance subsidiaries. Donegal Mutual allocates certain related expenses to Atlantic States in accordance with the relative
participation of Donegal Mutual and Atlantic States in the pooling agreement. Our insurance subsidiaries other than Atlantic
States reimburse Donegal Mutual for allocated costs of services Donegal Mutual provides on their behalf based on their
proportion of the total direct premiums written of the Donegal Insurance Group and other metrics. Allocated expenses from
Donegal Mutual for services it provided to Atlantic States and our other insurance subsidiaries totaled $199.2 million,
$186.6 million and $153.9 million for 2022, 2021 and 2020, respectively. To enhance process efficiencies, Donegal Mutual
paid certain expenses directly in 2022 and 2021 that our insurance subsidiaries paid directly in 2020, resulting in higher
allocations of expenses from Donegal Mutual to our insurance subsidiaries and lower direct expense payments by our insurance
subsidiaries in 2022 and 2021 compared to 2020.
Donegal Mutual is the employer of record for all personnel who provide services for our insurance subsidiaries. Donegal
Mutual strives to maintain a culture that is based on integrity and respect, with an environment designed to facilitate excellent
service to the agents and customers of the Donegal Insurance Group. At December 31, 2022, Donegal Mutual had 876
employees, of which 458 were based in its Marietta, Pennsylvania headquarters and 418 were based in regional offices or were
permanent remote employees. There were 866 full-time employees and 10 part-time employees. Many of Donegal Mutual's
employees work remotely from their homes or follow a hybrid schedule that includes working several days in their assigned
office to allow for enhanced collaboration and interaction with other employees. Donegal Mutual targets employee
compensation that is competitive and consistent with an employee's position, knowledge, experience and skill level. Donegal
Mutual provides annual wage increases that are based on merit. Donegal Mutual provides an annual cash incentive plan for all
of its employees that provides an opportunity for Donegal Mutual's employees to earn a bonus as a percentage of their annual
wages that varies based on the level of underwriting profit Donegal Insurance Group achieves for a calendar year. In addition,
Donegal Mutual provides to its full-time employees a comprehensive employee benefits program, including medical, dental and
vision insurance, paid time off, and a 401(k) retirement plan that includes company matching provisions. Donegal Mutual also
provides substantial training, development and wellness programs and resources to its employees.
Our insurance subsidiaries have a catastrophe reinsurance agreement with Donegal Mutual, pursuant to which Donegal
Mutual provides coverage for losses related to any catastrophic occurrence over a set retention of $3.0 million ($2.0 million for
2022, 2021 and 2020) for each participating insurance subsidiary, with a combined retention of $6.0 million ($5.0 million for
2022, 2021 and 2020) for a catastrophe involving a combination of participating insurance subsidiaries, up to the amount
Donegal Mutual and our insurance subsidiaries retain under catastrophe reinsurance agreements with unaffiliated reinsurers.
The purpose of the catastrophe reinsurance agreement is to lessen the effects of an accumulation of losses arising from one
event to levels that are appropriate given each subsidiary’s size, underwriting profile and surplus.
Donegal Mutual had a quota-share reinsurance agreement with MICO for policies effective through December 31, 2021.
The purpose of the quota-share reinsurance agreement with MICO was to transfer to Donegal Mutual 25% of the premiums and
losses related to MICO’s business. Donegal Mutual placed its assumed business from MICO into the underwriting pool.
Donegal Mutual and MICO terminated this reinsurance agreement on a run-off basis effective January 1, 2022. As a result,
MICO retains 100% of its net premiums and losses beginning with policies effective as of that date.
Donegal Mutual had a quota-share reinsurance agreement with Peninsula for policies effective through December 31, 2021.
The purpose of the quota-share reinsurance agreement with Peninsula was to transfer to Donegal Mutual 100% of the premiums
and losses related to the workers’ compensation product line of Peninsula in certain states. Donegal Mutual placed its assumed
business from Peninsula into the underwriting pool. Donegal Mutual and Peninsula terminated this reinsurance agreement on a
run-off basis effective January 1, 2022. As a result, Peninsula retains 100% of its net workers’ compensation premiums and
losses beginning with policies effective as of that date.
We and Donegal Mutual have maintained a coordinating committee since our formation in 1986. The coordinating
committee consists of two members of our board of directors, neither of whom is a member of Donegal Mutual’s board of
directors, and two members of Donegal Mutual’s board of directors, neither of whom is a member of our board of directors.
The purpose of the coordinating committee is to establish and maintain a process for an ongoing 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.
-4-
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 reinsurance agreements, the annual adjustments
typically relate to the reinsurance premiums and loss retention amounts. These agreements are ongoing in nature and will
continue in effect throughout 2023 in the ordinary course of our business.
Our members on the coordinating committee, as of the date of this Form 10-K Report, are Barry C. Huber and Richard D.
Wampler, II. Donegal Mutual’s members on the coordinating committee as of such date are Michael W. Brubaker and Cyril J.
Greenya. We refer to our proxy statement for our annual meeting of stockholders to be held on April 20, 2023 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 the Donegal
Insurance Group;
producing more stable and uniform underwriting results for our insurance subsidiaries over extended periods of time
than we could achieve without our relationship with Donegal Mutual;
providing opportunities for growth because of the ability of Donegal Mutual to affiliate and enter into reinsurance
agreements with, or otherwise acquire control of, mutual insurance companies and place the business it assumes into
the underwriting pool; and
providing Atlantic States with a significantly larger underwriting capacity because of the underwriting pool Donegal
Mutual and Atlantic States have maintained since 1986.
In the first quarter of 2023, 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
We and Donegal Mutual are focused on several primary strategies, including achieving sustained excellent financial
performance, strategically modernizing our operations and processes to transform our business, capitalizing on opportunities to
grow profitably and delivering a superior experience to our agents and policyholders. Our strategies are designed to provide
value to the policyholders of Donegal Mutual and our respective insurance subsidiaries and, ultimately, to provide value to our
stockholders. The annual net premiums earned of our insurance subsidiaries have increased from $301.5 million in 2006 to
$822.5 million in 2022, a compound annual growth rate of 6.5%.
-5- The combined ratio of our insurance subsidiaries and that of the United States property and casualty insurance industry as
computed using United States generally accepted accounting principles, or GAAP, and statutory accounting principles, or SAP,
for the years 2018 through 2022 are shown in the following table:
Our GAAP combined ratio
Our SAP combined ratio
Industry SAP combined ratio (1)
(1) As reported (projected for 2022) by A.M. Best Company.
2022
2021
2020
2019
2018
103.3 % 101.0 %
96.0 %
99.5 % 110.1 %
103.3
104.0
100.8
99.6
95.4
98.4
98.7
98.9
109.4
99.2
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.
A detailed review of our business strategies follows:
•
Achieving sustained excellent financial performance.
Our insurance subsidiaries seek to achieve consistent underwriting profitability. Underwriting profitability is a fundamental
component of our long-term financial strength because it allows our insurance subsidiaries to generate profits without relying
exclusively on their investment income for profitability. Our insurance subsidiaries seek to enhance their underwriting results
by:
•
•
•
carefully selecting the product lines they underwrite;
carefully selecting the individual risks they underwrite;
utilizing data analytics and predictive modeling tools to inform risk selection and pricing decisions;
• managing their property exposures in catastrophe-prone areas; and
•
evaluating their claims history on a regular basis to ensure the adequacy of their underwriting guidelines and
product pricing.
Our insurance subsidiaries maintain discipline in their pricing by effecting rate increases to sustain or improve their
underwriting results without unduly affecting their customer retention. In addition to appropriate pricing, our insurance
subsidiaries seek to ensure that their premium rates are adequate relative to the amount of risk they insure. Our insurance
subsidiaries review loss trends on a regular basis to identify changes in the frequency and severity of their claims and to assess
the adequacy of their rates and underwriting standards. Our insurance subsidiaries also carefully monitor and audit the
information they use to price their policies for the purpose of enabling them to receive an adequate level of premiums for the
risk they assume. For example, our insurance subsidiaries audit the payroll data of their workers’ compensation customers to
verify that the assumptions used to price a particular policy were accurate. By implementing appropriate rate increases and
understanding the risks our insurance subsidiaries agree to insure, our insurance subsidiaries seek to achieve consistent
underwriting profitability.
Our insurance subsidiaries monitor the performance of the product lines they underwrite and the geographies in which they
offer their insurance products. Our insurance subsidiaries take specific actions to remediate underperforming product lines or
geographies that include pricing increases, underwriting adjustments, reunderwriting initiatives as well as discontinuing a given
product or withdrawing from a geography when our insurance subsidiaries determine they cannot reasonably expect to generate
targeted profitability over time.
Our insurance subsidiaries have no material exposures to asbestos or environmental liabilities. Our insurance subsidiaries
seek to provide more than one policy to a given personal lines or commercial lines customer because this “account selling”
-6- 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.
Our insurance subsidiaries maintain stringent expense controls under direct supervision of their senior management. We
centralize the processing and administrative activities of our insurance subsidiaries to realize operating synergies and better
expense control. Our insurance subsidiaries utilize technology to automate much of their underwriting, claims and billing
processes and to facilitate agency and policyholder communications on an efficient, timely and cost-effective basis. Our
insurance subsidiaries have increased their annual premium per employee, a measure of efficiency that our insurance
subsidiaries use to evaluate their operations, from approximately $470,000 in 1999 to approximately $1.1 million in 2022.
Return on invested assets is an important element of the financial results of our insurance subsidiaries. The investment
strategy of our insurance subsidiaries is to generate an appropriate amount of after-tax income on invested assets while limiting
the potential impact of equity market volatility and minimizing credit risk through investments in high-quality securities. As a
result, our insurance subsidiaries seek to invest a high percentage of their assets in diversified, highly rated and marketable
fixed-maturity instruments. The fixed-maturity portfolios of our insurance subsidiaries consist of both taxable and tax-exempt
securities. Our insurance subsidiaries maintain a portion of their portfolios in short-term securities to provide liquidity for the
payment of claims and operation of their respective businesses. Our insurance subsidiaries maintain a small percentage (2.7% at
December 31, 2022) of their portfolios in equity securities that have a history of paying cash dividends or that our insurance
subsidiaries expect will appreciate in value over time.
•
Strategically modernizing our operations and processes to transform our business.
In 2018, Donegal Mutual initiated a multi-year systems modernization project to replace its remaining legacy systems,
streamline business processes and workflows and enhance data analytics and modeling capabilities. In February 2020, Donegal
Mutual implemented the first release of new systems related to the project, and our insurance subsidiaries began to issue
workers’ compensation policies from the new systems in the second quarter of 2020. In August 2021, Donegal Mutual
implemented the second release of new systems related to the project, including a new agency portal and the rating,
underwriting and policy issuance capabilities necessary to support the launch of new personal lines products, and our insurance
subsidiaries began to issue new personal lines products from the new systems in the fourth quarter of 2021. Over the next
several years, Donegal Mutual expects to implement new systems for the remaining lines of business the Donegal Insurance
Group offers currently. The next release of new systems related to the project will include three commercial lines of business
with enhanced straight-through-processing capabilities. This release is scheduled for implementation beginning in the first half
of 2023.
We have an enterprise analytics department that is focused on integrating data and analytics into strategy and decision-
making at all levels of our organization. The enterprise analytics team is responsible for core functions of rate-making,
predictive analytics, data management and business intelligence. These responsibilities include the development and expansion
of risk-based pricing segmentation, analytical innovation, predictive modeling solutions, formal data strategies, performance
monitoring and enhanced reporting mechanisms. We developed and began executing a pricing and analytics roadmap that will
continue to deliver data-driven insights to our underwriters. This roadmap includes ongoing development and enhancement of
quality tools that allow us to operationalize pricing and underwriting predictive models, integrate internal and external data for
better-informed pricing and underwriting decisions and enhance the automation and precision of our rate indication
methodology. Our enterprise analytics team is continuing to develop new tools and solutions that are enhancing our product
portfolio management capabilities, competitive intelligence, pricing sophistication and utilization of data to monitor and
manage our operations. The team also generates reporting and analyses that enable us to draw business insights from data that
drive actions to improve performance.
We are expanding our focus on process excellence, including the formalization of a structure to readily identify
opportunities for operational efficiencies and to build a multi-year roadmap for addressing those opportunities. We are also
expanding our data management personnel and capabilities to continually ensure the data upon which we rely for our business
decisions and financial reporting is complete, accurate and secure. We have assigned an innovation task force the responsibility
to research emerging technologies and identify potential technology solutions that might assist us in further modernizing our
operations.
•
Capitalizing on opportunities to grow profitably.
Continued expansion of our insurance subsidiaries within their existing markets will be a key source of their continued
premium growth, and maintaining an effective network of independent agencies is integral to this expansion. Our insurance
subsidiaries seek to be among the top three insurers within each of the independent agencies for the lines of business our
-7- insurance subsidiaries write by providing a consistent, competitive and stable market for their products. We believe that the
consistency of the product offerings of our insurance subsidiaries enables our insurance subsidiaries to compete effectively for
independent agents with other insurers whose product offerings may fluctuate based on industry conditions. Our insurance
subsidiaries offer a competitive compensation program to their independent agents that rewards them for producing profitable
growth and maintaining profitable books of business with our insurance subsidiaries.
Our insurance subsidiaries execute a combined annual business plan with Donegal Mutual and its insurance subsidiaries.
Within the past several years, we enhanced the annual planning process to ensure that we are directing efforts and resources
toward geographic regions, market segments, product lines and classes of business that will give us the best opportunities to
achieve sustained growth and profitability. As part of the planning process, we perform a detailed analysis of internal and
external data with respect to each state within our operating regions. We assess state-specific marketing dynamics and
opportunities, including an evaluation of the historical experience of our insurance subsidiaries. We then assign a strategic
posture for each state and develop action plans to execute state-specific strategies for growth or reduction of premiums, agency
distribution and enhanced profit generation over the next several years.
In recent years, the consolidation of independent agencies has accelerated, resulting in the acquisition of independent
agencies from which our insurance subsidiaries and Donegal Mutual currently receive business by national cluster groups and
aggregators. We have a national accounts team that is responsible for the management and expansion of our relationships with
these national agency groups. The national accounts team serves as a centralized point of contact for these groups and works
directly with our regional sales and marketing teams to support and develop relationships with independent agents affiliated
with national agency groups. We believe our relationships with existing and emerging national agency groups will continue to
expand and that these groups represent a significant opportunity for profitable future growth.
•
Delivering a superior experience to our agents and policyholders.
Donegal Mutual and our insurance subsidiaries strive to maintain technology comparable to that of their larger competitors.
“Ease of doing business” is an increasingly important component of an insurer’s value to an independent agency. Our insurance
subsidiaries provide fully automated underwriting and policy issuance portals that substantially ease data entry and facilitate the
quoting and issuance of policies for the independent agents of our insurance subsidiaries. As a result, applications of the
independent agents for our insurance subsidiaries can result in policy issuance without further re-entry of information. These
systems also interface with the agency management systems of the independent agents of our insurance subsidiaries. In
addition, we are employing new agency relationship management solutions to expand the abilities of our insurance subsidiaries
to manage their agency relationships and enhance their agency communications and interactions.
Our insurance subsidiaries also provide their independent agents with ongoing support to enable them to better attract and
service customers, including:
•
training programs;
• marketing support;
•
•
availability of a personal lines service center that provides comprehensive service for our policyholders; and
accessibility to and regular interactions with marketing and underwriting personnel and senior management of our
insurance subsidiaries.
We plan to introduce a new commercial lines service center in late 2023, which will represent an optional service
enhancement for agencies who prefer that we interact directly with their customers for mid-term policy coverage changes and
other service requests.
Our insurance subsidiaries appoint independent agencies with a strong underwriting and growth track record. We
believe that our insurance subsidiaries will drive continued long-term growth by carefully selecting, motivating and supporting
their independent agencies.
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:
-8- •
•
•
•
availability of a customer call center, secure website and mobile application for claims reporting;
availability of a secure website and mobile application for access to policy information and documents, payment
processing and other features;
timely replies to information requests and policy submissions; and
prompt responses to, and processing of, claims.
Our insurance subsidiaries periodically conduct policyholder surveys to evaluate the effectiveness of their service to
policyholders. The management of our insurance subsidiaries meets on a regular basis with the personnel of the independent
insurance agents our insurance subsidiaries appoint to seek service improvement recommendations, react to service issues and
better understand local market conditions.
•
Acquiring property and casualty insurance companies to augment the organic growth of our insurance
subsidiaries.
We have been an effective consolidator of smaller “main street” property and casualty insurance companies. While we are
currently placing less emphasis on pursuing acquisitions due to several ongoing major initiatives to enhance our technology
infrastructure as well as our analytical and processing capabilities, we expect to continue to acquire other insurance companies
to expand our business in a given region over time.
Since 1998, we and Donegal Mutual have completed seven transactions involving acquisitions of property and casualty
insurance companies or participation in the business of property and casualty insurance companies through Donegal Mutual’s
entry into quota-share reinsurance agreements with them. We and Donegal Mutual intend to continue our growth by pursuing
affiliations and acquisitions that meet our criteria. Our primary criteria are:
•
•
•
•
location in regions where our insurance subsidiaries and Donegal Mutual 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 and Donegal Mutual;
annual premium volume between $50.0 million to $100.0 million; and
fair and reasonable transaction terms.
We believe that our relationship with Donegal Mutual assists us in pursuing affiliations with, and subsequent acquisitions
of, mutual insurance companies because, through Donegal Mutual, we understand the concerns and issues that mutual insurance
companies face. In particular, Donegal Mutual has had success affiliating with underperforming mutual insurance companies
that were operating at a competitive disadvantage due to lack of economies of scale compared to other industry participants, and
we have either acquired them following their conversion to a stock company or benefited from their underwriting results as a
result of Donegal Mutual’s entry into a 100% quota-share reinsurance agreement with them and placement of that assumed
business into the pooling agreement. We evaluate a number of areas for operational synergies when considering acquisitions,
including product underwriting, expenses, the cost of reinsurance and technology.
We believe that our ability to make direct acquisitions of stock insurance companies and to make indirect acquisitions of
mutual insurance companies through Donegal Mutual provides us with flexibility that is a competitive advantage in making
acquisitions. We also believe our historic record demonstrates our ability to acquire control of an underperforming insurance
company utilizing a number of different acquisition structures and affiliation strategies, re-underwrite its book of business,
reduce its cost structure and return it to sustained profitability.
While Donegal Mutual and we generally engage in preliminary discussions with potential direct or indirect acquisition
candidates from time to time, neither Donegal Mutual nor we make any public disclosure regarding a proposed acquisition until
Donegal Mutual or we have entered into a definitive acquisition agreement.
-9- The following table highlights our and Donegal Mutual’s history of insurance company acquisitions and affiliations since
1998:
Company Name
Southern Heritage Insurance
Company (1)
State of Domicile
Georgia
Year Control
Acquired
1998
Method of Acquisition/Affiliation
Purchase of stock by us in 1998.
Le Mars Mutual Insurance
Company of Iowa and then Le
Mars Insurance Company (1)
Iowa
Peninsula Insurance Group
Sheboygan Falls Mutual Insurance
Company and then Sheboygan
Falls Insurance Company (1)
Maryland
Wisconsin
Southern Mutual Insurance
Company (2)
Georgia
Michigan Insurance Company
Michigan
Mountain States Mutual Casualty
Company(3)
New Mexico
2002
2004
2007
2009
2010
2017
Surplus note investment by Donegal Mutual in 2002;
conversion to stock company in 2004; acquisition of
stock by us in 2004.
Purchase of stock by us in 2004.
Contribution note investment by Donegal Mutual in
2007; conversion to stock company 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 in 2010.
Merger with and into Donegal Mutual in 2017.
(1) To reduce administrative and compliance costs and expenses, these subsidiaries subsequently merged into one of our existing
insurance subsidiaries.
(2) Control acquired by Donegal Mutual.
(3) Donegal Mutual completed the merger of Mountain States with and into Donegal Mutual effective May 25, 2017. Donegal Mutual
was the surviving company in the merger, and Mountain States insurance subsidiaries became insurance subsidiaries of Donegal
Mutual upon completion of the merger. Donegal Mutual also entered into a 100% quota-share reinsurance agreement with the
Mountain States insurance subsidiaries on the merger date. Beginning with policies effective in 2021, Donegal Mutual places the
business of the Mountain States Insurance Group into the underwriting pool.
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. Insurance companies that are
substantially larger than our insurance subsidiaries are likely to benefit from certain cost synergies, and insurance companies
that market their products directly to end consumers are likely to incur lower relative acquisition costs compared to those of our
insurance subsidiaries.
Products and Underwriting
We report the results of our insurance operations in two segments: commercial lines of insurance and personal lines of
insurance. The commercial lines our insurance subsidiaries write consist primarily of commercial automobile, commercial
multi-peril and workers’ compensation insurance. The personal lines our insurance subsidiaries write consist primarily of
private passenger automobile and homeowners insurance. We describe these lines of insurance in greater detail below:
Commercial
•
•
Commercial automobile — policies that provide protection against liability for bodily injury and property damage
arising from automobile accidents and protection against loss from damage to automobiles owned by the insured.
Commercial multi-peril — policies that provide protection to businesses against many perils, usually combining
liability and physical damage coverages.
• Workers’ compensation — policies employers purchase to provide benefits to employees for injuries sustained during
employment. The workers’ compensation laws of each state determine the extent of the coverage we provide.
-10-
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.
In recent years, we have taken actions to shift our business mix to a higher proportion of commercial business, where we
believe we will continue to have opportunities to achieve profitable, sustainable long-term growth. We are executing state-
specific strategies that include accelerating growth in states where we see opportunities for profitable growth and reducing
exposures in states we have targeted for profit improvement. While we expect to place greater emphasis on commercial growth
for the foreseeable future, we desire to maintain a profitable book of personal business to provide enhanced stability across our
product portfolio and increase our brand value to our independent agents. We commenced a phased rollout of new personal
lines products in the fourth quarter of 2021. These products feature various coverage enhancements, modernized rating
methodology, enhanced pricing segmentation, application of predictive analytical models and utilization of third-party data to
augment pricing and risk selection. We implemented a new personal lines agency portal and the rating, underwriting and policy
issuance capabilities necessary to support the launch in the ten states where Donegal Mutual and our insurance subsidiaries
offer personal lines. The portal and systems are now live in nine of the ten states in which our insurance subsidiaries offer
personal lines, and we plan to complete the rollout of the new personal lines products in the remaining state in the first half of
2023. Due to ongoing inflationary pressures on loss costs, we will carefully manage personal lines premium growth in 2023,
and our insurance subsidiaries plan to continue implementing premium rate increases throughout the year.
The following table sets forth the net premiums written of our insurance subsidiaries by line of insurance for the periods
indicated:
(dollars in thousands)
Commercial lines:
Automobile
Workers’ compensation
Commercial multi-peril
Other
Total commercial lines
Personal lines:
Automobile
Homeowners
Other
Total personal lines
Total business
Year Ended December 31,
2022
2021
2020
Amount
%
Amount
%
Amount
%
$ 167,774
111,892
200,045
40,086
519,797
181,129
120,087
22,517
323,733
19.9 % $ 161,947
20.1 % $ 135,294
18.2 %
13.3
23.7
4.7
61.6
21.5
14.2
2.7
38.4
113,256
188,242
38,340
501,785
170,578
109,974
21,930
302,482
14.1
23.4
4.8
62.4
21.2
13.7
2.7
37.6
109,960
147,993
32,739
425,986
184,602
111,886
19,666
316,154
14.8
19.9
4.5
57.4
24.9
15.1
2.6
42.6
$ 843,530
100.0 % $ 804,267
100.0 % $ 742,140
100.0 %
The commercial lines and personal 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. Within each of the underwriting
departments, our insurance subsidiaries have dedicated product development and management teams responsible for the
development of quality products at competitive prices to promote growth and profitability as well as the enhancement of our
current products to meet targeted customer needs.
In order to achieve underwriting profitability on a consistent basis, our insurance subsidiaries:
•
•
assess and select primarily standard and preferred risks;
adhere to disciplined underwriting guidelines;
-11-
•
•
seek to price risks appropriately based on exposure, risk characteristics, utilization of predictive models and
application of underwriting judgment and
utilize various types of risk management and loss control services.
Our insurance subsidiaries also review their existing portfolio of insured accounts to determine whether certain risks or
classes of business continue to meet their underwriting guidelines and margin expectations. If a given account or class of
business no longer meets those underwriting guidelines or margin expectations, our insurance subsidiaries will take appropriate
action regarding that account or class of business, including raising premium rates or non-renewing policies to the extent
applicable laws and regulations permit.
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 laws and regulations permit, of agencies that are
unable to achieve acceptable underwriting profitability.
Distribution
Our insurance subsidiaries market their products primarily in the Mid-Atlantic, Midwestern, New England, Southern and
Southwestern regions through approximately 2,300 independent insurance agencies. At December 31, 2022, the Donegal
Insurance Group actively wrote business in 24 states (Alabama, Colorado, Delaware, Georgia, Illinois, Indiana, Iowa, Maine,
Maryland, Michigan, Nebraska, New Hampshire, New Mexico, North Carolina, Ohio, Pennsylvania, South Carolina, South
Dakota, Tennessee, Texas, Utah, Vermont, Virginia, and Wisconsin). Beginning with policies effective in 2021, Donegal
Mutual includes the business it writes directly and assumes from the Mountain States insurance subsidiaries in four
Southwestern states (Colorado, New Mexico, Texas and Utah) in the pooling agreement between Donegal Mutual and Atlantic
States. This business had no impact on our results of operations prior to 2021. We believe the relationships of our insurance
subsidiaries with their independent agents are valuable in identifying, obtaining and retaining profitable business. Our insurance
subsidiaries maintain a stringent agency selection procedure that emphasizes appointing agencies with proven marketing
strategies for the development of profitable business, and our insurance subsidiaries only appoint agencies with a strong
underwriting history and potential growth capabilities. Our insurance subsidiaries also regularly evaluate the independent
agencies that represent them based on their profitability and performance in relation to the objectives of our insurance
subsidiaries. Our insurance subsidiaries seek to be among the top three insurers within each of their agencies for the lines of
business our insurance subsidiaries write.
-12- 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 include in the underwriting pool, in each of the states where they
conducted a significant portion of their business in 2022:
Pennsylvania
Michigan
Maryland
Delaware
Virginia
Georgia
Wisconsin
Ohio
Indiana
North Carolina
Iowa
Tennessee
Other
Total
35.1 %
15.8
8.6
6.4
5.9
4.6
3.5
3.5
2.6
2.3
1.8
1.7
8.2
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 multi-year systems modernization project is further enhancing the ability of
our insurance subsidiaries to conduct business with their independent agents and to develop and implement new products. Our
insurance subsidiaries have a competitive compensation program for their independent agents that includes base commissions,
growth incentive plans and a profit-sharing plan, consistent with applicable state laws and regulations, under which the
independent agents may earn additional commissions based upon the volume of premiums produced and the profitability of the
business our insurance subsidiaries receive from that agency. We have an agency stock purchase plan that allows our
independent agents to purchase our Class A common stock at a discount to market prices to further align the interests of our
independent agents with the interests of our stockholders.
Our insurance subsidiaries encourage their independent agents to focus on “account selling,” or serving all of a particular
insured’s property and casualty insurance needs, which our insurance subsidiaries believe generally results in more favorable
loss experience than covering a single risk for an individual insured.
Technology
Donegal Mutual owns and manages the technology that our insurance subsidiaries utilize on a daily basis. The technology
is comprised of highly integrated agency-facing and back-end processing systems that operate within an advanced, modernized
infrastructure that provides high service levels for performance, reliability, security and availability. Donegal Mutual maintains
disaster recovery and backup systems and tests these systems on a regular basis. Our insurance subsidiaries bear their
proportionate share of information services expenses based on their respective percentage of the total net premiums written of
the Donegal Insurance Group.
The business strategy and ultimate success of our insurance subsidiaries depends on the effectiveness of efficient and
integrated business systems and technology infrastructure. These systems enable our insurance subsidiaries to provide quality
service to agents and policyholders by processing business in a timely and dependable manner, communicate and share data
with agents and provide a variety of methods for the payment of premiums. These systems also allow for the accumulation and
analysis of data and information for the management of our insurance subsidiaries. Donegal Mutual is currently in the midst of
a multi-year effort to modernize certain of its key infrastructure and applications systems we describe in more detail under
“Business - Business Strategy - Strategically modernizing our operations and processes to transform our business.”
The modernized proficiency of these integrated technology systems facilitates high service levels for the agents and
policyholders of our insurance subsidiaries, increased efficiencies in processing the business of our insurance subsidiaries and
lower operating costs. Key components of these technology systems include agency interface systems, automated policy
management systems, a claims processing system and a billing administration system. The agency interface systems provide
-13- our insurance subsidiaries with a comprehensive single source to facilitate data sharing both to and from agents’ systems and
also provides agents with an integrated means of processing new business. The automated policy management systems 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 billing administration system allows
our insurance subsidiaries to process premium billing and collection efficiently and in an automated environment.
We believe Donegal Mutual's agency-facing technology systems compare well against those of many national property and
casualty insurance carriers in terms of feature capabilities and service levels. Donegal Mutual maintains a regular interactive
forum with its independent agents to be proactive in identifying opportunities for continued automation and technology
enhancements.
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
application. Our insurance subsidiaries strive to respond to notifications of claims promptly, generally within the day reported.
Our insurance subsidiaries believe that, by responding promptly to claims, they provide quality customer service and minimize
the ultimate cost of the claims. Our insurance subsidiaries engage independent adjusters as needed to handle claims in areas in
which the volume of claims is not sufficient to justify the hiring of internal claims adjusters by our insurance subsidiaries. Our
insurance subsidiaries also employ independent adjusters and private investigators, structural experts and outside legal counsel
to supplement their internal staff and to assist in the investigation of claims. Our insurance subsidiaries have a special
investigative unit primarily staffed by former law enforcement officers that attempts to identify and prevent fraud and abuse and
to investigate questionable claims.
The management of the claims departments of our insurance subsidiaries develops and implements policies and procedures
for the establishment of adequate claim reserves. Our insurance subsidiaries employ an actuarial staff that regularly reviews
their reserves for incurred but not reported claims. The management and staff of the claims departments resolve policy coverage
issues, manage and process reinsurance recoveries and handle salvage and subrogation matters. The litigation and personal
injury sections of our insurance subsidiaries manage all claims litigation. Branch office claims above certain thresholds require
home office review and settlement authorization. Our insurance subsidiaries provide their claims adjusters reserving and
settlement authority based upon their experience and demonstrated abilities. Larger or more complicated claims require
consultation and approval of senior claims department management.
Liabilities for Losses and Loss Expenses
Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with
respect to incurred policyholder claims based on facts and circumstances the insurer knows at that point in time. For example,
legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise
require our insurance subsidiaries to pay losses for damages that their policies explicitly excluded or did not intend to cover. At
the time of establishing its estimates, an insurer recognizes that its ultimate liability for losses and loss expenses will exceed or
be less than such estimates. Our insurance subsidiaries base their estimates of liabilities for losses and loss expenses on
assumptions as to future loss trends, expected claims severity, judicial theories of liability and other factors. However, during
the loss adjustment period, our insurance subsidiaries may learn additional facts regarding individual claims, and, consequently,
it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates for these liabilities. We reflect any
adjustments to the liabilities for losses and loss expenses of our insurance subsidiaries in our consolidated results of operations
in the period in which our insurance subsidiaries make adjustments to their estimates.
Our insurance subsidiaries maintain liabilities for the payment of losses and loss expenses with respect to both reported
and unreported claims. Our insurance subsidiaries establish these liabilities for the purpose of covering the ultimate costs of
-14- settling all losses, including investigation and litigation costs. Our insurance subsidiaries base the amount of their liability for
reported losses primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the insurance policy provisions relating to the type of loss the policyholder incurred. Our insurance
subsidiaries determine the amount of their liability for unreported claims and loss expenses on the basis of historical
information by line of insurance. Our insurance subsidiaries account for inflation in the reserving function through analysis of
costs and trends and reviews of historical reserving results. Our insurance subsidiaries monitor their liabilities closely and
recompute them periodically using new information on reported claims and a variety of statistical techniques. Our insurance
subsidiaries do not discount their liabilities for losses and loss expenses.
Reserve estimates can change over time because of unexpected changes in assumptions related to our insurance
subsidiaries’ external environment and, to a lesser extent, assumptions related to our insurance subsidiaries’ internal operations.
For example, our insurance subsidiaries have experienced an increase in claims severity and a lengthening of the claim
settlement periods on bodily injury claims during the past several years. In addition, the COVID-19 pandemic and related
government mandates and restrictions resulted in various changes from historical claims reporting and settlement trends during
2020 and resulted in significant increases in loss costs in 2021 and 2022 due to a number of factors, including supply chain
disruption, higher new and used automobile values, increases in the cost of replacement automobile parts and rising labor rates.
These trend changes give rise to greater uncertainty as to the pattern of future loss settlements. Related uncertainties regarding
future trends include social inflation, availability and cost of replacement automobile parts and building materials, availability
of skilled labor, the rate of plaintiff attorney involvement in claims and the cost of medical technologies and procedures.
Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law
and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and
policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and
loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the
impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written
within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other
items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed,
our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our
insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at
December 31, 2022. For every 1% change in our insurance subsidiaries’ loss and loss expense reserves, net of reinsurance
recoverable, the effect on our pre-tax results of operations would be approximately $6.7 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 a decrease in their liability
for losses and loss expenses of prior years of $44.8 million, $31.2 million and $12.9 million in 2022, 2021 and 2020,
respectively. Our insurance subsidiaries made no significant changes in their reserving philosophy or claims management
personnel, and they have made no significant offsetting changes in estimates that increased or decreased their loss and loss
expense reserves in those years. The 2022 development represented 7.2% of the December 31, 2021 net carried reserves and
resulted primarily from lower-than-expected loss emergence in the personal automobile and commercial automobile lines of
business for accident years prior to 2022. The majority of the 2022 development related to decreases in the liability for losses
and loss expenses of prior years for Atlantic States and MICO. The 2021 development represented 5.6% of the December 31,
2020 net carried reserves and resulted primarily from lower-than-expected loss emergence in the personal automobile, workers’
compensation and commercial automobile lines of business for accident years prior to 2021. The majority of the 2021
development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO. The
2020 development represented 2.6% of the December 31, 2019 net carried reserves and resulted primarily from lower-than-
expected severity in the workers’ compensation and personal automobile lines of business, partially offset by higher-than-
expected severity in the commercial automobile and commercial multi-peril lines of business, for accident years prior to 2020.
The majority of the 2020 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic
States and MICO.
Excluding the impact of severe weather events and the COVID-19 pandemic, our insurance subsidiaries have noted stable
amounts in the number of claims incurred and the number of claims outstanding at period ends relative to their premium base in
-15- recent years across most of their lines of business. However, the amount of the average claim outstanding has increased
gradually over the past several years due to various factors such as rising inflation and increased litigation trends. We have also
experienced a general slowing of settlement rates in litigated claims and lengthening of repair completion times for property
and automobile claims. Our insurance subsidiaries could have to make further adjustments to their estimates in the future.
However, on the basis of our insurance subsidiaries’ internal procedures, which analyze, among other things, their prior
assumptions, their experience with similar cases and historical trends such as reserving patterns, loss payments, pending levels
of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes, we believe that our
insurance subsidiaries have made adequate provision for their liability for losses and loss expenses.
Atlantic States’ participation in the underwriting pool with Donegal Mutual exposes Atlantic States to adverse loss
development on the business that Donegal Mutual contributes to the underwriting pool. However, pooled business represents
the predominant percentage of the net underwriting activity of both companies, and Donegal Mutual and Atlantic States share
proportionately any adverse risk development relating to the pooled business. The business in the underwriting pool is
homogeneous, and each company has a pro-rata share of the entire underwriting pool. Since the predominant percentage of the
business of Atlantic States and Donegal Mutual is pooled and the results shared by each company according to its participation
level under the terms of the pooling agreement, the intent of the underwriting pool is to produce a more uniform and stable
underwriting result from year to year for each company than either would experience individually and to spread the risk of loss
between the companies.
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 $28.7 million, $23.5 million and $21.0 million at December 31, 2022,
2021 and 2020, respectively.
-16- 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,
2022
2021
2020
Gross liability for unpaid losses and loss expenses at beginning of year
$
1,077,620 $
962,007 $
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
451,261
626,359
404,818
557,189
608,900
551,918
472,709
(44,821)
(31,208)
564,079
520,710
(12,945)
459,764
302,272
218,304
520,576
669,862
451,184
269,317
182,223
451,540
626,359
451,261
869,674
362,768
506,906
236,984
172,497
409,481
557,189
404,818
962,007
Gross liability for unpaid losses and loss expenses at end of year
$
1,121,046 $
1,077,620 $
The following table sets forth the development of the liability for net unpaid losses and loss expenses of our insurance
subsidiaries from 2012 to 2022. 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 2012 liability has developed a deficiency
after ten years because we expect the re-estimated net losses and loss expenses to be $24.7 million more than the estimated
liability we initially established in 2012 of $250.9 million.
The “Cumulative deficiency (excess)” shows the cumulative deficiency or excess at December 31, 2022 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 2012 column
indicates that at December 31, 2022 payments equal to $268.4 million of the currently re-estimated ultimate liability for net
losses and loss expenses of $275.6 million had been made.
-17-
(in thousands)
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Year Ended December 31,
Net liability at end of
year for unpaid
losses and loss
expenses
Net liability re-
estimated as of:
$ 250,936 $ 265,605 $ 292,301 $ 322,054 $ 347,518 $ 383,401 $ 475,398 $ 506,906 $ 557,189 $ 626,359 $ 669,862
One year later
261,294
280,074
299,501
325,043
354,139
419,032
462,466
493,961
525,981
581,538
Two years later
268,877
281,782
299,919
329,115
375,741
413,535
450,862
479,927
498,724
Three years later
270,473
281,666
304,855
338,118
376,060
404,902
440,168
463,441
Four years later
270,794
284,429
307,840
339,228
372,230
398,560
432,027
Five years later
271,954
285,130
310,354
338,020
370,960
396,695
Six years later
272,553
287,439
310,380
338,200
372,346
Seven years later
274,111
287,063
311,594
339,625
Eight years later
274,472
288,298
313,354
Nine years later
275,385
289,066
275,638
24,702
23,461
21,053
17,571
24,828
13,294
(43,371)
(43,465)
(58,465)
(44,821)
Ten years later
Cumulative
deficiency
(excess)
Cumulative amount
of liability paid
through:
One year later
$ 126,677 $ 131,766 $ 131,779 $ 149,746 $ 163,005 $ 175,883 $ 195,956 $ 172,497 $ 182,223 $ 218,304
Two years later
191,208
194,169
206,637
228,506
250,678
276,331
275,993
276,069
297,860
Three years later
225,956
233,371
251,654
274,235
306,338
317,447
335,310
343,912
Four years later
245,094
255,451
274,248
300,715
324,628
342,583
371,231
Five years later
254,502
265,841
287,178
309,630
337,946
362,061
Six years later
259,437
272,431
292,327
315,105
349,496
Seven years later
263,386
275,357
295,106
321,777
Eight years later
265,026
277,315
300,306
Nine years later
266,433
279,928
Ten years later
268,446
(in thousands)
2014
2015
2016
2017
2018
2019
2020
2021
2022
Year Ended December 31,
Gross liability at end
of year
Reinsurance
recoverable
Net liability at end of
$ 538,258 $ 578,205 $ 606,665 $ 676,672 $ 814,665 $ 869,674 $ 962,007 $ 1,077,620 $ 1,121,046
245,957
256,151
259,147
293,271
339,266
362,768
404,818
451,261
451,184
year
292,301
322,054
347,518
383,401
475,398
506,906
557,189
626,359
669,862
Gross re-estimated
liability
Re-estimated
recoverable
Net re-estimated
liability
Gross cumulative
deficiency
(excess)
564,561
594,072
628,241
679,800
755,701
792,676
872,833
933,712
251,207
254,447
255,895
283,105
323,674
329,235
374,109
352,174
313,354
339,625
372,346
396,695
432,027
463,441
498,724
581,538
26,303
15,867
21,576
3,128
(58,964)
(76,998)
(89,174)
(143,908)
-18-
Third-Party Reinsurance
Our insurance subsidiaries and Donegal Mutual purchase certain third-party reinsurance on a combined basis. 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.
The external reinsurance our insurance subsidiaries and Donegal Mutual purchased for 2022 included:
•
•
excess of loss reinsurance, under which Donegal Mutual and our insurance subsidiaries recovered losses over a set
retention of $2.0 million ($3.0 million retention for all losses except for workers' compensation for 2023); and
catastrophe reinsurance, under which Donegal Mutual and our insurance subsidiaries recovered 100% of an
accumulation of many losses resulting from a single event, including natural disasters, over a set retention of $15.0
million up to aggregate losses of $185.0 million per occurrence (over a set retention of $25.0 million up to aggregate
losses of $175.0 million per occurrence for 2023).
For property insurance, our insurance subsidiaries had excess of loss reinsurance that provided for coverage of
$38.0 million per loss over a set retention of $2.0 million ($37.0 million per loss over a set retention of $3.0 million for 2023).
For liability insurance, our insurance subsidiaries had excess of loss reinsurance that provided for coverage of $73.0 million per
occurrence over a set retention of $2.0 million ($72.0 million per occurrence over a set retention of $3.0 million for 2023). For
workers’ compensation insurance, our insurance subsidiaries had excess of loss reinsurance that provided for coverage of
$18.0 million on any one life over a set retention of $2.0 million (no change for 2023).
Our insurance subsidiaries and Donegal Mutual also purchased facultative reinsurance to cover certain exposures,
including property exposures that exceeded the limits provided by their respective treaty reinsurance.
Investments
At December 31, 2022, 100.0% of all debt securities our insurance subsidiaries held had an investment-grade rating. The
investment portfolios of our insurance subsidiaries did not contain any mortgage loans or any non-performing assets at
December 31, 2022.
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, 2022:
(dollars in thousands)
(1)
Rating
U.S. Treasury and U.S. agency securities(2)
Aaa or AAA
Aa or AA
A
BBB
Total
December 31, 2022
Amount
Percent
$
396,191
32.7 %
25,010
343,138
200,629
247,263
2.1
28.3
16.6
20.3
$
1,212,231
100.0 %
(1) Ratings assigned by Moody’s Investors Services, Inc. or Standard & Poor’s Corporation.
(2)
Includes mortgage-backed securities of $229.3 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 19.9%, 21.1% and 22.9% of the fixed-maturity securities in the
combined investment portfolios of our insurance subsidiaries at December 31, 2022, 2021 and 2020, respectively.
-19-
The following table shows the classification of our investments and the investments of our insurance subsidiaries at
December 31, 2022, 2021 and 2020 (at carrying value):
(dollars in thousands)
Fixed maturities(1):
Held to maturity:
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies
2022
December 31,
2021
2020
Percent of
Percent of
Percent of
Amount
Total
Amount
Total
Amount
Total
$ 103,362
7.9 % $ 89,268
7.0 % $ 77,435
6.3 %
Obligations of states and political subdivisions
382,097
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)
Short-term investments(3)
Total investments
190,949
12,031
688,439
63,521
40,156
202,838
217,277
523,792
1,212,231
35,105
57,321
29.3
14.6
1.0
52.8
4.9
3.1
15.5
16.6
40.1
92.9
2.7
4.4
371,436
191,147
16,254
668,105
32,185
57,378
221,611
221,455
532,629
1,200,734
63,420
12,692
29.1
15.0
1.2
52.3
2.5
4.5
17.4
17.3
41.7
94.0
5.0
1.0
312,319
173,270
23,585
586,609
47,815
68,965
212,708
225,648
555,136
1,141,745
58,556
20,901
25.6
14.2
1.9
48.0
3.9
5.7
17.4
18.5
45.5
93.5
4.8
1.7
$ 1,304,657
100.0 % $ 1,276,846
100.0 % $ 1,221,202
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 $598.0 million at December 31, 2022, $697.4 million at December 31, 2021 and
$632.6 million at December 31, 2020. The amortized cost of fixed maturities we classified as available for sale was $571.9 million
at December 31, 2022, $523.3 million at December 31, 2021 and $535.0 million at December 31, 2020.
(2) We value equity securities at fair value. The total cost of equity securities was $30.8 million at December 31, 2022, $43.3 million at
December 31, 2021 and $42.4 million at December 31, 2020
(3) We value short-term investments at cost, which approximates fair value.
-20-
The following table sets forth the maturities (at carrying value) in the fixed maturity portfolio of our insurance subsidiaries
at December 31, 2022, 2021 and 2020:
(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
2022
Percent
of
Total
Amount
December 31,
2021
Percent
of
Total
Amount
2020
Percent
of
Total
Amount
$
39,094
3.2 % $ 48,771
4.1 % $ 73,166
6.4 %
107,689
133,068
357,114
191,118
154,840
229,308
8.9
11.0
29.5
15.8
12.7
18.9
93,100
120,038
362,266
165,327
173,523
237,709
7.7
10.0
30.2
13.8
14.4
19.8
85,805
111,258
341,947
139,604
140,732
249,233
7.5
9.8
30.0
12.2
12.3
21.8
$ 1,212,231
100.0 % $ 1,200,734
100.0 % $ 1,141,745
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
$229.3 million at December 31, 2022. The mortgage-backed securities consist primarily of investments in governmental agency
balloon pools with stated maturities between one and 35 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, 2022,
2021 and 2020:
(dollars in thousands)
Invested assets(1)
Investment income(2)
Average yield
Average tax-equivalent yield
Year Ended December 31,
2022
2021
2020
$ 1,290,752
$ 1,249,024
$ 1,165,878
34,016
31,126
29,504
2.6 %
2.7
2.5 %
2.6
2.5 %
2.7
(1) Average of the aggregate invested amounts at the beginning and end of the period.
(2)
Investment income is net of investment expenses and does not include investment gains or losses or provision for income taxes.
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), 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 insurance obligations.
-21-
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, 2022, our insurance subsidiaries and Donegal Mutual each exceeded the minimum levels of statutory capital the
RBC rules require by a substantial margin.
Generally, every state has guaranty fund laws under which insurers licensed to do business in that state can be assessed on
the basis of premiums written by the insurer in that state in order to fund policyholder liabilities of insolvent insurance
companies. Under these laws in general, an insurer is subject to assessment, depending upon its market share of a given line of
business, to assist in the payment of policyholder claims against insolvent insurers. Our insurance subsidiaries and Donegal
Mutual have made accruals for their portion of assessments related to such insolvencies based upon the most current
information furnished by the guaranty associations.
We are part of an insurance holding company system of which Donegal Mutual is the ultimate controlling person. All of
the states in which our insurance companies and Donegal Mutual maintain a domicile have legislation that regulates insurance
holding company systems. Each insurance company in the insurance holding company system must register with the insurance
supervisory agency of its state of domicile and furnish information concerning the operations of companies within the insurance
holding company system that may materially affect the operations, management or financial condition of the insurers within the
system. Pursuant to these laws, the respective insurance departments in which our subsidiaries and Donegal Mutual maintain a
domicile may examine our insurance subsidiaries or Donegal Mutual at any time, require disclosure of material transactions by
the holding company with another member of the insurance holding company system and require prior notice or prior approval
of certain transactions, such as “extraordinary dividends” from the insurance subsidiaries to the holding company. We have
insurance subsidiaries domiciled in Michigan, Pennsylvania and Virginia.
The Pennsylvania Insurance Holding Companies Act, which generally applies to Donegal Mutual, us and our insurance
subsidiaries, requires that all transactions within an insurance holding company system to which an insurer is a party must be
fair and reasonable and that any charges or fees for services performed must be reasonable. Any management agreement,
service agreement, cost sharing arrangement and material reinsurance agreement must be filed with the Pennsylvania Insurance
Department, or the Department, and is subject to the Department’s review. We have filed with the Department the pooling
agreement between Donegal Mutual and Atlantic States that established the underwriting pool and all material agreements
between Donegal Mutual and our insurance subsidiaries.
Approval of the applicable insurance commissioner is also required prior to consummation of transactions affecting the
control of an insurer. In virtually all states, including the states where our insurance subsidiaries are domiciled, the acquisition
of 10% or more of the outstanding capital stock of an insurer or its holding company or the intent to acquire such an interest
creates a rebuttable presumption of a change in control. Pursuant to an order issued in April 2003, the Department approved
Donegal Mutual’s ownership of up to 70% of our outstanding Class A common stock and Donegal Mutual’s ownership of up to
100% of our outstanding Class B common stock.
Our insurance subsidiaries have the legal obligation under state insurance laws to participate in involuntary insurance
programs for automobile insurance, as well as other property and casualty insurance lines, in the states in which they conduct
business. These programs include joint underwriting associations, assigned risk plans, fair access to insurance requirements
plans, reinsurance facilities, windstorm plans and tornado plans. Legislation establishing these programs requires all companies
that write lines covered by these programs to provide coverage, either directly or through reinsurance, for insureds who are
unable to obtain insurance in the voluntary market. The legislation creating these programs usually allocates a pro rata portion
-22- 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, 2022. 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 did not pay any dividends to us in
2022. Our insurance subsidiaries paid dividends to us of $5.0 million and $14.0 million in 2021 and 2020, respectively. At
December 31, 2022, the amount of ordinary dividends our insurance subsidiaries could pay to us during 2023, 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
$ 26,357,936
MICO
Peninsula
Southern
Total
7,544,187
6,009,019
6,446,312
$ 46,357,454
Donegal Mutual Insurance Company
Donegal Mutual organized as a mutual fire insurance company in Pennsylvania in 1889. At December 31, 2022, Donegal
Mutual had admitted assets of $726.4 million and policyholders’ surplus of $346.9 million. At December 31, 2022, Donegal
Mutual had total liabilities of $379.5 million, including reserves for net losses and loss expenses of $186.5 million and unearned
premiums of $70.0 million. Donegal Mutual’s investment portfolio of $466.2 million at December 31, 2022 consisted primarily
of investment-grade bonds of $224.9 million and its investment in our Class A common stock and our Class B common stock.
At December 31, 2022, Donegal Mutual owned 11,578,470 shares, or approximately 43%, of our Class A common stock,
which Donegal Mutual carried on its books at $152.7 million, and 4,708,571 shares, or approximately 84%, of our Class B
common stock, which Donegal Mutual carried on its books at $62.1 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.
-23-
Information about Our Executive Officers
The following table sets forth information regarding the executive officers of Donegal Mutual and the Registrant as of the
date of this Form 10-K Report:
Name
Kevin G. Burke
Age
57
Jeffrey D. Miller
Kristi S. Altshuler
W. Daniel DeLamater
William A. Folmar
Jeffery T. Hay
Christina M. Hoffman
Matthew T. Hudnall
Robert R. Long, Jr.
Sanjay Pandey
David W. Sponic
V. Anthony Viozzi
Daniel J. Wagner
58
42
50
64
48
48
45
64
56
58
49
62
Position
President and Chief Executive Officer of us since 2015; President and Chief
Executive Officer of Donegal Mutual since 2018; Executive Vice President and
Chief Operating Officer of Donegal Mutual from 2014 to 2018; Senior Vice
President of Human Resources of Donegal Mutual and us from 2005 to 2014; other
positions from 2000 to 2005.
Executive Vice President and Chief Financial Officer of Donegal Mutual and us
since 2014; Senior Vice President and Chief Financial Officer of Donegal Mutual
and us from 2005 to 2014; other positions from 1993 to 2005.
Senior Vice President and Chief Analytics Officer of us since 2020; Senior Vice
President and Chief Analytics Officer of Donegal Mutual since 2019; Director of
Willis Towers Watson from 2018 to 2019; Director of Pricing Innovation of
USAA from 2014 to 2018; other positions at USAA from 2001 to 2014.
Senior Vice President of us since 2022; Senior Vice President and Head of Field
Operations & National Accounts of Donegal Mutual since 2022; Senior Vice
President of National Accounts for Donegal Mutual from 2020 to 2022; President
of Southern Mutual Insurance Company since 2016; other positions at Southern
Mutual Insurance Company from 2000 to 2016.
Senior Vice President of Claims of Donegal Mutual and Senior Vice President of
us since 2019; Vice President of Claims of Donegal Mutual from 2010 to 2019;
other positions from 1998 to 2010.
Senior Vice President and Chief Underwriting Officer of Donegal Mutual and
Senior Vice President of us since 2021; Senior Director of Willis Towers Watson
from 2018 to 2021; Head of Personal Lines Product Management of The Hartford
from 2015 to 2018; other positions at The Hartford from 2005 to 2015.
Senior Vice President and Chief Risk Officer of Donegal Mutual and us since
2019; Senior Vice President of Internal Audit of Donegal Mutual and Senior Vice
President of us from 2013 to 2019; Vice President of Internal Audit of Donegal
Mutual and Vice President of us from 2009 to 2013.
Senior Vice President of Commercial Lines of Donegal Mutual and Senior Vice
President of us since 2022; Senior Vice President of Underwriting of Preferred
Mutual from 2021 to 2022; Vice President of Small Commercial Underwriting of
Hanover Insurance Group from 2016 to 2021; Vice President of Casualty
Underwriting at Hanover Insurance Group from 2013 to 2016.
Senior Vice President and General Counsel of Donegal Mutual and us since 2018;
Vice President and House Counsel of Donegal Mutual from 2012 to 2018; other
positions from 2010 to 2012.
Senior Vice President and Chief Information Officer of Donegal Mutual and us
since 2013; other positions from 2000 to 2013.
Senior Vice President of Personal Lines of Donegal Mutual and Senior Vice
President of us since 2022; Vice President of Personal Lines of Donegal Mutual
from 2008 to 2022; other positions from 1990 to 2008.
Senior Vice President and Chief Investment Officer of Donegal Mutual and us
since 2012; Vice President of Investments of Donegal Mutual and us from 2007 to
2012.
Senior Vice President and Treasurer of Donegal Mutual and us since 2005; other
positions from 1987 to 2005.
-24- 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 2022 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.
-25- Item 1A. Risk Factors.
Risk Factors
Risks Relating to the Property and Casualty Insurance Industry
Industry trends, such as increasing loss severity due to higher rates of litigation against the insurance industry and
individual insurers, the willingness of courts to expand covered causes of loss, rising jury awards, escalating medical,
automobile and property repair costs and other factors may contribute to increased costs and result in ultimate loss
settlements that exceed the reserves of our insurance subsidiaries.
Loss severity in the property and casualty insurance industry has increased in recent years, principally driven by factors
such as distracted driving, larger court judgments, higher jury awards and increasing medical and automobile and property
repair costs, including increases due to inflation and supply chain disruption. In addition, many classes of complainants have
brought legal actions and proceedings that tend to increase the size of judgments. The propensity of policyholders and third-
party claimants to litigate and the willingness of courts to expand causes of loss and the size of awards, to eliminate exclusions
and to increase coverage limits may result in ultimate settlements of current and future losses that exceed the loss reserves of
our insurance subsidiaries.
Our insurance subsidiaries are subject to catastrophe losses and losses from other severe weather events, which are
unpredictable and may adversely affect our results of operations, liquidity and financial condition.
The underwriting results of our insurance subsidiaries are subject to weather and other conditions that may adversely affect
our financial condition, liquidity or results of operations. Because the occurrence and severity of catastrophes are inherently
unpredictable and may vary significantly from year to year and region to region, our historical results of operations may not be
indicative of our future results of operations. Our property and casualty insurance operations expose us to claims arising from
catastrophic events affecting multiple policyholders. Such catastrophic events consist of various natural disasters, including, but
not limited to, hurricanes, tropical storms, tornadoes, windstorms, hailstorms, fires and wildfires, flooding, landslides,
earthquakes, severe winter weather events and man-made disasters such as terrorist attacks, explosions and infrastructure
failures. Historically, our insurance subsidiaries have experienced weather-related losses from hurricanes and tropical storms in
Mid-Atlantic and Southern states, tornadoes and hailstorms in Mid-Atlantic, Midwestern and Southern states and severe winter
weather events in Mid-Atlantic, Midwestern and New England states.
Losses from catastrophic events are a function of both the extent of our insurance subsidiaries’ exposures, the frequency
and severity of the events themselves and the level of reinsurance coverage our insurance subsidiaries purchase. The increased
frequency and severity of weather-related catastrophes and other losses, such as from wildfires and flooding, incurred by the
industry in recent years may be indicative of changing weather patterns due to climate change. Should those patterns continue
to emerge, increased weather-related catastrophes in the states in which our insurance subsidiaries operate would lead to higher
overall losses that they may be unable to offset through pricing actions.
Our insurance subsidiaries seek to reduce their exposure to catastrophe losses through their underwriting strategies and
their purchase of catastrophe reinsurance. Nevertheless, reinsurance may prove inadequate under certain circumstances. While
the emerging science regarding climate change and its connection to extreme weather events continues to be studied, climate
change, to the extent it produces rising temperatures and changes in weather patterns, could affect the frequency and severity of
weather events and other losses and thus impact the affordability and availability of catastrophe reinsurance coverage for our
insurance subsidiaries. Our insurance subsidiaries' ability to appropriately manage catastrophe risk depends partially on
catastrophe models, which may be affected by inaccurate or incomplete data, the uncertainty of the frequency and severity of
future events and the uncertain impact of changing climate conditions that tend to occur gradually over time.
Changing climate conditions could lead to new or revised regulations with which our insurance subsidiaries would have to
comply. Such regulations could impact the ability of our insurance subsidiaries to manage their exposures in areas impacted by
increased weather activity, require our insurance companies to alter the terms and conditions of their policies or impact the
ability of our insurance subsidiaries to obtain sufficient pricing increases to offset higher loss activity.
-26-
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. Proposed increases in premium rates are subject to regulatory approval
on a state-by-state basis, and there is a lag between the time that our insurance subsidiaries file for such approval and the date
upon which our insurance subsidiaries can implement any such approved premium rate increase across their book of business
for a product in a particular state. The premium rates our insurance subsidiaries charge may not be sufficient to cover the
ultimate losses they 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, the reporting of the loss and the settlement 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;
economic and social inflation; and
changes in the regulatory and litigation environments.
If our insurance subsidiaries determine that their reserves are insufficient to cover their ultimate liability, they will increase
their reserves. An increase in reserves results in an increase in losses and a reduction in net income for the period in which our
insurance subsidiaries recognize a deficiency in reserves. Accordingly, an increase in reserves may adversely impact the
business, liquidity, financial condition and results of operations of our insurance subsidiaries.
The financial results of our insurance subsidiaries depend primarily on their ability to underwrite risks effectively and
to charge adequate rates to policyholders.
The financial condition, cash flows and results of operations of our insurance subsidiaries depend on their ability to
underwrite and set rates accurately for a full spectrum of risks across a number of lines of insurance. Rate adequacy is necessary
to generate sufficient premium to pay losses, loss adjustment expenses and underwriting expenses and to realize a profit.
The ability to underwrite and set rates effectively is subject to a number of risks and uncertainties, including those related
to:
•
•
•
•
•
•
•
the availability of sufficient, reliable data;
the ability to conduct a complete and accurate analysis of available data;
the ability to recognize in a timely manner changes in trends and to project both the severity and frequency of losses
with reasonable accuracy;
uncertainties generally inherent in estimates and assumptions;
the ability to project changes in certain operating expense levels with reasonable certainty;
the development, selection and application of appropriate rating formulae or other pricing methodologies;
the effective development, governance and appropriate use of modeling tools to assist with correctly and consistently
achieving the intended results in underwriting and pricing;
-27-
•
•
•
•
•
•
•
•
•
•
•
•
•
the ability to innovate with new pricing strategies and the success of those innovations upon implementation;
the ability to secure regulatory approval of premium rates on an adequate and timely basis;
the ability to predict policyholder retention accurately;
unanticipated court decisions, legislation or regulatory action;
unanticipated changes in our claim settlement practices;
changes in driving patterns for auto exposures;
changes in weather patterns for property exposures;
changes in the medical sector of the economy that impact bodily injury loss costs;
changes in new and used car prices, auto repair costs and auto parts prices, including the increasing integration of
sophisticated technology-related components;
the impact of emerging technologies, including driver assistance technologies and autonomous vehicles, on pricing,
insurance coverages and loss costs;
the impact of inflation and other factors on the cost and availability of construction materials and labor;
the ability to monitor property concentration in catastrophe-prone areas, such as hurricane, earthquake and wind/hail
regions; and
the general state of the economy in the states in which our insurance subsidiaries operate.
Such risks may result in our insurance subsidiaries basing their premium rates on inadequate or inaccurate data or
inappropriate assumptions or methodologies and may cause our estimates of future changes in the frequency or severity of
claims to be incorrect. As a result, our insurance subsidiaries could underprice risks, which would negatively affect our
margins, or our insurance subsidiaries could overprice risks, which could reduce their premium volume and competitiveness. In
either event, underpricing or overpricing risks could adversely impact our operating results, financial condition and cash flows.
The pace of innovation within the insurance industry is rapidly increasing, and our insurance subsidiaries may be
unable to effectively implement new technologies and anticipate changes in customer preferences and insurance needs,
which could put our insurance subsidiaries at a competitive disadvantage and adversely affect their future profitability.
Innovation, recent technological developments, changing customer demographics and preferences, societal shifts and
emerging technologies are greatly impacting the insurance industry. Our insurance subsidiaries compete with much larger
insurers that are focused on implementing technology and innovative solutions to select and price risks, enhance the experience
of their customers and improve their operations. If our insurance subsidiaries are unable to anticipate changes in customer
expectations and keep pace with the technological changes their competitors implement, our insurance subsidiaries may not be
able to attract and maintain quality accounts, adequately price risks or operate as efficiently as their competitors. In addition,
emerging technologies such as electric and autonomous vehicles, driver-assistance and accident avoidance features on vehicles,
sensor technology and other forms of automation may reduce the future need for, or decrease the future pricing of, the insurance
products our insurance subsidiaries offer.
Loss or significant restriction of the use of credit scoring in the pricing and underwriting of the personal lines
insurance products by our insurance subsidiaries could adversely affect their future profitability.
Our insurance subsidiaries use credit scoring as a factor in making risk selection and pricing decisions for personal lines
insurance products where allowed by state law. There is increasing regulatory debate as to whether use of credit scoring
unfairly discriminates against people with low incomes, minority groups and the elderly. Consumer groups and regulators often
call for the prohibition or restriction on the use of credit scoring in underwriting and pricing. Laws or regulations that
significantly curtail the use of credit scoring in the underwriting process could reduce the future profitability of our insurance
subsidiaries.
-28-
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;
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.
The NAIC and state insurance regulators re-examine existing laws and regulations from time to time, specifically focusing
on areas such as:
•
•
•
•
•
•
•
•
insurance company investments;
issues relating to the solvency of insurance companies;
risk-based capital guidelines;
restrictions on the terms and conditions included in insurance policies;
certain methods of accounting;
reserves for unearned premiums, losses and other purposes;
the values at which insurance companies may carry investment securities and the definition of other-than-temporary
impairment of investment securities; and
interpretations of existing laws and the development of new laws.
Changes in state laws and regulations, as well as changes in the way state regulators view related-party transactions in
particular, could change the operating environment of our insurance subsidiaries and have an adverse effect on their business.
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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.
Risks Relating to Us and Our Business
The emergence of COVID-19 has affected the business operations of our insurance subsidiaries and Donegal Mutual,
and economic disruption related to COVID-19 or a future pandemic may adversely affect our revenues, profitability, results
of operations, cash flows, liquidity and financial condition.
During 2020 and 2021, the COVID-19 pandemic resulted in significant disruptions in economic activity throughout our
operating regions. We cannot predict at this time the ultimate impact that the economic and financial disruption related to the
ongoing COVID-19 pandemic or any other future pandemic will have on us. Risks related to COVID-19 or a future pandemic
include, but are not limited to, the following:
•
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•
•
•
•
•
•
•
the business operations or a specific operational function of our insurance subsidiaries and Donegal Mutual could be
disrupted by the illness of significant numbers of their employees and remedial efforts that would be required upon
discovery of exposure to a communicable illness within their facilities;
the business operations of our insurance subsidiaries and Donegal Mutual are dependent upon technology systems for
which regular physical access is required to maintain critical operational capabilities, and the business operations of
our insurance subsidiaries and Donegal Mutual would be adversely impacted by government mandates requiring
closure of facilities where those technology systems are located or restricting physical access to such facilities;
the revenues of our insurance subsidiaries and Donegal Mutual may decrease as a result of reduced demand for their
insurance products as economic disruption adversely impacts current and potential insurance customers;
our insurance subsidiaries and Donegal Mutual may incur an increase in their losses and loss expenses in certain lines
of business as a result of a pandemic and related economic disruption, and such losses and loss expenses may exceed
the reserves our insurance subsidiaries and Donegal Mutual have established or may establish in the future;
our insurance subsidiaries and Donegal Mutual may incur increased costs related to legal disputes over policy
coverages or exclusions and their defense against litigation related to a pandemic;
legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or
otherwise require our insurance subsidiaries and Donegal Mutual to pay losses for damages that their policies
explicitly excluded or did not intend to cover;
legislative, judicial and regulatory actions may require our insurance subsidiaries and Donegal Mutual to reduce or
refund premiums, suspend cancellation of policies for non-payment of premiums or otherwise grant extended grace
periods and time allowances for the payment of premium balances due to them;
our insurance subsidiaries and Donegal Mutual may not be able to collect premium balances due to them, resulting in
reduced operating cash flows and an increase in premium write-offs that would increase their operating expenses;
our insurance subsidiaries may suffer declines in the market values of their investments as a result of financial market
volatility related to pandemic concerns and related economic disruption; and
economic disruption related to a pandemic could result in significant declines in the credit quality of issuers, ratings
downgrades or changes in financial market conditions and regulatory changes that might adversely impact the value of
the fixed-maturity investments that our insurance subsidiaries own.
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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;
we and Donegal Mutual 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.
Donegal Mutual has sufficient voting power to determine the outcome of substantially all matters submitted to our
stockholders for approval.
Each share of our Class A common stock has one-tenth of a vote per share and generally votes as a single class with our
Class B common stock. Each share of our Class B common stock has one vote per share and generally votes as a single class
with our Class A common stock. Donegal Mutual has the right to vote approximately 71% of the combined voting power of our
Class A common stock and our Class B common stock and has sufficient voting control to and has acted to:
•
•
elect all of the members of our board of directors, who determine our management and policies; and
control the outcome of any corporate transaction or other matter submitted to a vote of our stockholders for approval,
including mergers or other acquisition proposals and the sale of all or substantially all of our assets, in each case
regardless of how all of our stockholders other than Donegal Mutual vote their shares.
The interests of Donegal Mutual in maintaining this greater-than-majority voting control of us may have an adverse effect
on the price of our Class A common stock and the price of our Class B common stock because of the absence of any potential
“takeover” premium and may, therefore, be inconsistent with the interests of our stockholders other than Donegal Mutual.
Donegal Mutual’s majority voting control of us, certain provisions of our certificate of incorporation and by-laws and
certain provisions of Delaware law make it remote that anyone could acquire actual control of us unless Donegal Mutual
were in favor of another person’s acquisition of control of us.
Donegal Mutual’s majority voting control of us, certain anti-takeover provisions in our certificate of incorporation and by-
laws and certain provisions of the Delaware General Corporation Law, or the DGCL, could delay or prevent the removal of
members of our board of directors and could make a merger, tender offer or proxy contest involving us more expensive as well
as unlikely to succeed, even if such events were in the best interests of our stockholders other than Donegal Mutual. These
factors could also discourage a third party from attempting to acquire control of us. In particular, our certificate of incorporation
and by-laws include the following anti-takeover provisions:
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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;
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•
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•
•
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.
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 Michigan, Pennsylvania and Virginia, and Donegal Mutual owns
or controls insurance companies domiciled in Georgia and New Mexico. The insurance laws of each of these states provide that
no person can acquire or seek to acquire a 10% or greater interest in us without first filing specified information with the
insurance commissioners of those states and obtaining the prior approval of the proposed acquisition of a 10% or greater
interest in us by each of the state insurance commissioners based on statutory standards designed to protect the safety and
soundness of us and our insurance subsidiaries.
Our insurance subsidiaries and Donegal Mutual currently conduct business in a limited number of states, with a
concentration of business in Pennsylvania, Michigan, Maryland, Delaware, Virginia and Georgia. Any single catastrophe
occurrence or other condition affecting losses in these states could adversely affect the results of operations of our insurance
subsidiaries.
Our insurance subsidiaries and Donegal Mutual conduct business in 24 states located primarily in the Mid-Atlantic,
Midwestern, New England, Southern and Southwestern states. A substantial portion of their business consists of private
passenger and commercial automobile, homeowners, commercial multi-peril and workers’ compensation insurance in
Pennsylvania, Michigan, Maryland, Delaware, Virginia and Georgia. While our insurance subsidiaries and Donegal Mutual
actively manage their respective exposure to catastrophes through their underwriting processes and the purchase of reinsurance,
a single catastrophic occurrence, destructive weather pattern, general economic trend, terrorist attack, regulatory development
or other condition affecting one or more of the states in which our insurance subsidiaries conduct substantial business could
materially adversely affect their business, financial condition and results of operations. Common catastrophic events include
hurricanes, earthquakes, tornadoes, wind and hailstorms, fires and wildfires, explosions and severe winter storms.
If the independent agents who market the products of our insurance subsidiaries and Donegal Mutual do not maintain
their current levels of premium writing with us and Donegal Mutual, fail to comply with established underwriting guidelines
of our insurance subsidiaries and Donegal Mutual or otherwise inappropriately market the products of our insurance
subsidiaries and Donegal Mutual, the business, financial condition and results of operations of our insurance subsidiaries
could be adversely affected.
Our insurance subsidiaries and Donegal Mutual market their insurance products solely through a network of approximately
2,300 independent insurance agencies. This agency distribution system is one of the most important components of the
competitive profile of our insurance subsidiaries and Donegal Mutual. As a result, our insurance subsidiaries and Donegal
Mutual depend to a material extent upon their independent agents, each of whom has the authority to bind one or more of our
insurance subsidiaries or Donegal Mutual to insurance coverage. To the extent that such independent agents’ marketing efforts
fail to result in the maintenance of their current levels of volume and quality or they bind our insurance subsidiaries or Donegal
Mutual to unacceptable insurance risks, fail to comply with the established underwriting guidelines of our insurance
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subsidiaries and Donegal Mutual or otherwise inappropriately market the products of our insurance subsidiaries and Donegal
Mutual, the business, financial condition and results of operations of our insurance subsidiaries could suffer.
The business of our insurance subsidiaries and Donegal Mutual may not continue to grow and may be materially
adversely affected if our insurance subsidiaries and Donegal Mutual cannot retain existing, and attract new, independent
agents or if insurance consumers increase their use of insurance distribution channels other than independent agents.
The ability of our insurance subsidiaries and Donegal Mutual to retain existing, and to attract new, independent agents is
essential to the continued growth of the business of our insurance subsidiaries and Donegal Mutual. If independent agents find
it easier to do business with the competitors of our insurance subsidiaries and Donegal Mutual, our insurance subsidiaries and
Donegal Mutual could find it difficult to retain their existing business or to attract new business. While our insurance
subsidiaries and Donegal Mutual believe they maintain good relationships with the independent agents they have appointed, our
insurance subsidiaries and Donegal Mutual cannot be certain that these independent agents will continue to sell the products of
our insurance subsidiaries and Donegal Mutual to the consumers these independent agents represent. Some of the factors that
could adversely affect the ability of our insurance subsidiaries and Donegal Mutual to retain existing, and attract new,
independent agents include:
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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 and Donegal Mutual that independent agents adhere to certain standards;
the ability of our insurance subsidiaries and Donegal Mutual to pay competitive and attractive commissions, bonuses
and other incentives to independent agents; and
the ongoing consolidation of independent agencies, which may result in the acquisition of independent agencies from
which our insurance subsidiaries and Donegal Mutual currently receive business by larger entities with which our
insurance subsidiaries and Donegal Mutual do not have business relationships.
While our insurance subsidiaries and Donegal Mutual sell insurance to policyholders solely through their network of
independent agencies, many competitors of our insurance subsidiaries and Donegal Mutual sell insurance through a variety of
delivery methods, including independent agencies, captive agencies and direct sales. To the extent that current and potential
policyholders change their distribution channel preference, the business, financial condition and results of operations of our
insurance subsidiaries may be adversely affected.
Dividends from our insurance subsidiaries are the primary source of funds for the payment of our operating expenses
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 2023 without prior regulatory approval is approximately $46.4 million. Other business
and regulatory considerations, such as the impact of dividends on surplus that could affect the ratings of our insurance
subsidiaries, competitive conditions, RBC requirements, the investment results of our insurance subsidiaries and the amount of
premiums that our insurance subsidiaries write could also adversely impact the ability of our insurance subsidiaries to pay
dividends to us.
If A.M. Best downgrades the rating it has assigned to Donegal Mutual or any of our insurance subsidiaries, it would
adversely affect their competitive position.
Industry ratings are a factor in establishing and maintaining the competitive position of insurance companies. A.M. Best, an
industry-accepted source of insurance company financial strength ratings, rates Donegal Mutual and our insurance subsidiaries.
A.M. Best ratings provide an independent opinion of an insurance company’s financial health and its ability to meet its
obligations to its policyholders. We believe that the financial strength rating of A.M. Best is material to the operations of
Donegal Mutual and our insurance subsidiaries. For example, certain lenders require customers to purchase insurance from an
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insurance carrier that has received an A.M. Best rating that exceeds a certain level. Currently, Donegal Mutual and our
insurance subsidiaries each have an A (Excellent) rating from A.M. Best. In March 2022, A.M. Best affirmed its A (Excellent)
ratings of Donegal Mutual and our insurance subsidiaries. However, if A.M. Best were to downgrade the rating of Donegal
Mutual or any of our insurance subsidiaries, it would adversely affect the competitive position of Donegal Mutual or that
insurance subsidiary and make it more difficult for it to market its products and retain its existing policyholders.
The growth and profitability of our insurance subsidiaries depend, in part, on the effective maintenance and ongoing
development of Donegal Mutual’s information technology systems, and the allocation of related costs to our insurance
subsidiaries may adversely impact their profitability.
Our insurance subsidiaries utilize Donegal Mutual’s information technology systems to conduct their insurance business,
including policy quoting and issuance, claims processing, processing of incoming premium payments and other important
functions. As a result, the ability of our insurance subsidiaries to grow their business and conduct profitable operations depends
on Donegal Mutual’s ability to maintain its existing information technology systems and to develop new technology systems
that will support the business of Donegal Mutual and our insurance subsidiaries in a cost-efficient manner and provide
information technology capabilities equivalent to those of our competitors. The allocation among our insurance subsidiaries
and Donegal Mutual of the costs of developing and maintaining Donegal Mutual’s information technology systems may
adversely impact our insurance subsidiaries’ expense ratio and underwriting profitability, and such costs may exceed Donegal
Mutual’s and our expectations.
Donegal Mutual is currently in the midst of a multi-year effort to modernize certain of its key infrastructure and
applications systems, and the allocation of related costs to our insurance subsidiaries has resulted in an increase to their expense
ratio. These new systems are intended to provide various benefits to the member companies of the Donegal Insurance Group,
including streamlined workflows and business processes, service enhancements for their agents and policyholders,
opportunities to implement new product models and innovative business solutions, greater utilization of data analytics and
operational efficiencies. Our insurance subsidiaries began to issue workers’ compensation policies from the new systems in the
second quarter of 2020 and began to issue personal lines policies from the new systems, including a new personal lines agency
portal, in the fourth quarter of 2021. Over the next several years, Donegal Mutual expects to implement new systems for the
remaining lines of business that the Donegal Insurance Group offers currently, including three commercial lines of business
with enhanced straight-through-processing capabilities beginning in the first half of 2023. Even with Donegal Mutual's and our
best planning and efforts and the involvement of third-party experts, Donegal Mutual may not complete the implementation of
these new systems within its planned timeframes or budget. Further, Donegal Mutual’s information technology systems may
not deliver the benefits Donegal Mutual and we expect and may fail to keep pace with our competitors’ information technology
systems. As a result, Donegal Mutual and our insurance subsidiaries may not have the ability to grow their business and meet
their profitability objectives.
Our strategy to grow in part through acquisitions of other insurance companies exposes us to risks that could adversely
affect our results of operations and financial condition.
The affiliation with, and acquisition of, other insurance companies involves risks that could adversely affect our results of
operations and financial condition. The risks associated with these affiliations and acquisitions include:
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the potential inadequacy of reserves for losses and loss expenses of the other insurer;
the need to supplement management of the other insurer with additional experienced personnel;
conditions imposed by regulatory agencies that make the realization of cost-savings through integration of the
operations of the other insurer with our operations more difficult;
our management's lack of familiarity with the geography, demographics and distribution systems in the markets the
other insurer serves that cause the other insurer to fail to meet the growth and profitability objectives we anticipated at
the time of the acquisition or affiliation;
the need of the other insurer for additional capital that we did not anticipate at the time of the acquisition or affiliation;
and
the use of more of our management’s time in improving the operations of the other insurer than we originally
anticipated.
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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 may 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.
Competition within the property and casualty insurance industry may adversely impact the revenues and profit margins
of our insurance subsidiaries.
The property and casualty insurance industry is intensely competitive. Competition can be based on many factors,
including:
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the perceived financial strength of the insurer;
premium rates;
policy terms and conditions;
policyholder service;
reputation; and
experience.
Our insurance subsidiaries and Donegal Mutual compete with many regional and national property and casualty insurance
companies, including direct sellers of insurance products, insurers having their own agency organizations and other insurers
represented by independent agents. Many of these insurers have greater capital than our insurance subsidiaries and Donegal
Mutual, have substantially greater financial, technical and operating resources, have substantially greater exposure and access to
potential customers and have equal or higher ratings from A.M. Best than our insurance subsidiaries and Donegal Mutual. In
addition, our competitors may become increasingly better capitalized in the future as the property and casualty insurance
industry continues to consolidate.
The greater capitalization of many of the competitors of our insurance subsidiaries and Donegal Mutual enables them to
operate with lower profit margins and, therefore, allows them to market their products more aggressively, to take advantage
more quickly of new marketing opportunities and to offer lower premium rates. In addition to established insurers, our
insurance subsidiaries and Donegal Mutual compete with a growing number of start-ups, some of which have received
substantial infusions of capital, that seek to disrupt traditional business platforms and distribution channels. Our insurance
subsidiaries and Donegal Mutual may not be able to maintain their current competitive position in the markets in which they
operate if their competitors offer prices for their products that are lower than the prices our insurance subsidiaries and Donegal
Mutual are prepared to offer. Moreover, if these competitors lower the price of their products and our insurance subsidiaries and
Donegal Mutual meet their pricing, the profit margins and revenues of our insurance subsidiaries and Donegal Mutual may
decrease and their ratios of claims and expenses to premiums may increase. All of these factors could materially adversely
affect the financial condition and results of operations of our insurance subsidiaries and their A.M. Best ratings.
The investment portfolios of our insurance subsidiaries consist primarily of fixed-income securities; therefore, the
investment income and the fair value of the investment portfolios of our insurance subsidiaries could decrease as a result of
a number of factors.
Our insurance subsidiaries invest the premiums they receive from their policyholders and maintain investment portfolios
that consist primarily of fixed-income securities. The effective management of these investment portfolios is an important
component of the profitability of our insurance subsidiaries. Our insurance subsidiaries derive a significant portion of their
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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 by either 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. As we
experienced when market interest rates increased significantly in 2022, 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 will typically have an
adverse impact on the market values of fixed-rate securities. If interest rates decline, 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 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, 2022, our insurance subsidiaries had approximately $148.3 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 certain 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, 2022, MICO had approximately $60.7 million of
reinsurance receivables from MCCA relating to paid and unpaid losses. The MCCA has generated significant operating deficits
in past years. While the MCCA generated an increase in surplus in recent years, the MCCA board approved the return of a
significant portion of its accumulated surplus to policyholders in the form of cash refunds in early 2022. Although we currently
consider the risk to be remote, should the MCCA be unable to fulfill its payment obligations to MICO in the future, MICO’s
financial condition and results of operations could be adversely affected.
In addition, our insurance subsidiaries face a risk of the non-availability of reinsurance or an increase in reinsurance costs
that could adversely affect their ability to write business or their results of operations. Market conditions beyond the control of
our insurance subsidiaries, such as the amount of surplus in the reinsurance market and the frequency and severity of natural
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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. For example, due to increased
reinsurance pricing and reduced reinsurance market capacity, our insurance subsidiaries increased their net retentions under
several of their reinsurance programs for 2023.
The disruption or failure of Donegal Mutual’s information technology 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 addition, in the normal course of their operations, Donegal Mutual and
our insurance subsidiaries collect, utilize and maintain confidential information regarding individuals and businesses. While
Donegal Mutual has established various security measures to protect its information technology systems and confidential data,
unanticipated computer viruses, malware, ransomware, power outages, unauthorized access or other cyberattacks could disrupt
those systems or result in the misappropriation or loss of confidential data. Donegal Mutual could experience technology
system failures or other outages that would impact the availability of its information technology systems. Donegal Mutual has
experienced brief disruptions of systems in the past, including those systems that allow underwriting and processing of new
policies. Disruption in the availability of Donegal Mutual’s information technology systems could affect the ability of Donegal
Mutual and our insurance subsidiaries to underwrite and process their policies timely, process and settle claims promptly and
provide expected levels of customer service to agents and policyholders.
While Donegal Mutual has identified threats to the security of its information technology systems, Donegal Mutual and we
are unaware of any significant breach of the security measures Donegal Mutual maintains. A significant breach of the security
of Donegal Mutual’s information technology systems that results in the misappropriation or misuse of confidential information
could damage the business reputation of Donegal Mutual and our insurance subsidiaries and could expose Donegal Mutual and
our insurance subsidiaries to litigation. The financial impact to Donegal Mutual, us and our insurance subsidiaries of a
significant breach could be material.
Risks Relating to Our Common Stock
The price of our common stock may be adversely affected by its low trading volume.
Our Class A common stock and our Class B common stock have limited liquidity. Reported average daily trading volume
for our Class A common stock and our Class B common stock for the year ended December 31, 2022 was approximately
73,246 shares and approximately 1,289 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
Georgia, Michigan, New Mexico, Pennsylvania and Virginia 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,
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.
-37-
Item 1B. Unresolved Staff Comments.
We have no unresolved written comments from the Securities and Exchange Commission 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 allocates to our insurance subsidiaries their proportionate share of
building-related expenses under a services allocation agreement. The Marietta headquarters has approximately 270,000 square
feet of office space. Southern owns a facility of approximately 10,000 square feet in Glen Allen, Virginia.
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. However, regardless of outcome, litigation and related matters could have an adverse
impact on us and our insurance subsidiaries due to defense and settlement costs, diversion of management resources, negative
publicity, reputational harm and other factors.
Item 4. Mine Safety Disclosures.
Not applicable.
-38-
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Our Class A common stock and Class B common stock trade on the NASDAQ Global Select Market under the symbols
“DGICA” and “DGICB,” respectively.
At the close of business on March 1, 2023, we had approximately 1,792 holders of record of our Class A common stock
and approximately 225 holders of record of our Class B common stock.
We declared dividends of $0.66 per share on our Class A common stock and $0.59 per share on our Class B common stock
in 2022, compared to $0.64 per share on our Class A common stock and $0.57 per share on our Class B common stock in 2021.
Unregistered Sales of Equity Securities and Use of Proceeds.
Between October 1, 2022 and December 31, 2022, Donegal Mutual purchased shares of our Class A common stock as set
forth in the table below:
Period
Month #1
October 1-31, 2022
(a) Total Number of Shares
(or Units) Purchased
Class A – None
Class B – None
(b) Average Price Paid per
Share (or Unit)
Class A – None
Class B – None
(c) Total Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs
Class A – None
Class B – None
(d) Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs
Month #2
November 1-30, 2022
Class A – 157,148
Class B – None
Month #3
December 1-31, 2022
Class A – 102,360
Class B – None
Total
Class A – 259,508
Class B – None
Class A – $15.24
Class B – None
Class A – $14.97
Class B – None
Class A – $15.13
Class B –None
Class A – 157,148
Class B – None
Class A – 102,360
Class B – None
Class A – 259,508
Class B – None
(1)
(1)
(1) Donegal Mutual purchased these shares pursuant to its disclosure on April 29, 2022 that it will, at its discretion,
purchase shares of our Class A common stock and Class B common stock at market prices prevailing from time to
time in the open market subject to the provisions of SEC Rule 10b-18 and in privately negotiated transactions. Such
disclosure did not stipulate a maximum number of shares that may be purchased under this program.
-39-
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, 2017 and ending on December 31, 2022, compared to the
Russell 2000 Index and a peer group comprised of six property and casualty insurance companies over the same period. The
peer group consists of Cincinnati Financial Corp., Hanover Insurance Group Inc., Horace Mann Educators Corp., Kemper
Corp., Selective Insurance Group Inc. and United Fire Group Inc. The graph shows the change in value of an initial $100
investment on December 31, 2017, assuming reinvestment of all dividends.
Donegal Group Inc. Class A
Donegal Group Inc. Class B
Russell 2000
Peer Group
2017
$100.00
100.00
100.00
100.00
2018
$81.96
80.44
88.99
105.40
2019
$92.74
90.43
111.70
132.70
2020
$91.80
87.32
134.00
119.87
2021
$97.30
103.58
153.85
140.13
2022
$101.23
130.35
122.41
135.46
Research Data Group 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.
Item 6. [Reserved]
-40- 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”), The Peninsula Insurance
Company and Peninsula Indemnity Company (collectively, “Peninsula”), and Michigan Insurance Company (“MICO”) and
their affiliates write commercial and personal lines of property and casualty coverages exclusively through a network of
independent insurance agents in certain Mid-Atlantic, Midwest, New England, Southern and Southwestern states. The
commercial lines products of our insurance subsidiaries consist primarily of commercial automobile, commercial multi-peril
and workers’ compensation policies. The personal lines products of our insurance subsidiaries consist primarily of homeowners
and private passenger automobile policies.
At December 31, 2022, Donegal Mutual held approximately 43% of our outstanding Class A common stock and
approximately 84% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately
71% of the 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 have participated in a proportional reinsurance agreement, or pooling agreement, since
1986. Under the pooling agreement, Donegal Mutual and Atlantic States contribute substantially all of their respective
premiums, losses and loss expenses to the underwriting pool, and the underwriting pool, acting through Donegal Mutual, then
allocates 80% of the pooled business to Atlantic States. Thus, Donegal Mutual and Atlantic States share the underwriting results
of the pooled business in proportion to their respective participation in the underwriting pool. 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 conduct business together with Donegal Mutual and its
insurance subsidiaries as the Donegal Insurance Group. The Donegal Insurance Group is not a legal entity, is not an insurance
company and does not issue or administer insurance policies. Rather, it is a trade name that refers to the group of insurance
companies that are affiliated with Donegal Mutual. See “Business - Relationship with Donegal Mutual” for more information
regarding the pooling agreement and other transactions with our affiliates.
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.
Donegal Mutual completed the merger of Mountain States Mutual Casualty Company, or Mountain States, with and into
Donegal Mutual effective May 25, 2017. Donegal Mutual was the surviving company in the merger, and Mountain States’
insurance subsidiaries, Mountain States Indemnity Company and Mountain States Commercial Insurance Company
(collectively, the “Mountain States insurance subsidiaries”), became insurance subsidiaries of Donegal Mutual upon completion
of the merger. Upon completion of the merger, Donegal Mutual assumed all of the policy obligations of Mountain States and
began to market its products together with the Mountain States insurance subsidiaries as the Mountain States Insurance Group
in four Southwestern states. Donegal Mutual also entered into a 100% quota-share reinsurance agreement with the Mountain
States insurance subsidiaries on the merger date. Beginning with policies effective in 2021, Donegal Mutual began to place the
business of the Mountain States Insurance Group into the underwriting pool. As a result, our consolidated financial results
through December 31, 2020 excluded the results of the Mountain States Insurance Group operations in those Southwestern
states.
In July 2013, our board of directors authorized a share repurchase program pursuant to which we have the authority to
purchase up to 500,000 additional shares of our Class A common stock at prices prevailing from time to time in the open
market subject to the provisions of the SEC Rule 10b-18 and in privately negotiated transactions. We did not purchase any
-41- shares of our Class A common stock under this program during 2022 or 2021. We have purchased a total of 57,658 shares of
our Class A common stock under this program from its inception through December 31, 2022.
On April 29, 2022, Donegal Mutual disclosed that it will, at its discretion, purchase shares of our Class A common stock
and our Class B common stock at market prices prevailing from time to time in the open market subject to the provisions of
SEC Rule 10b-18 and in privately negotiated transactions. Such disclosure did not stipulate a maximum number of shares that
may be purchased under this program. During 2022, Donegal Mutual purchased 1,035,778 shares of our Class A common stock
and 54,231 shares of our Class B common stock.
In accordance with Section 12b-2 of the Exchange Act, we are no longer a “smaller reporting company” as of December
31, 2022. However, under Item 10(f)(2)(i) of Regulation S-K, we are permitted to avail ourselves of the scaled disclosure
requirements available to smaller reporting companies in this Form 10-K Report. Having ceased to be a smaller reporting
company, we will no longer be able to avail ourselves of such scaled disclosure beginning with our quarterly report on Form
10-Q for the quarterly period ending March 31, 2023. We have historically not availed ourselves of most aspects of such scaled
disclosure and do not expect any material increase in financial or legal expenses for additional disclosure requirements as a
result of the change in status.
Critical Accounting Policies and Estimates
We combine our financial statements with those of our insurance subsidiaries and present them on a consolidated basis in
accordance with GAAP.
Our insurance subsidiaries make estimates and assumptions that can have a significant effect on amounts and disclosures
we report in our financial statements. The most significant estimates relate to the reserves of our insurance subsidiaries for
property and casualty insurance unpaid losses and loss expenses. While we believe our estimates and the estimates of our
insurance subsidiaries are appropriate, the ultimate amounts may differ from the estimates we provided. We regularly review
our methods for making these estimates, and we reflect any adjustment we consider necessary in our results of operations for
the period in which we make an adjustment.
Liability for Losses and Loss Expenses
Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with
respect to incurred policyholder claims based on facts and circumstances the insurer knows at that point in time. For example,
legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise
require our insurance subsidiaries to pay losses for damages that their policies explicitly excluded or did not intend to cover. At
the time of establishing its estimates, an insurer recognizes that its ultimate liability for losses and loss expenses will exceed or
be less than such estimates. Our insurance subsidiaries base their estimates of liabilities for losses and loss expenses on
assumptions as to future loss trends, expected claims severity, judicial theories of liability and other factors. However, during
the loss adjustment period, our insurance subsidiaries may learn additional facts regarding individual claims, and, consequently,
it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates for these liabilities. We reflect any
adjustments to the liabilities for losses and loss expenses of our insurance subsidiaries in our consolidated results of operations
in the period in which our insurance subsidiaries make adjustments to their estimates.
Our insurance subsidiaries maintain liabilities for the payment of losses and loss expenses with respect to both reported
and unreported claims. Our insurance subsidiaries establish these liabilities for the purpose of covering the ultimate costs of
settling all losses, including investigation and litigation costs. Our insurance subsidiaries base the amount of their liability for
reported losses primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the insurance policy provisions relating to the type of loss the policyholder incurred. Our insurance
subsidiaries determine the amount of their liability for unreported claims and loss expenses on the basis of historical
information by line of insurance. Our insurance subsidiaries account for inflation in the reserving function through analysis of
costs and trends and reviews of historical reserving results. Our insurance subsidiaries monitor their liabilities closely and
recompute them periodically using new information on reported claims and a variety of statistical techniques. Our insurance
subsidiaries do not discount their liabilities for losses and loss expenses.
Reserve estimates can change over time because of unexpected changes in assumptions related to our insurance
subsidiaries’ external environment and, to a lesser extent, assumptions related to our insurance subsidiaries’ internal operations.
For example, our insurance subsidiaries have experienced an increase in claims severity and a lengthening of the claim
settlement periods on bodily injury claims during the past several years. In addition, the COVID-19 pandemic and related
government mandates and restrictions resulted in various changes from historical claims reporting and settlement trends during
-42- 2020 and resulted in significant increases in loss costs in 2021 and 2022 due to a number of factors, including supply chain
disruption, higher new and used automobile values, increases in the cost of replacement automobile parts and rising labor rates.
These trend changes give rise to greater uncertainty as to the pattern of future loss settlements. Related uncertainties regarding
future trends include social inflation, availability and cost of replacement automobile parts and building materials, availability
of skilled labor, the rate of plaintiff attorney involvement in claims and the cost of medical technologies and procedures.
Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law
and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and
policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and
loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the
impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written
within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other
items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed,
our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our
insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at
December 31, 2022. For every 1% change in our insurance subsidiaries’ loss and loss expense reserves, net of reinsurance
recoverable, the effect on our pre-tax results of operations would be approximately $6.7 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 a decrease in their liability for losses and loss expenses of prior years of $44.8
million, $31.2 million and $12.9 million in 2022, 2021 and 2020, respectively. Our insurance subsidiaries made no significant
changes in their reserving philosophy or claims management personnel, and they have made no significant offsetting changes in
estimates that increased or decreased their loss and loss expense reserves in those years. The 2022 development represented
7.2% of the December 31, 2021 net carried reserves and resulted primarily from lower-than-expected loss emergence in the
personal automobile and commercial automobile lines of business for accident years prior to 2022. The majority of the 2022
development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO. The
2021 development represented 5.6% of the December 31, 2020 net carried reserves and resulted primarily from lower-than-
expected loss emergence in the personal automobile, workers’ compensation and commercial automobile lines of business for
accident years prior to 2021. The majority of the 2021 development related to decreases in the liability for losses and loss
expenses of prior years for Atlantic States and MICO. The 2020 development represented 2.6% of the December 31, 2019 net
carried reserves and resulted primarily from lower-than-expected severity in the workers’ compensation and personal
automobile lines of business, partially offset by higher-than-expected severity in the commercial automobile and commercial
multi-peril lines of business, for accident years prior to 2020. The majority of the 2020 development related to decreases in the
liability for losses and loss expenses of prior years for Atlantic States and MICO.
Excluding the impact of severe weather events and the COVID-19 pandemic, our insurance subsidiaries have noted stable
amounts in the number of claims incurred and the number of claims outstanding at period ends relative to their premium base in
recent years across most of their lines of business. However, the amount of the average claim outstanding has increased
gradually over the past several years due to various factors such as rising medical loss costs and increased litigation trends. We
have also experienced a general slowing of settlement rates in litigated claims. Our insurance subsidiaries could have to make
further adjustments to their estimates in the future. However, on the basis of our insurance subsidiaries’ internal procedures,
which analyze, among other things, their prior assumptions, their experience with similar cases and historical trends such as
reserving patterns, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic
conditions and public attitudes, we believe that our insurance subsidiaries have made adequate provision for their liability for
losses and loss expenses.
Atlantic States’ participation in the pool with Donegal Mutual exposes Atlantic States to adverse loss development on the
business of Donegal Mutual that the pool includes. However, pooled business represents the predominant percentage of the net
underwriting activity of both companies, and Donegal Mutual and Atlantic States share proportionately any adverse risk
development relating to the pooled business. The business in the pool is homogeneous and each company has a pro-rata share
-43- of the entire pool. Since the predominant percentage of the business of Atlantic States and Donegal Mutual is pooled and the
results shared by each company according to its participation level under the terms of the pooling agreement, the intent of the
underwriting pool is to produce a more uniform and stable underwriting result from year to year for each company than either
would experience individually and to spread the risk of loss between the companies.
Our insurance subsidiaries’ liability for losses and loss expenses by major line of business at December 31, 2022 and 2021
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
2022
2021
(in thousands)
$ 174,833
$ 172,302
120,539
203,567
23,071
522,010
108,715
28,481
10,656
147,852
669,862
451,184
122,398
168,445
18,530
481,675
109,915
26,169
8,600
144,684
626,359
451,261
Total liability for losses and loss expenses
$ 1,121,046
$ 1,077,620
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, 2022
Percentage Change in
Equity at December 31,
2022(1)
(dollars in thousands)
Adjusted Loss and Loss
Expense Reserves Net of
Reinsurance at
December 31, 2021
Percentage Change in
Equity at
December 31, 2021(1)
-10.0%
$602,876
10.9%
$563,723
9.3%
-7.5
-5.0
-2.5
Base
2.5
5.0
7.5
10.0
619,622
636,369
653,115
669,862
686,609
703,355
720,102
736,848
8.2
5.5
2.7
—
-2.7
-5.5
-8.2
-10.9
579,382
595,041
610,700
626,359
642,018
657,677
673,336
688,995
7.0
4.7
2.3
—
-2.3
-4.7
-7.0
-9.3
(1) Net of income tax effect.
-44- Our insurance subsidiaries base their reserves for unpaid losses and loss expenses on current trends in loss and loss expense
development and reflect their best estimates for future amounts needed to pay losses and loss expenses with respect to incurred
events currently known to them plus incurred but not reported (“IBNR”) claims. Our insurance subsidiaries develop their
reserve estimates based on an assessment of known facts and circumstances, review of historical loss settlement patterns,
estimates of trends in claims severity, frequency, legal and regulatory changes and other assumptions. Our insurance
subsidiaries consistently apply actuarial loss reserving techniques and assumptions, which rely on historical information as
adjusted to reflect current conditions, including consideration of recent case reserve activity. Our insurance subsidiaries use the
point estimate their actuaries select. For the year ended December 31, 2022, the actuaries developed a range from a low of
$621.6 million to a high of $721.6 million and selected a point estimate of $669.9 million. The actuaries’ range of estimates for
commercial lines in 2022 was $486.4 million to $560.5 million, and the actuaries selected a point estimate of $522.0 million.
The actuaries’ range of estimates for personal lines in 2022 was $135.2 million to $161.1 million, and the actuaries selected a
point estimate of $147.9 million. For the year ended December 31, 2021, the actuaries developed a range from a low of
$575.7 million to a high of $681.5 million and selected a point estimate of $626.4 million. The actuaries’ range of estimates for
commercial lines in 2021 was $442.8 million to $524.0 million, and the actuaries selected a point estimate of $481.7 million.
The actuaries’ range of estimates for personal lines in 2021 was $132.9 million to $157.5 million, and the actuaries selected a
point estimate of $144.7 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. 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 2022 and 2021 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
Management Evaluation of Operating Results
For the Year Ended December 31,
2022
2021
3,336
6,683
6,653
3,366
2,898
6,883
6,445
3,336
$
55,809 $
12,062
50,664
10,067
Despite challenging insurance market conditions and increasing property and casualty loss severity trends that affected our
results in recent years, we believe that our focused business strategy, including our insurance subsidiaries’ ongoing
implementation of premium rate increases and refinements to their disciplined underwriting practices, have positioned us well
for 2023 and beyond.
Because our insurance subsidiaries do not prepare GAAP financial statements, we evaluate the performance of our
commercial lines and personal 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:
Commercial lines:
Automobile
Workers’ compensation
Commercial multi-peril
Other
Total commercial lines
Personal lines:
Automobile
Homeowners
Other
Total personal lines
Total net premiums written
Components of combined ratio:
Loss ratio
Expense ratio
Dividend ratio
Combined ratio
Revenues:
Net premiums earned:
Commercial lines
Personal lines
Total net premiums earned
Net investment income
Investment (losses) gains
Other
Total revenues
(in thousands)
Components of net (loss) income:
Underwriting (loss) income:
Commercial lines
Personal lines
SAP underwriting (loss) income
GAAP adjustments
GAAP underwriting (loss) income
Net investment income
Investment (losses) gains
Other
(Loss) income before income tax (benefit) expense
Income tax (benefit) expense
Net (loss) income
Year Ended December 31,
2022
2021
2020
$ 167,774
$ 161,947
$ 135,294
111,892
113,256
109,960
200,045
188,242
147,993
40,086
38,340
32,739
519,797
501,785
425,986
181,129
170,578
184,602
120,087
109,974
111,886
22,517
21,930
19,666
323,733
302,482
316,154
$ 843,530
$ 804,267
$ 742,140
68.6 %
67.1 %
62.0 %
34.1
0.6
33.3
0.6
33.0
1.0
103.3 %
101.0 %
96.0 %
$ 510,153
$ 468,433
$ 412,877
312,337
307,582
329,163
822,490
776,015
742,040
34,016
(10,185)
1,900
31,126
6,477
2,848
29,504
2,778
3,497
$ 848,221
$ 816,466
$ 777,819
Year Ended December 31,
2022
2021
2020
$
(22,665) $
(35,174) $
(858)
(13,506)
17,235
(36,171)
(17,939)
8,667
9,945
(27,504)
(7,994)
34,016
(10,185)
31,126
6,477
35
(3,638)
(1,679)
(1,959) $
730
30,339
5,085
25,254 $
$
31,764
30,906
(959)
29,947
29,504
2,778
1,043
63,272
10,457
52,815
-46-
Non-GAAP Information
We prepare our consolidated financial statements on the basis of GAAP. Our insurance subsidiaries prepare financial
statements based on SAP. SAP financial measures are considered non-GAAP financial measures under applicable SEC rules
because the SAP financial measures include or exclude certain items that the most comparable GAAP financial measures do not
ordinarily include or exclude. Our calculation of non-GAAP financial measures may differ from similar measures other
companies use. As a result, investors should exercise caution when comparing our non-GAAP financial measures to the non-
GAAP financial measures other companies use. The SAP financial measures we utilize are net premiums written and statutory
combined ratio.
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 2022, 2021 and
2020:
Year Ended December 31,
2022
2021
2020
Net premiums earned
Change in net unearned premiums
Net premiums written
$ 822,489,450 $ 776,015,201 $ 742,040,339
99,554
$ 843,528,599 $ 804,266,509 $ 742,139,893
28,251,308
21,039,149
The increase in the change in net unearned premiums for 2021 compared to 2020 primarily reflects the inclusion of the
business of the Mountain States Insurance Group in the underwriting pool beginning with policies effective in 2021.
Statutory Combined Ratio
The combined ratio is a standard measurement of underwriting profitability for an insurance company. The combined
ratio does not reflect investment income, net investment gains or losses, federal income taxes or other non-operating income or
expense. A combined ratio of less than 100% generally indicates underwriting profitability.
The statutory combined ratio is a non-GAAP financial measure that is based upon amounts determined under SAP. We
calculate our statutory combined ratio as the sum of:
•
•
•
the statutory loss ratio, which is the ratio of calendar-year net incurred losses and loss expenses to net premiums
earned;
the statutory expense ratio, which is the ratio of expenses incurred for net commissions, premium taxes and
underwriting expenses to net premiums written; and
the statutory dividend ratio, which is the ratio of dividends to holders of workers’ compensation policies to net
premiums earned.
The calculation of our statutory combined ratio differs from the calculation of our GAAP combined ratio. In calculating
our GAAP combined ratio, we do not deduct installment payment fees from incurred expenses, and we base the expense ratio
on net premiums earned instead of net premiums written. Differences between our GAAP loss ratio and our statutory loss ratio
result from anticipating salvage and subrogation recoveries for our GAAP loss ratio but not for our statutory loss ratio.
-47-
The following table presents comparative details with respect to our GAAP and statutory combined ratios for the years
ended December 31, 2022, 2021 and 2020:
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
Other
Total commercial lines
Personal lines:
Automobile
Homeowners
Other
Total personal lines
Total commercial and personal lines
Results of Operations
Year Ended December 31,
2022
2021
2020
60.9 %
7.7
34.1
0.6
103.3 %
98.0 %
97.3
116.9
80.8
103.7
103.8
111.0
52.1
102.8
103.3
61.3 %
5.8
33.3
0.6
101.0 %
108.6 %
94.6
114.1
77.5
104.9
94.4
102.9
49.3
94.4
100.8
55.1 %
6.9
33.0
1.0
96.0 %
112.7 %
86.3
98.4
74.0
97.8
91.3
97.2
74.9
92.4
95.4
YEAR ENDED DECEMBER 31, 2022 COMPARED TO YEAR ENDED DECEMBER 31, 2021
Net Premiums Earned
Our insurance subsidiaries’ net premiums earned increased to $822.5 million for 2022, an increase of $46.5 million, or
6.0%, compared to 2021, primarily reflecting solid premium retention and renewal premium increases. Our insurance
subsidiaries earn premiums and recognize them as income over the terms of the policies they issue. Such terms are generally
one year or less in duration. Therefore, increases or decreases in net premiums earned generally reflect increases or decreases in
net premiums written in the preceding twelve-month period compared to the same period one year earlier.
Net Premiums Written
Our insurance subsidiaries’ 2022 net premiums written increased 4.9% to $843.5 million, compared to $804.3 million for
2021. Commercial lines net premiums written increased $18.0 million, or 3.6%, for 2022 compared to 2021. We attribute the
increase in commercial lines net premiums written primarily to modest new business writings, strong premium retention and a
continuation of renewal premium increases in lines other than workers’ compensation, offset partially by planned attrition in
regions we have targeted for profit improvement. Personal lines net premiums written increased $21.3 million, or 7.0%, for
2022 compared to 2021. We attribute the increase in personal lines net premiums written primarily to renewal premium
increases, strong policy retention and new business writings in certain states where we have introduced an updated suite of
products.
Investment Income
For 2022, our net investment income increased 9.3% to $34.0 million, compared to $31.1 million for 2021, due primarily to
higher average reinvestment yields and higher average invested assets for 2022 compared to 2021.
-48-
Net Investment (Losses) Gains
Our net investment losses for 2022 were $10.2 million. Our net investment gains for 2021 were $6.5 million. The net
investment (losses) gains for 2022 and 2021 were primarily related to (decreases) increases in unrealized (losses) gains within
our equity securities portfolio. We did not recognize any impairment losses during 2022 or 2021.
Losses and Loss Expenses
Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was
68.6% for 2022, compared to 67.1% for 2021. Our insurance subsidiaries’ commercial lines loss ratio decreased to 67.1% for
2022, compared to 68.6% for 2021. This decrease resulted primarily from the commercial automobile loss ratio decreasing to
64.2% for 2022, compared to 75.0% for 2021. The personal lines loss ratio increased to 71.0% for 2022, compared to 64.8% for
2021. The personal automobile loss ratio increased to 72.1% for 2022, compared to 65.6% for 2021, primarily due to an
increase in automobile claim severity due to the ongoing impact of supply chain disruption and labor shortages on the costs of
repair and replacement vehicles. The homeowners loss ratio increased to 76.1% for 2022, compared to 69.6% for 2021,
primarily due to increased average claim severity due to the ongoing impact of supply chain disruption and labor shortages on
repair and replacement costs for homes. Our insurance subsidiaries experienced favorable loss reserve development of
approximately $44.8 million, or 5.4 percentage points of the loss ratio, during 2022 in their reserves for prior accident years,
compared to approximately $31.2 million, or 4.0 percentage points of the loss ratio, during 2021. The favorable loss reserve
development in 2022 resulted primarily from lower-than-expected loss emergence in the personal automobile and commercial
automobile lines of business for accident years prior to 2022. Weather-related losses of $63.5 million, or 7.7 percentage points
of the loss ratio, for 2022 increased from $45.3 million, or 5.8 percentage points of the loss ratio, for 2021, with the increase
primarily impacting the commercial multi-peril line of business. Large fire losses, which we define as individual fire losses in
excess of $50,000, were $53.5 million, or 6.5 percentage points of the loss ratio, for 2022, compared to $45.6 million, or 5.9
percentage points of the loss ratio, for 2021. The increase was related to increased average claim severity of both commercial
property and home fires in 2022 compared to 2021, which we attribute in part to inflationary repair cost increases.
Underwriting Expenses
Our insurance subsidiaries’ expense ratio, which is the ratio of policy acquisition and other underwriting expenses to
premiums earned, was 34.1% for 2022, compared to 33.3% for 2021. We attribute the modest increase to higher technology
system-related expenses for 2022 compared to 2021, offset somewhat by lower commercial growth incentive costs for our
agents and decreased underwriting-based incentive costs for our employees for 2022 compared to 2021. The increase in
technology systems-related expenses for 2022 was primarily due to an increased allocation of costs from Donegal Mutual to our
insurance subsidiaries following the successful implementation of the second phase of our ongoing systems modernization
project in August 2021.
Policyholder Dividends
Our insurance subsidiaries pay policyholder dividends primarily on workers' compensation policies on a sliding scale based
on the profitability of a given policy.
Combined Ratio
Our insurance subsidiaries’ combined ratio was 103.3% and 101.0% for 2022 and 2021, 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 the loss
ratio.
Interest Expense
Our interest expense for 2022 decreased to $620,558, compared to $895,605 for 2021. We attribute the decrease to lower
average borrowings under our lines of credit during 2022 compared to 2021.
-49- Income Taxes
Our income tax benefit was $1.7 million for 2022, compared to income tax expense of $5.1 million for 2021. Our effective
tax rate for 2021 was 16.8%.
Net (Loss) Income and (Loss) Earnings Per Share
Our net loss for 2022 was $2.0 million, or $.06 per share of Class A common stock and $.07 per share of Class B common
stock, compared to net income for 2021 of $25.3 million, or $0.83 per share of Class A common stock on a diluted basis and
$0.74 per share of Class B common stock. We had 27.1 million and 25.8 million Class A shares outstanding at December 31,
2022 and 2021, 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
Our stockholders’ equity decreased by $47.4 million during 2022, primarily due to $45.4 million of after-tax unrealized
losses within our available-for-sale fixed-maturity portfolio, resulting in a decrease in our book value per share to $14.79 at
December 31, 2022, compared to $16.95 a year earlier.
YEAR ENDED DECEMBER 31, 2021 COMPARED TO YEAR ENDED DECEMBER 31, 2020
Net Premiums Earned
Our insurance subsidiaries’ net premiums earned increased to $776.0 million for 2021, an increase of $34.0 million, or
4.6%, compared to 2020, primarily reflecting the inclusion of the business of the Mountain States Insurance Group in the
underwriting pool beginning with policies effective in 2021, as well solid premium retention and renewal premium increases.
Our insurance subsidiaries earn premiums and recognize them as income over the terms of the policies they issue. Such terms
are generally one year or less in duration. Therefore, increases or decreases in net premiums earned generally reflect increases
or decreases in net premiums written in the preceding twelve-month period compared to the same period one year earlier.
Net Premiums Written
Our insurance subsidiaries’ 2021 net premiums written increased 8.4% to $804.3 million, compared to $742.1 million for
2020. Commercial lines net premiums written increased $75.8 million, or 17.8%, for 2021 compared to 2020. We attribute the
increase in commercial lines net premiums written primarily to the inclusion of the business of the Mountain States Insurance
Group in the underwriting pool beginning with policies effective in 2021, as well as solid premium retention and renewal
premium increases. Personal lines net premiums written decreased $13.7 million, or 4.3%, for 2021 compared to 2020. We
attribute the decrease in personal lines net premiums written primarily to net attrition as a result of measures our insurance
subsidiaries implemented to improve underwriting profitability, partially offset by the impact of premium rate increases.
Investment Income
For 2021, our net investment income increased to $31.1 million, compared to $29.5 million for 2020, due primarily to
higher average invested assets for 2021 compared to 2020.
Net Investment Gains
Our net investment gains for 2021 and 2020 were $6.5 million and $2.8 million, respectively. The net investment gains for
2021 and 2020 were primarily related to increases in unrealized gains within our equity securities portfolio. We did not
recognize any impairment losses during 2021 or 2020.
Losses and Loss Expenses
Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was
67.1% for 2021, compared to 62.0% for 2020. Our insurance subsidiaries’ commercial lines loss ratio increased to 68.6% for
2021, compared to 63.9% for 2020. This increase resulted primarily from the workers’ compensation loss ratio increasing to
57.7% for 2021, compared to 51.1% for 2020, and the commercial multi-peril loss ratio increasing to 76.9% for 2021,
compared to 65.9% for 2020. The personal lines loss ratio increased to 64.8% for 2021, compared to 59.5% for 2020. The
personal automobile loss ratio increased to 65.6% for 2021, compared to 60.1% for 2020, primarily due to an increase in
-50- automobile claim frequency as driving activity generally returned to pre-pandemic levels. The homeowners loss ratio increased
to 69.6% for 2021, compared to 61.8% for 2020. Our insurance subsidiaries experienced favorable loss reserve development of
approximately $31.2 million, or 4.0 percentage points of the loss ratio, during 2021 in their reserves for prior accident years,
compared to favorable loss reserve development of approximately $12.9 million, or 1.7 percentage points of the loss ratio,
during 2020. The favorable loss reserve development in 2021 resulted primarily from lower-than-expected loss emergence in
the personal automobile, workers’ compensation and commercial automobile lines of business for accident years prior to 2021.
Weather-related losses of $45.3 million, or 5.8 percentage points of the loss ratio, for 2021 decreased from $51.4 million, or 6.9
percentage points of the loss ratio, for 2020, with the decrease primarily impacting the commercial multi-peril line of business.
Large fire losses, which we define as individual fire losses in excess of $50,000, were $45.6 million, or 5.9 percentage points of
the loss ratio, for 2021, compared to $22.8 million, or 3.1 percentage points of the loss ratio, for 2020. The significant increase
was related to a higher incidence of both commercial property and home fires in 2021 compared to 2020.
Underwriting Expenses
Our insurance subsidiaries’ expense ratio, which is the ratio of policy acquisition and other underwriting expenses to
premiums earned, was 33.3% for 2021, compared to 33.0% for 2020. We attribute the modest increase to higher technology
system-related expenses for 2021 compared to 2020, offset somewhat by lower commercial growth incentive costs for our
agents and decreased underwriting-based incentive costs for our agents and employees for 2021 compared to 2020. The
increase in technology systems-related expenses for 2021 was primarily due to an increased allocation of costs from Donegal
Mutual to our insurance subsidiaries following the successful implementation of the second phase of our ongoing systems
modernization project in August 2021.
Policyholder Dividends
Our insurance subsidiaries pay policyholder dividends primarily on workers' compensation policies on a sliding scale based
on the profitability of a given policy. We attribute the decrease in dividends incurred for 2021 compared to 2020 to a modest
decline in the profitability of the workers' compensation line of business over the respective periods to which the dividends
applied.
Combined Ratio
Our insurance subsidiaries’ combined ratio was 101.0% and 96.0% for 2021 and 2020, respectively. The combined ratio
represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of workers’ compensation policy
dividends incurred to premiums earned. We attribute the increase in our combined ratio primarily to the increase in the loss
ratio.
Interest Expense
Our interest expense for 2021 decreased to $895,605, compared to $1.2 million for 2020. We attribute the decrease to
lower average borrowings under our lines of credit during 2021 compared to 2020.
Income Taxes
Our income tax expense was $5.1 million for 2021, compared to $10.5 million for 2020. Our effective tax rate for 2021
was 16.8%, compared to 16.5% for 2020. Our income tax expense for 2020 included a $1.6 million income tax benefit related
to the carryback of 2018 net operating losses to past tax years with higher statutory income tax rates than are currently in effect,
as allowed under the Coronavirus Aid, Relief and Economic Security Act that was enacted in March 2020.
Net Income and Earnings Per Share
Our net income for 2021 was $25.3 million, or $0.83 per share of Class A common stock on a diluted basis and $0.74 per
share of Class B common stock, compared to net income for 2020 of $52.8 million, or $1.83 per share of Class A common
stock on a diluted basis and $1.65 per share of Class B common stock. We had 25.8 million and 24.6 million Class A shares
outstanding at December 31, 2021 and 2020, respectively. We had 5.6 million Class B shares outstanding for both periods.
There are no outstanding securities that dilute our shares of Class B common stock.
-51- Book Value Per Share
Our stockholders’ equity increased by $13.3 million during 2021 as a result of our net income, offset somewhat by a
reduction of net unrealized gains within our available-for-sale fixed maturity investments. Our book value per share decreased
to $16.95 at December 31, 2021, compared to $17.13 a year earlier, primarily as a result of an increase in the number of Class
A shares outstanding during the year.
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 2022, 2021 and 2020
were $67.1 million, $76.7 million and $101.1 million, respectively.
At December 31, 2022, we had no outstanding borrowings under our line of credit with M&T and had the ability to
borrow up to $20.0 million at interest rates equal to the then-current LIBOR rate plus 2.00%. At December 31, 2022, Atlantic
States had a $35.0 million outstanding advance with the FHLB of Pittsburgh that carries a fixed interest rate of 1.74% and is
due in August 2024. In March 2020, Atlantic States issued $50.0 million of debt to the FHLB of Pittsburgh in exchange for a
cash advance in the same amount for contingent liquidity funding in light of uncertainty surrounding the economic impact of
the COVID-19 pandemic. Atlantic States repaid this advance when it became due in March 2021. In September 2021, upon
receipt of approval from the Michigan Department of Insurance and Financial Services, MICO repaid in full the $5.0 million
surplus note held previously by Donegal Mutual, along with accrued interest of $178,082. We discuss in Note 9 – Borrowings
our estimate of the timing of the amounts payable for the borrowings under our lines of credit based on their contractual
maturities.
We estimate the timing of claim payments associated with the liabilities for losses and loss expenses of our insurance
subsidiaries based on historical experience and expectations of future payment patterns. Amounts Atlantic States assumes
pursuant to the pooling agreement with Donegal Mutual represent a substantial portion of our insurance subsidiaries’ gross
liabilities for losses and loss expenses, and amounts Atlantic States cedes pursuant to the pooling agreement represent a
substantial portion of our insurance subsidiaries’ reinsurance recoverable on unpaid losses and loss expenses. We include cash
settlement of Atlantic States’ assumed liabilities from the pool in monthly settlements of pooled activity, as we net amounts
ceded to and assumed from the pool. Although Donegal Mutual and we do not anticipate any changes in the pool participation
levels in the foreseeable future, any such change would be prospective in nature and therefore would not impact the timing of
expected payments by Atlantic States for its percentage share of pooled losses occurring in periods prior to the effective date of
such change.
The cash dividends we declared to our stockholders totaled $20.9 million, $19.6 million and $17.3 million in 2022, 2021
and 2020, 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,
2022. Amounts available for distribution to us as dividends from our insurance subsidiaries without prior approval of insurance
regulatory authorities in 2023 are approximately $26.4 million from Atlantic States, $6.5 million from Southern, $6.0 million
from Peninsula and $7.5 million from MICO, or a total of approximately $46.4 million.
-52- Investments
At December 31, 2022 and 2021, our investment portfolio of primarily investment-grade bonds, common stock, short-term
investments and cash totaled $1.3 billion, representing 58.2% and 59.2%, respectively, of our total assets. See “Business -
Investments” for more information.
December 31,
2022
2021
Percent of
Percent of
Amount
Total
Amount
Total
(dollars in thousands)
Fixed maturities:
Total held to maturity
$ 688,439
52.8 % $ 668,105
52.3 %
Total available for sale
Total fixed maturities
Equity securities
Short-term investments
523,792
1,212,231
35,105
57,321
40.1
92.9
2.7
4.4
532,629
1,200,734
63,420
12,692
41.7
94.0
5.0
1.0
Total investments
$ 1,304,657
100.0 % $ 1,276,846
100.0 %
The carrying value of our fixed maturity investments represented 92.9% and 94.0% of our total invested assets at
December 31, 2022 and 2021, respectively.
Our fixed maturity investments consisted of high-quality marketable bonds, of which 100.0% were rated at investment-
grade levels at December 31, 2022 and 2021, respectively.
At December 31, 2022, the net unrealized loss on our available-for-sale fixed maturity investments, net of deferred taxes,
amounted to $38.0 million, compared to a net unrealized gain of $7.4 million at December 31, 2021.
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 Changing Climate Conditions
Insured losses from severe weather events could significantly impact the underwriting results of our insurance subsidiaries.
Losses from catastrophic events are a function of both the extent of our insurance subsidiaries’ exposures, the frequency and
severity of the events themselves and the level of reinsurance coverage our insurance subsidiaries purchase. The increased
frequency and severity of weather-related catastrophes and other losses, such as from wildfires and flooding, incurred by the
industry in recent years may be indicative of changing weather patterns due to climate change. Should those patterns continue
to emerge, increased weather-related catastrophes in the states in which our insurance subsidiaries operate would lead to higher
overall losses that they may be unable to offset through pricing actions.
Our insurance subsidiaries seek to reduce their exposure to catastrophe losses through their underwriting strategies and
their purchase of catastrophe reinsurance. While the emerging science regarding climate change and its connection to extreme
weather events continues to be studied, climate change, to the extent it produces rising temperatures and changes in weather
patterns, could affect the frequency and severity of weather events and other losses and thus impact the affordability and
availability of catastrophe reinsurance coverage for our insurance subsidiaries. Our insurance subsidiaries’ ability to
appropriately manage catastrophe risk depends partially on catastrophe models, which rely on historical data that might not be
representative of the frequency and severity of future events. Such models might also be unable to anticipate the uncertain
impact of changing climate conditions that tend to occur gradually over time. Because the policies of our insurance subsidiaries
renew not less frequently than annually, our insurance subsidiaries have the ability to respond to the impact of changing climate
conditions through adjustments to their underwriting standards, pricing, and policy terms and conditions, subject to applicable
regulatory approvals.
-53-
Changing climate conditions could lead to new or revised regulations with which our insurance subsidiaries would have to
comply. Such regulations could impact the ability of our insurance subsidiaries to manage their exposures in areas impacted by
increased weather activity, require our insurance companies to alter the terms and conditions of their policies or impact the
ability of our insurance subsidiaries to obtain sufficient pricing increases to offset higher loss activity.
Impact of New Accounting Standards
In September 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. In November 2019, the FASB issued guidance that delays the effective date for “smaller
reporting companies,” as defined in Item 10(f)(1) of Regulation S-K, to annual and interim reporting periods beginning after
December 15, 2022 from December 15, 2019. We are a smaller reporting company and our adoption of this guidance on
January 1, 2023 will result in an after-tax adjustment to retained earnings estimated between $1.5 million and $2.5 million. We
do not expect the adoption of this guidance to have a significant impact on our results of operations or cash flows.
Off-Balance Sheet Arrangements
As of December 31, 2022 and 2021, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of
Regulation S-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to the impact of interest rate changes, to changes in fair values of investments and to credit risk.
In the normal course of business, we employ established policies and procedures to manage our exposure to changes in
interest rates, fluctuations in the fair market value of our debt and equity securities and credit risk. We seek to mitigate these
risks by various actions we describe below.
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, 2022 that are sensitive to interest rates are as follows:
(in thousands)
Fixed-maturity and short-term investments:
2023
2024
2025
2026
2027
Thereafter
Total
Fair value
Debt:
2024
Total
Fair value
Principal Cash
Flows
Weighted-
Average
Interest Rate
$
96,897
3.54 %
3.98
4.00
4.00
3.83
3.04
1.74 %
46,799
63,851
70,116
73,460
967,145
$ 1,318,268
$ 1,179,158
$
$
$
35,000
35,000
35,000
-54-
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.
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.
-55- 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 (KPMG LLP, PCAOB ID 185)
Schedule:
Schedule III — Supplementary Insurance Information
57
58
59
60
61
93
101
-56-
Donegal Group Inc.
Consolidated Balance Sheets
December 31,
2022
2021
Assets
Investments
Fixed maturities
Held to maturity, at amortized cost (fair value $598,044,681 and $697,400,964) . . . . . $ 688,439,360 $ 668,104,568
532,629,015
Available for sale, at fair value (amortized cost $571,912,727 and $523,293,046) . . . .
63,419,973
Equity securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments, at cost, which approximates fair value . . . . . . . . . . . . . . . . . . . .
12,692,341
1,276,845,897
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57,709,375
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,214,971
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
168,862,580
Premiums receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
455,411,009
Reinsurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68,028,373
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,685,619
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
176,935,842
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,956,930
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,252
Accounts receivable - securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,290,938
Federal income taxes recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,112,800
Receivable from Michigan Catastrophic Claims Association . . . . . . . . . . . . . . . . . . . . . . . .
1,922,717
Due from affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,625,354
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
958,010
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,612,732
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,243,349,335 $ 2,255,175,399
523,791,931
35,104,840
57,321,111
1,304,657,242
25,123,332
8,861,292
173,846,294
456,522,223
73,170,230
21,603,017
160,591,399
2,755,105
1,842
8,510,897
—
—
5,625,354
958,010
1,123,098
Liabilities and Stockholders’ Equity
Liabilities
Losses and loss expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,121,045,758 $ 1,077,620,301
572,958,422
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,028,659
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,946,105
Reinsurance balances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,000,000
Borrowings under lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,915,268
Cash dividends declared to stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,112,800
Cash refunds due to Michigan policyholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Due to affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,557,757
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,724,139,312
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
577,653,130
4,226,390
3,495,824
35,000,000
5,296,990
—
5,173,289
7,864,942
1,759,756,323
Stockholders’ Equity
Preferred stock, $.01 par value, authorized 2,000,000 shares; none issued . . . . . . . . . . . .
Class A common stock, $.01 par value, authorized 50,000,000 shares, issued 30,120,263
and 28,756,203 shares and outstanding 27,117,675 and 25,753,615 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) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56,492
304,889,481
3,283,551
263,745,358
(41,226,357)
531,036,087
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,243,349,335 $ 2,255,175,399
56,492
325,601,647
(41,703,747)
240,563,774
(41,226,357)
483,593,012
—
—
301,203
287,562
See accompanying notes to consolidated financial statements.
-57-
Donegal Group Inc.
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
Years Ended December 31,
2021
2020
2022
Statements of (Loss) Income
Revenues
Net premiums earned (includes affiliated reinsurance of $232,105,306,
$212,591,341 and $192,861,276 - see note 3) . . . . . . . . . . . . . . . . . . . . . $ 822,489,450 $ 776,015,201 $ 742,040,339
29,504,466
Investment income, net of investment expenses . . . . . . . . . . . . . . . . . . . . .
31,125,631
34,016,112
Installment payment fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,516,330
2,416,873
3,063,097
Lease income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment (losses) gains (includes ($979,972), $382,602 and
383,451
430,800
434,089
$572,106 accumulated other comprehensive income reclassification) . .
(10,184,797)
6,477,286
2,777,919
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
848,220,546
816,465,791
777,819,910
Expenses
Net losses and loss expenses (includes affiliated reinsurance of
$177,849,040, $131,367,599 and $87,374,791 - see note 3) . . . . . . . . . .
564,078,993
520,709,542
459,764,293
Amortization of deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . .
142,430,000
128,733,000
119,072,000
Other underwriting expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
137,923,739
129,367,893
125,862,651
Policyholder dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,560,407
5,198,515
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
620,558
895,605
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,244,948
1,222,728
7,394,310
1,196,406
1,257,747
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
851,858,645
786,127,283
714,547,407
(Loss) income before income tax (benefit) expense . . . . . . . . . . . . . . . . . . . .
Income tax (benefit) expense (includes ($205,794), $80,346 and $120,142
income tax (benefit) expense from reclassification items) . . . . . . . . . . . . . .
(3,638,099) 30,338,508
63,272,503
(1,678,694)
5,084,334
10,457,251
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,959,405) $ 25,254,174 $ 52,815,252
Basic (loss) earnings per common share:
Class A common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Class B common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(0.06) $
(0.07) $
0.83 $
0.74 $
Diluted (loss) earnings per common share:
Class A common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Class B common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(0.06) $
(0.07) $
0.83 $
0.74 $
1.84
1.65
1.83
1.65
Statements of Comprehensive (Loss) Income
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,959,405) $ 25,254,174 $ 52,815,252
Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain arising during the period, net of income
tax (benefit) expense of ($12,164,443), ($2,008,078) and $2,944,892 .
Reclassification adjustment for losses (gains) included in net (loss)
income, net of income tax (benefit) expense of ($205,794), $80,346
and $120,142 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(45,761,476)
(7,544,805) 11,078,406
774,178
(302,256)
(451,964)
Other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,847,061) 10,626,442
Comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (46,946,703) $ 17,407,113 $ 63,441,694
(44,987,298)
See accompanying notes to consolidated financial statements.
-58-
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
26,203,935
5,649,240 $ 262,040 $ 56,492 $ 268,151,601 $
504,170 $ 223,267,573 $ (41,226,357) $ 451,015,519
Balance, January 1,
2020 . . . . . . . . . .
Issuance of common
stock (stock
compensation
plans) . . . . . . . . .
Stock-based
Net income . . . . . . .
Cash dividends . . . .
Grant of stock
options . . . . . . . .
Other
comprehensive
income . . . . . . . .
Balance,
December 31,
2020 . . . . . . . . . .
Issuance of common
stock (stock
compensation
plans) . . . . . . . . .
Stock-based
Net income . . . . . . .
Cash dividends . . . .
Grant of stock
options . . . . . . . .
Other
comprehensive
loss . . . . . . . . . . .
Balance,
December 31,
2021 . . . . . . . . . .
Issuance of common
stock (stock
compensation
plans) . . . . . . . . .
Stock-based
Net loss . . . . . . . . . .
Cash dividends . . . .
Grant of stock
options . . . . . . . .
Other
comprehensive
loss . . . . . . . . . . .
Balance,
December 31,
2022 . . . . . . . . . .
153,233
1,532
2,057,504
compensation . . .
1,294,606
12,946
18,582,085
52,815,252
(17,337,160)
2,059,036
18,595,031
52,815,252
(17,337,160)
358,377
(358,377)
—
10,626,442
10,626,442
27,651,774
5,649,240 $ 276,518 $ 56,492 $ 289,149,567 $ 11,130,612 $ 258,387,288 $ (41,226,357) $ 517,774,120
157,783
compensation . . .
946,646
1,578
9,466
2,161,142
13,260,855
25,254,174
(19,578,187)
2,162,720
13,270,321
25,254,174
(19,578,187)
317,917
(317,917)
—
(7,847,061)
(7,847,061)
28,756,203
5,649,240 $ 287,562 $ 56,492 $ 304,889,481 $
3,283,551 $ 263,745,358 $ (41,226,357) $ 531,036,087
161,254
1,613
2,122,277
compensation . . .
1,202,806
12,028
18,252,148
(1,959,405)
(20,884,438)
2,123,890
18,264,176
(1,959,405)
(20,884,438)
337,741
(337,741)
—
(44,987,298)
(44,987,298)
30,120,263
5,649,240 $ 301,203 $ 56,492 $ 325,601,647 $ (41,703,747) $ 240,563,774 $ (41,226,357) $ 483,593,012
See accompanying notes to consolidated financial statements.
-59-
Donegal Group Inc.
Consolidated Statements of Cash Flows
Cash Flows from Operating Activities:
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,959,405) $ 25,254,174 $ 52,815,252
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation, amortization and other non-cash items . . . . . . . . . . . . . . . . .
Net investment losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,841,559
10,184,797
5,837,809
(6,477,286)
6,721,621
(2,777,919)
Years Ended December 31,
2021
2020
2022
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 to affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance balances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows from Investing Activities:
Purchases of fixed maturities:
115,612,864
35,768,824
(25,086,539)
92,333,588
43,425,457
27,042,113
4,694,708
661,454
197,731
(3,863,383)
733,752
(4,983,714)
127,901
(8,871,415)
(5,141,857)
(2,958,735)
6,448
1,095,306
(1,111,214) (46,502,159) (41,887,382)
(870,850)
224,324
1,117,439
(7,517,509) (26,942,566)
(3,174,200)
(2,201,569)
(399,440)
867,438
48,319,148
51,477,794
101,134,400
76,731,968
(3,219,959)
796,805
69,069,425
67,110,020
(646,321)
7,096,006
(450,281)
(278,092)
(12,216,212)
16,344,443
712,582
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of fixed maturities:
(74,902,605) (125,630,220) (157,048,527)
(151,994,462) (163,593,018) (176,500,255)
(6,964,092)
(15,862,888) (25,354,790)
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,381,244
6,281,963
22,172,930
Maturity of fixed maturities:
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales (purchases) of property and equipment . . . . . . . . . . . . . . . . . . . . . .
Net (purchases) sales of short-term investments . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows from Financing Activities:
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings under lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . .
53,747,886
75,759,806
34,973,196
28,290
47,448,424
172,084,542
6,091,288
(89,702)
(6,869,933)
(44,628,770)
(98,498,303) (62,199,311) (99,675,325)
44,211,076
165,867,395
26,585,663
1,224,806
8,207,814
19,304,956
19,292,324
14,181,702
(20,502,716) (19,099,220) (16,976,093)
—
—
50,000,000
(1,197,760) (59,917,518) 52,316,231
(5,000,000)
(50,000,000)
—
—
—
—
(32,586,043) (45,384,861) 53,775,306
Net (decrease) increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49,318,930
103,094,236
57,709,375
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,123,332 $ 57,709,375 $ 103,094,236
See accompanying notes to consolidated financial statements.
-60-
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”), the Peninsula Insurance Group (“Peninsula”), which consists of Peninsula Indemnity Company and The
Peninsula Insurance Company and Michigan Insurance Company (“MICO”), and affiliates write personal and commercial lines
of property and casualty coverages exclusively through a network of independent insurance agents in certain Mid-Atlantic,
Midwestern, New England, Southern and Southwestern states.
At December 31, 2022, we had three segments: our investment function, our commercial lines of insurance and our
personal lines of insurance. The commercial lines products of our insurance subsidiaries consist primarily of commercial
automobile, commercial multi-peril and workers’ compensation policies. The personal lines products of our insurance
subsidiaries consist primarily of homeowners and private passenger automobile policies.
At December 31, 2022, Donegal Mutual held approximately 43% of our outstanding Class A common stock and
approximately 84% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately
71% of the total voting power of our common stock. Our insurance subsidiaries and Donegal Mutual have interrelated
operations due to a pooling agreement and other intercompany agreements and transactions. While each company maintains its
separate corporate existence, our insurance subsidiaries and Donegal Mutual conduct business together as the Donegal
Insurance Group. As such, Donegal Mutual and our insurance subsidiaries share the same business philosophy, the same
management, the same employees and the same facilities and offer the same types of insurance products.
Atlantic States, our largest subsidiary, participates in a proportional reinsurance agreement, or pooling agreement, with
Donegal Mutual. Under the pooling agreement, Donegal Mutual and Atlantic States contribute substantially all of their
respective premiums, losses and loss expenses to the underwriting pool, and the underwriting pool, acting through Donegal
Mutual, then allocates 80% of the pooled business to Atlantic States. Thus, Donegal Mutual and Atlantic States share the
underwriting results of the pooled business in proportion to their respective participation in the underwriting pool.
In addition, Donegal Mutual has a 100% quota-share reinsurance agreement with Southern Mutual Insurance Company, or
Southern Mutual. Donegal Mutual places its assumed business from Southern Mutual into the underwriting pool.
Donegal Mutual completed the merger of Mountain States Mutual Casualty Company, or Mountain States, with and into
Donegal Mutual effective May 25, 2017. Donegal Mutual was the surviving company in the merger, and Mountain States’
insurance subsidiaries, Mountain States Indemnity Company and Mountain States Commercial Insurance Company
(collectively, the “Mountain States insurance subsidiaries”), became insurance subsidiaries of Donegal Mutual upon completion
of the merger. Upon completion of the merger, Donegal Mutual assumed all of the policy obligations of Mountain States and
began to market its products together with the Mountain States insurance subsidiaries as the Mountain States Insurance Group
in four Southwestern states. Donegal Mutual also entered into a 100% quota-share reinsurance agreement with the Mountain
States insurance subsidiaries on the merger date. Beginning with policies effective in 2021, Donegal Mutual began to place the
business of the Mountain States Insurance Group into the underwriting pool. As a result, our consolidated financial results
through December 31, 2020 excluded the results of the Mountain States Insurance Group operations in those Southwestern
states.
The same executive management and underwriting personnel administer products, classes of business underwritten, pricing
practices and underwriting standards of Donegal Mutual and our insurance subsidiaries. In addition, as the Donegal Insurance
Group, Donegal Mutual and our insurance subsidiaries share a combined business plan to achieve market penetration and
underwriting profitability objectives. The products our insurance subsidiaries and Donegal Mutual market are generally
complementary, thereby allowing the Donegal Insurance Group to offer a broader range of products to a given market and to
expand the Donegal Insurance Group’s ability to service an entire personal lines or commercial lines account. Distinctions
within the products of Donegal Mutual and our insurance subsidiaries generally relate to specific risk profiles targeted within
similar classes of business, such as preferred tier versus standard tier products, but we do not allocate all of the standard risk
gradients to one company. Therefore, the underwriting profitability of the business the individual companies write directly will
vary. However, the underwriting pool homogenizes the risk characteristics of all business that Donegal Mutual and Atlantic
-61- States write directly. The business Atlantic States derives from the underwriting pool represents a significant percentage of our
total consolidated revenues. 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.
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. 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 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 securities not classified as held to maturity; reported at fair value, with unrealized gains and
losses excluded from income and reported as a separate component of stockholders’ equity (net of tax effects).
Short-term investments are carried at amortized cost, which approximates fair value.
We make estimates concerning the valuation of our investments and the recognition of other-than-temporary declines in the
value of our investments. For equity securities, we measure investments at fair value and recognize changes in fair value in our
results of operations. With respect to a debt security that is in an unrealized loss position, we first assess if we intend to sell the
debt security. If we determine we intend to sell the debt security, we recognize the impairment loss in our results of operations.
If we do not intend to sell the debt security, we determine whether it is more likely than not that we will be required to sell the
debt security prior to recovery. If we determine it is more likely than not that we will be required to sell the debt security prior
to recovery, we recognize an impairment loss in our results of operations. If we determine it is more likely than not that we will
not be required to sell the debt security prior to recovery, we then evaluate whether a credit loss has occurred. We determine
whether a credit loss has occurred by comparing the amortized cost of the debt security to the present value of the cash flows
we expect to collect. If we expect a cash flow shortfall, we consider that a credit loss has occurred. If we determine that a credit
loss has occurred, we consider the impairment to be other than temporary. We then recognize the amount of the impairment loss
related to the credit loss in our results of operations, and we recognize the remaining portion of the impairment loss in our other
comprehensive income, net of applicable taxes. In addition, we may write down securities in an unrealized loss position based
on a number of other factors, including when the fair value of an investment is significantly below its cost, when the financial
condition of the issuer of a security has deteriorated, the occurrence of industry, company or geographic events that have
negatively impacted the value of a security and rating agency downgrades.
We amortize premiums and discounts on debt securities over the life of the security as an adjustment to yield using the
effective interest method. We compute investment gains and losses using the specific identification method.
-62- We amortize premiums and discounts for mortgage-backed debt securities using anticipated prepayments.
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.
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, related directly to the successful acquisition of new or
renewal insurance contracts. We amortize these deferred policy acquisition costs over the period in which our insurance
subsidiaries earn the premiums. The method we follow in computing deferred policy acquisition costs limits the amount of such
deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income,
losses and loss expenses and certain other costs we expect to incur as our insurance subsidiaries earn the premium. Estimates in
the calculation of policy acquisition costs have not shown material variability because of uncertainties in applying accounting
principles or as a result of sensitivities to changes in key assumptions.
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.
Losses and Loss Expenses
Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with
respect to incurred policyholder claims based on facts and circumstances the insurer knows at that point in time. For example,
legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise
require our insurance subsidiaries to pay losses for damages that their policies explicitly excluded or did not intend to cover. At
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the time of establishing its estimates, an insurer recognizes that its ultimate liability for losses and loss expenses will exceed or
be less than such estimates. Our insurance subsidiaries base their estimates of liabilities for losses and loss expenses on
assumptions as to future loss trends, expected claims severity, judicial theories of liability and other factors. However, during
the loss adjustment period, our insurance subsidiaries may learn additional facts regarding individual claims, and, consequently,
it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates for these liabilities. We reflect any
adjustments to the liabilities for losses and loss expenses of our insurance subsidiaries in our consolidated results of operations
in the period in which our insurance subsidiaries make adjustments to their estimates.
Our insurance subsidiaries maintain liabilities for the payment of losses and loss expenses with respect to both reported
and unreported claims. Our insurance subsidiaries establish these liabilities for the purpose of covering the ultimate costs of
settling all losses, including investigation and litigation costs. Our insurance subsidiaries base the amount of their liability for
reported losses primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the insurance policy provisions relating to the type of loss the policyholder incurred. Our insurance
subsidiaries determine the amount of their liability for unreported claims and loss expenses on the basis of historical
information by line of insurance. Our insurance subsidiaries account for inflation in the reserving function through analysis of
costs and trends and reviews of historical reserving results. Our insurance subsidiaries monitor their liabilities closely and
recompute them periodically using new information on reported claims and a variety of statistical techniques. Our insurance
subsidiaries do not discount their liabilities for losses and loss expenses.
Reserve estimates can change over time because of unexpected changes in assumptions related to our insurance
subsidiaries’ external environment and, to a lesser extent, assumptions related to our insurance subsidiaries’ internal operations.
For example, our insurance subsidiaries have experienced an increase in claims severity and a lengthening of the claim
settlement periods on bodily injury claims during the past several years. In addition, the COVID-19 pandemic and related
government mandates and restrictions resulted in various changes from historical claims reporting and settlement trends during
2020 and resulted in significant increases in loss costs in 2021 and 2022 due to a number of factors, including supply chain
disruption, higher new and used automobile values, increases in the cost of replacement automobile parts and rising labor rates.
These trend changes give rise to greater uncertainty as to the pattern of future loss settlements. Related uncertainties regarding
future trends include social inflation, availability and cost of replacement automobile parts and building materials, availability
of skilled labor, the rate of plaintiff attorney involvement in claims and the cost of medical technologies and procedures.
Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law
and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and
policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and
loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the
impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written
within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other
items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed,
our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our
insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded.
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.
Income Taxes
We currently file a consolidated federal income tax return that includes us and our insurance subsidiaries.
We account for income taxes using the asset and liability method. The objective of the asset and liability method is to
establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis
of our assets and liabilities at enacted tax rates we expect to be in effect when we realize or settle such amounts.
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 2022, 2021 and 2020, we realized $360,452, $438,850 and $302,901, 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.
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2 - Impact of New Accounting Standards
In September 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. In November 2019, the FASB issued guidance that delays the effective date for “smaller
reporting companies,” as defined in Item 10(f)(1) of Regulation S-K, to annual and interim reporting periods beginning after
December 15, 2022 from December 15, 2019. We are a smaller reporting company and our adoption of this guidance on
January 1, 2023 will result in an after-tax adjustment to retained earnings estimated between $1.5 million and $2.5 million. We
do not expect the adoption of this guidance to have a significant impact on our 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:
a. Reinsurance Pooling and Other Reinsurance Arrangements
Atlantic States, our largest insurance subsidiary, and Donegal Mutual have a pooling agreement under which both
companies contribute substantially all of their direct written business to the pool and receive an allocated percentage of the
pooled underwriting results, excluding certain reinsurance Donegal Mutual assumes from our insurance subsidiaries. Beginning
with policies effective in 2021, Donegal Mutual began to place the business of the Mountain States Insurance Group into the
underwriting pool. In addition, Donegal Mutual has a 100% quota-share reinsurance agreement with Southern Mutual Insurance
Company, or Southern Mutual, and Donegal Mutual places its assumed business from Southern Mutual into the underwriting
pool. Atlantic States has an 80% share of the results of the pool, and Donegal Mutual has a 20% share of the results of the pool.
The intent of the pooling agreement is to produce more uniform and stable underwriting results from year to year for each pool
participant than they would experience individually and to spread the risk of loss between the participants based on each
participant’s relative amount of surplus and relative access to capital. Each participant in the pool has at its disposal the capacity
of the entire pool, rather than being limited to policy exposures of a size commensurate with its own capital and surplus.
The following amounts represent reinsurance Atlantic States ceded to the pool during 2022, 2021 and 2020:
Premiums earned
Losses and loss expenses
Prepaid reinsurance premiums
Liability for losses and loss expenses
2022
2021
2020
$ 314,321,443 $ 305,729,418 $ 266,400,636
202,228,589 222,737,225
181,205,743
154,472,615 152,323,262
146,387,565
277,641,902 274,033,812
232,540,607
The following amounts represent reinsurance Atlantic States assumed from the pool during 2022, 2021 and 2020:
Premiums earned
Losses and loss expenses
Unearned premiums
Liability for losses and loss expenses
2022
2021
2020
$ 578,216,706 $ 573,891,394 $ 514,172,448
309,315,497
395,794,813 383,455,320
280,031,908 289,976,879
262,004,199
496,849,769 455,564,733
377,530,215
Donegal Mutual and MICO had a quota-share reinsurance agreement under which Donegal Mutual assumed 25% of the
premiums and losses related to the business of MICO for policies effective through December 31, 2021. Donegal Mutual and
MICO terminated this reinsurance agreement on a run-off basis effective January 1, 2022. Donegal Mutual and Peninsula had a
quota-share reinsurance agreement under which Donegal Mutual assumed 100% of the premiums and losses related to the
workers’ compensation product line of Peninsula in certain states for policies effective through December 31, 2021. Donegal
Mutual and Peninsula terminated this reinsurance agreement on a run-off basis effective January 1, 2022. Donegal Mutual
places its assumed business from MICO and Peninsula into the underwriting pool.
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The following amounts represent reinsurance ceded to Donegal Mutual pursuant to these quota-share reinsurance
agreements during 2022, 2021 and 2020:
Premiums earned
Losses and loss expenses
Prepaid reinsurance premiums
Liability for losses and loss expenses
2022
2021
2020
$ 17,989,939 $ 37,996,474 $ 39,315,398
5,194,974
20,037,608
15,471,037
—
18,548,821
17,155,909
22,642,908
36,659,853
35,306,627
Each of our insurance subsidiaries had a catastrophe reinsurance agreement with Donegal Mutual that provided coverage
under any one catastrophic occurrence above a set retention of $2,000,000, with a combined retention of $5,000,000 for a
catastrophe involving a combination of our insurance subsidiaries, up to the amount Donegal Mutual and our insurance
subsidiaries retained under catastrophe reinsurance agreements with unaffiliated reinsurers.
The following amounts represent reinsurance that our insurance subsidiaries ceded to Donegal Mutual pursuant to these
reinsurance agreements during 2022, 2021 and 2020:
Premiums earned
Losses and loss expenses
Liability for losses and loss expenses
2022
2021
2020
$ 13,800,018 $ 17,574,161 $ 15,595,138
10,517,709
9,309,624
25,259,527
1,271,006
1,658,057
3,812,339
The following amounts represent the effect of affiliated reinsurance transactions on net premiums our insurance
subsidiaries earned during 2022, 2021 and 2020:
Assumed
Ceded
Net
2022
2021
2020
$ 578,216,706 $ 573,891,394 $ 514,172,448
(346,111,400) (361,300,053) (321,311,172)
$ 232,105,306 $ 212,591,341 $ 192,861,276
The following amounts represent the effect of affiliated reinsurance transactions on net losses and loss expenses our
insurance subsidiaries incurred during 2022, 2021 and 2020:
Assumed
Ceded
Net
b. Expense Sharing
2022
2021
2020
$ 395,790,312 $ 383,452,056 $ 309,311,098
(217,941,272) (252,084,457) (221,936,307)
$ 177,849,040 $ 131,367,599 $ 87,374,791
Donegal Mutual provides facilities, management and other services to us and our insurance subsidiaries. In addition,
Donegal Mutual purchases and maintains the information technology systems that support the business of Donegal Mutual and
our insurance subsidiaries. Donegal Mutual allocates certain related expenses to Atlantic States in relation to the relative
participation of Atlantic States and Donegal Mutual in the pooling agreement. Our insurance subsidiaries other than Atlantic
States reimburse Donegal Mutual for allocated costs of services Donegal Mutual provides on their behalf based on their
proportion of the total direct premiums written of the Donegal Insurance Group and other metrics. Donegal Mutual allocates
costs related to its development and maintenance of information technology systems over the estimated useful life of those
systems (generally five years) and charges a proportionate share of those costs to our insurance subsidiaries based on their
percentage of the total net premiums written of the Donegal Insurance Group. Allocated expenses from Donegal Mutual for
services it provided to our insurance subsidiaries totaled $199,177,393, $186,568,897 and $153,941,121 for 2022, 2021 and
2020, respectively. To enhance process efficiencies, Donegal Mutual paid certain expenses directly in 2022 and 2021 that our
insurance subsidiaries paid directly in 2020, resulting in higher allocations of expenses from Donegal Mutual to our insurance
subsidiaries and lower direct expense payments by our insurance subsidiaries in 2022 and 2021 compared to 2020.
Donegal Mutual is currently in the midst of a multi-year effort to modernize certain of its key technology infrastructure and
application systems. Donegal Mutual placed the first and second releases of new systems into service in 2020 and 2021,
respectively. Donegal Mutual allocated $7.6 million, $5.1 million and $2.8 million of related costs to our insurance subsidiaries
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in 2022, 2021 and 2020, respectively. Donegal Mutual will allocate to our insurance subsidiaries their proportionate share of the
remaining $25.7 million of its costs for the first and second releases over the next four years. Donegal Mutual incurred an
additional $18.1 million of deferred costs related to releases under development that were not yet ready for their intended use at
December 31, 2022.
Our management believes that the allocation methods Donegal Mutual utilizes are reasonable. In addition, Donegal Mutual
and we maintain a coordinating committee that consists of two members of our board of directors, neither of whom is a member
of Donegal Mutual’s board of directors, and two members of Donegal Mutual’s board of directors, neither of whom is a
member of our board of directors. The purpose of the coordinating committee is to maintain a process for an ongoing evaluation
of the fairness of the terms of all transactions between Donegal Mutual and our insurance subsidiaries.
We include in our consolidated balance sheet the net amount of intercompany balances due to or from Donegal Mutual.
During 2021, Donegal Mutual and our insurance subsidiaries aligned the timing of monthly settlements of various
intercompany balances, including affiliated reinsurance transactions, expenses Donegal Mutual allocates to our insurance
subsidiaries, premiums Donegal Mutual collects on behalf of our insurance subsidiaries, and losses and loss expenses Donegal
Mutual pays on behalf of our insurance subsidiaries.
c. Lease Agreement
We lease office equipment with terms ranging from 3 to 10 years to Donegal Mutual under a lease agreement dated
January 1, 2011.
4 - Investments
The amortized cost and estimated fair values of our fixed maturities at December 31, 2022 and 2021 are as follows:
2022
Held to Maturity
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Estimated Fair
Value
$ 103,362,028 $
856 $ 10,566,154 $ 92,796,730
Obligations of states and political subdivisions
382,097,461
1,809,879
60,494,134
323,413,206
Corporate securities
Mortgage-backed securities
Totals
190,948,922
—
20,510,543 170,438,379
12,030,949
—
634,583
11,396,366
$ 688,439,360 $
1,810,735 $ 92,205,414 $ 598,044,681
2022
Available for Sale
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Estimated Fair
Value
$ 68,537,456 $
108,683 $
5,124,827 $ 63,521,312
Obligations of states and political subdivisions
45,448,157
33,994
5,326,367
40,155,784
Corporate securities
Mortgage-backed securities
Totals
218,040,945
8,315
15,211,215 202,838,045
239,886,169
155,278
22,764,657 217,276,790
$ 571,912,727 $
306,270 $ 48,427,066 $ 523,791,931
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2021
Held to Maturity
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Estimated Fair
Value
$ 89,267,988 $
1,922,976 $
1,015,040 $ 90,175,924
Obligations of states and political subdivisions
371,435,776
17,856,745
948,113
388,344,408
Corporate securities
Mortgage-backed securities
Totals
191,147,051
11,576,693
772,809
201,950,935
16,253,753
675,944
—
16,929,697
$ 668,104,568 $ 32,032,358 $
2,735,962 $ 697,400,964
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
Totals
2021
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Estimated Fair
Value
$ 32,501,080 $
144,377 $
460,831 $ 32,184,626
55,458,687
215,668,644
219,664,635
2,002,035
6,817,036
3,000,806
82,631
57,378,091
874,405
221,611,275
1,210,418
221,455,023
$ 523,293,046 $ 11,964,254 $
2,628,285 $ 532,629,015
At December 31, 2022, our holdings of obligations of states and political subdivisions included general obligation bonds
with an aggregate fair value of $240.7 million and an amortized cost of $283.5 million. Our holdings also included special
revenue bonds with an aggregate fair value of $122.9 million and an amortized cost of $144.0 million. With respect to both
categories of bonds, we held no securities of any issuer that comprised more than 10% of that category at December 31, 2022.
Education bonds and water and sewer utility bonds represented 48% and 35%, respectively, of our total investments in special
revenue bonds based on their carrying values at December 31, 2022. Many of the issuers of the special revenue bonds we held
at December 31, 2022 have the authority to impose ad valorem taxes. In that respect, many of the special revenue bonds we
held are similar to general obligation bonds.
At December 31, 2021, our holdings of obligations of states and political subdivisions included general obligation bonds
with an aggregate fair value of $284.9 million and an amortized cost of $272.7 million. Our holdings also included special
revenue bonds with an aggregate fair value of $160.8 million and an amortized cost of $154.2 million. With respect to both
categories of bonds, we held no securities of any issuer that comprised more than 10% of that category at December 31, 2021.
Education bonds and water and sewer utility bonds represented 48% and 35%, respectively, of our total investments in special
revenue bonds based on their carrying values at December 31, 2021. Many of the issuers of the special revenue bonds we held
at December 31, 2021 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 income the net unrealized losses of $15.1 million arising
prior to the November 30, 2013 reclassification date for fixed maturities reclassified from available for sale to held to maturity.
We are amortizing this balance over the remaining life of the related securities as an adjustment of yield in a manner consistent
with the accretion of discount on the same fixed maturities. We recorded amortization of $510,819, $897,073 and $1.4 million
in other comprehensive income in 2022, 2021 and 2020, respectively. At December 31, 2022 and 2021, net unrealized losses of
$4.7 million and $5.2 million, respectively, remained within accumulated other comprehensive (loss) income.
We set forth below the amortized cost and estimated fair value of fixed maturities at December 31, 2022 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.
-69-
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
$ 24,608,278 $ 24,736,944
86,581,717
83,910,606
245,818,039 218,039,676
319,400,377 259,961,089
12,030,949
11,396,366
$ 688,439,360 $ 598,044,681
$ 14,601,260 $ 14,485,681
163,170,354 154,175,256
123,462,268 111,296,437
30,792,676
26,557,767
239,886,169 217,276,790
$ 571,912,727 $ 523,791,931
The cost and estimated fair values of our equity securities at December 31, 2022 were as follows:
Cost
Gross Gains
Gross Losses
Estimated Fair
Value
Equity securities
$
30,770,633 $
5,666,467 $
1,332,260 $
35,104,840
The cost and estimated fair values of our equity securities at December 31, 2021 were as follows:
Cost
Gross Gains
Gross Losses
Estimated Fair
Value
Equity securities
$
43,262,577 $
20,413,667 $
256,271 $
63,419,973
The amortized cost of fixed maturities on deposit with various regulatory authorities at December 31, 2022 and 2021
amounted to $9,473,047 and $8,852,886, respectively.
We derived 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
2022
2021
2020
$ 34,945,437 $ 32,343,878 $ 30,750,231
897,429
817,428
29,250
1,437,948
1,386,343
321,117
29,250
427,392
29,250
36,689,544
34,132,193
32,593,216
(2,673,432)
(3,006,562)
(3,088,750)
$ 34,016,112 $ 31,125,631 $ 29,504,466
-70-
We present below gross gains and losses from investments and the change in the difference between fair value and cost of
investments:
Gross realized gains:
Fixed maturities
Equity securities
Real estate
Gross realized losses:
Fixed maturities
Equity securities
Net realized (losses) gains
2022
2021
2020
$
1,149,761 $
676,724 $
818,350
1,765,923
1,430,465
106,075
477,287
—
—
3,392,971
2,107,189
924,425
2,129,736
4,113,526
6,243,262
294,126
462,335
756,461
246,243
3,555,304
3,801,547
(2,850,291)
1,350,728
(2,877,122)
Gross unrealized gains on equity securities
258,532
5,627,949
8,426,806
Gross unrealized losses on equity securities
(7,593,038)
(501,391)
(2,771,765)
Net investment (losses) gains
$ (10,184,797) $ 6,477,286 $ 2,777,919
Change in difference between fair value and cost of
investments:
Fixed maturities
Equity securities
Totals
$ (177,147,840) $ (27,576,934) $ 33,876,212
15,823,189
4,010,973
4,088,003
$ (161,324,651) $ (23,565,961) $ 37,964,215
We held fixed maturities with unrealized losses representing declines that we considered temporary at December 31, 2022
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
$ 90,245,322 $ 5,326,954 $ 47,237,638 $ 10,364,027
Obligations of states and political subdivisions
261,464,427 49,327,324 47,945,038 16,493,177
Corporate securities
Mortgage-backed securities
Totals
298,706,256 22,272,711 72,959,284 13,449,047
143,885,626
10,940,722 69,878,986 12,458,518
$ 794,301,631 $ 87,867,711 $ 238,020,946 $ 52,764,769
We held fixed maturities with unrealized losses representing declines that we considered temporary at December 31, 2021
as follows:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
$ 27,691,051 $
412,055 $ 28,426,248 $ 1,063,816
Less than 12 months
12 months or longer
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Obligations of states and political subdivisions
56,654,480
899,139
Corporate securities
Mortgage-backed securities
Totals
92,736,747
1,609,931
7,090,499
1,462,717
131,605
37,283
90,006,234
82,221
$ 267,088,512 $ 4,049,322 $ 39,340,696 $ 1,314,925
2,361,232
1,128,197
We make estimates concerning the valuation of our investments and the recognition of other-than-temporary declines in the
value of our investments. For equity securities, we measure investments at fair value, and we recognize changes in fair value in
our results of operations. With respect to a debt security that is in an unrealized loss position, we first assess if we intend to sell
the debt security. If we determine we intend to sell the debt security, we recognize the impairment loss in our results of
-71-
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 882 debt
securities that were in an unrealized loss position at December 31, 2022. 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 2022, 2021 or 2020. We had no sales or transfers from our held to maturity
portfolio in 2022, 2021 or 2020. We had no derivative instruments or hedging activities during 2022, 2021 or 2020.
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
price estimates we obtain from independent pricing services. We classify our fixed maturity investments and non-publicly
traded equity securities as Level 2. Our fixed maturity investments consist of U.S. Treasury securities and obligations of U.S.
government corporations and agencies, obligations of states and political subdivisions, corporate securities and mortgage-
backed securities.
We present our investments in available-for-sale fixed maturity and equity securities at estimated fair value. The estimated
fair value of a security may differ from the amount that we could realize if we sold the security in a forced transaction. In
addition, the valuation of fixed maturity investments is more subjective when markets are less liquid, increasing the potential
that the estimated fair value does not reflect the price at which an actual transaction would occur. We utilize nationally
recognized independent pricing services to estimate fair values or obtain market quotations for substantially all of our fixed
maturity and equity investments. We generally obtain two prices per security. The pricing services utilize market quotations for
fixed maturity and equity securities that have quoted prices in active markets. For fixed maturity securities that generally do not
trade on a daily basis, the pricing services prepare estimates of fair value measurements based predominantly on observable
market inputs. The pricing services do not use broker quotes in determining the fair values of our investments. Our investment
personnel review the estimates of fair value the pricing services provide to determine if the estimates we obtain are
representative of fair values based upon the general knowledge of the market of our investment personnel, their research
findings related to unusual fluctuations in value and their comparison of such values to execution prices for similar securities.
Our investment personnel monitor the market and are familiar with current trading ranges for similar securities and pricing of
specific investments. Our investment personnel review all pricing estimates that we receive from the pricing services against
their expectations with respect to pricing based on fair market curves, security ratings, coupon rates, security type and recent
trading activity. Our investment personnel review documentation with respect to the pricing services’ pricing methodology that
they obtain periodically to determine if the primary pricing sources, market inputs and pricing frequency for various security
types are reasonable. At December 31, 2022, 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, 2022, we did not identify any material discrepancies, and we did not make any adjustments to the
estimates the pricing services provided.
-72-
We present our cash and short-term investments at estimated fair value. The carrying values in our balance sheet for
premium receivables, reinsurance receivables related to paid losses and loss expenses and reinsurance balances payable
approximate their fair values. The carrying amounts reported in the balance sheet for our 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, 2022 and 2021.
The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and
equity securities at December 31, 2022:
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
$ 63,521,312 $
— $ 63,521,312 $
40,155,784
202,838,045
217,276,790
—
40,155,784
—
202,838,045
— 217,276,790
35,104,840
32,820,452
2,284,388
Total investments in the fair value hierarchy
$ 558,896,771 $ 32,820,452 $ 526,076,319 $
—
—
—
—
—
—
The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and
equity securities at December 31, 2021:
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
$ 32,184,626 $
— $ 32,184,626 $
57,378,091
221,611,275
221,455,023
—
—
—
57,378,091
221,611,275
221,455,023
63,419,973
61,130,385
2,289,588
Total investments in the fair value hierarchy
$ 596,048,988 $ 61,130,385 $ 534,918,603 $
—
—
—
—
—
—
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
2022
2021
2020
$ 68,028,373 $ 59,156,958 $ 59,284,859
147,571,857
137,604,415
118,944,099
(142,430,000) (128,733,000) (119,072,000)
$ 73,170,230 $ 68,028,373 $ 59,156,958
-73-
7 - Property and Equipment
Property and equipment at December 31, 2022 and 2021 consisted of the following:
Office equipment
Automobiles
Real estate
Software
Accumulated depreciation
2022
2021
Estimated Useful
Life
$
8,245,030 $
8,382,877
3-15 years
42,794
322,703
5 years
2,575,207
2,575,207
5-50 years
1,386,936
1,386,936
5 years
12,249,967
12,667,723
(9,494,862)
(9,710,793)
$
2,755,105 $
2,956,930
Depreciation expense for 2022, 2021 and 2020 amounted to $173,535, $208,641 and $257,397, 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. For example, legislative, judicial and regulatory
actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries to pay
losses for damages that their policies explicitly excluded or did not intend to cover. Furthermore, we cannot predict the timing,
frequency and extent of adjustments to our insurance subsidiaries’ estimated future liabilities, because the historical conditions
and events that serve as a basis for our insurance subsidiaries’ estimates of ultimate claim costs may change. As is the case for
substantially all property and casualty insurance companies, our insurance subsidiaries have found it necessary in the past to
increase their estimated future liabilities for losses and loss expenses in certain periods, and, in other periods, their estimates
have exceeded their actual liabilities. Changes in our insurance subsidiaries’ estimate of their liability for losses and loss
expenses generally reflect actual payments and their evaluation of information received since the prior reporting date.
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
2022
2021
2020
$ 1,077,620,301 $ 962,007,437 $ 869,673,849
(451,261,306) (404,818,480) (362,768,427)
626,358,995
557,188,957
506,905,422
608,900,206
551,917,571
472,709,060
(44,821,213)
(31,208,029)
(12,944,767)
564,078,993
520,709,542
459,764,293
302,272,322
269,316,762
236,984,291
218,304,130
182,222,742
172,496,467
520,576,452
451,539,504
409,480,758
669,861,536
626,358,995
557,188,957
451,184,222
404,818,480
451,261,306
$ 1,121,045,758 $ 1,077,620,301 $ 962,007,437
Our insurance subsidiaries recognized a decrease in their liability for losses and loss expenses of prior years of $44.8
million, $31.2 million and $12.9 million in 2022, 2021 and 2020, respectively. Our insurance subsidiaries made no significant
changes in their reserving philosophy or claims management personnel, and they have made no significant offsetting changes in
estimates that increased or decreased their loss and loss expense reserves in those years. The 2022 development represented
7.2% of the December 31, 2021 net carried reserves and resulted primarily from lower-than-expected loss emergence in the
personal automobile and commercial automobile lines of business for accident years prior to 2022. The majority of the 2022
-74-
development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO. The
2021 development represented 5.6% of the December 31, 2020 net carried reserves and resulted primarily from lower-than-
expected loss emergence in the personal automobile, workers’ compensation and commercial automobile lines of business for
accident years prior to 2021. The majority of the 2021 development related to decreases in the liability for losses and loss
expenses of prior years for Atlantic States and MICO. The 2020 development represented 2.6% of the December 31, 2019 net
carried reserves and resulted primarily from lower-than-expected severity in the workers’ compensation and personal
automobile lines of business, partially offset by higher-than-expected severity in the commercial automobile and commercial
multi-peril lines of business, for accident years prior to 2020. The majority of the 2020 development related to decreases in the
liability for losses and loss expenses of prior years for Atlantic States and MICO.
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 2022.
The actuaries for our insurance subsidiaries generally prepare an initial estimate for ultimate losses and loss expenses for
the current accident year by multiplying earned premium by an “a priori,” or expected, loss ratio for each line of business our
insurance subsidiaries write. Expected loss ratios represent the actuaries’ expectation of losses at the time our insurance
subsidiaries price and write their policies, before the emergence of any actual claims experience. The actuaries determine an
expected loss ratio by analyzing historical experience and adjusting for loss cost trends, loss frequency and severity trends,
premium rate level changes, reported and paid loss emergence patterns and other known or observed factors.
The actuaries use a variety of actuarial methods to estimate the ultimate cost of losses and loss expenses. These methods
include paid loss development, incurred loss development and the Bornhuetter-Ferguson method from which the actuaries
select loss development factor assumptions. The actuaries base their selection of a point estimate on a judgmental weighting of
estimates each of these methods produce.
The actuaries consider loss frequency and severity trends when they develop expected loss ratios and point estimates. Loss
frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size
of claims. Factors that affect loss frequency include changes in weather patterns or economic activity. Factors that affect loss
severity include changes in policy limits, reinsurance retentions, inflation rates and judicial interpretations.
Our insurance subsidiaries create a claim file when they receive notice of an actual demand for payment, an event that may
lead to a demand for payment or when they otherwise determine that a demand for payment could potentially lead to a future
demand for payment on another coverage under the same policy or another policy they have issued. In recent years, our
insurance subsidiaries have noted an increase in the period of time between the occurrence of a casualty loss event and the date
on which they receive notice of a liability claim. Changes in the length of time between the loss occurrence date and the claim
reporting date affect the actuaries’ ability to accurately predict loss frequency and the amount of IBNR reserves our insurance
subsidiaries require.
Our insurance subsidiaries generally create a claim file for a policy at the claimant level by type of coverage and generally
recognize one count for each claim event. In certain lines of business where it is common for multiple parties to claim damages
arising from a single claim event, our insurance subsidiaries recognize one count for each claimant involved in the event.
Atlantic States recognizes one count for each claim event, or claimant involved in a multiple-party claim event, related to losses
Atlantic States assumes through its participation in its pooling agreement with Donegal Mutual. Our insurance subsidiaries
accumulate the claim counts and report them by line of business. For purposes of the claim development tables we present
below, our insurance subsidiaries count claims on policies they issue even if they eventually close such claims without making
a loss payment. Claims our insurance subsidiaries close without making a loss payment typically generate loss expenses. The
methods our insurance subsidiaries have used to summarize claim counts have not changed significantly over the time periods
we report in the tables below.
-75- The following tables present information about incurred and paid claims development as of December 31, 2022, 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, 2013 through 2021, which we
present as supplementary information.
Personal
Automobile
Accident
Year
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
At December 31, 2022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Total IBNR
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
(dollars and reported claims in thousands)
Unaudited
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Personal
Automobile
Accident
Year
(in thousands)
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
$ 124,965
$ 130,737
$ 131,594
$ 132,643
$ 132,604
$ 132,934
$ 132,853
$ 132,690
$ 132,787
$
132,735
$
124,426
124,806
124,210
126,200
126,779
126,734
126,861
126,977
137,569
139,333
139,181
142,493
142,408
142,073
142,010
150,216
153,937
157,516
157,943
156,935
156,436
166,690
127,728
175,939
174,784
173,730
186,580
183,358
181,558
180,787
161,056
157,689
156,300
111,483
103,585
119,364
127,108
141,965
156,227
173,032
179,732
154,805
100,339
118,752
126,203
Total
$ 1,410,898
51
65
135
522
901
1,695
2,559
3,324
6,432
19,934
66
71
70
73
79
81
68
43
47
48
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Unaudited
$ 84,241
$ 109,051
$ 120,118
$ 125,946
$ 130,026
$ 131,326
$ 131,642
$ 132,215
$ 132,300
$
132,420
85,377
104,736
114,893
120,491
123,815
124,926
125,619
125,762
93,611
116,303
128,395
135,027
139,121
140,028
140,892
102,433
129,507
143,321
151,159
153,521
154,769
111,964
142,372
159,879
166,099
169,190
115,585
150,175
163,036
169,651
103,101
127,187
141,004
66,084
81,783
76,477
126,701
141,172
155,521
170,895
173,922
146,667
89,736
93,998
83,616
All outstanding liabilities before 2013, net of reinsurance
Total
1,314,648
913
Liabilities for claims and claims adjustment expenses, net of reinsurance
$
97,163
-76-
Homeowners
Accident
Year
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
At December 31, 2022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Total IBNR
Plus Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
(dollars and reported claims in thousands)
Unaudited
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Homeowners
Accident
Year
(in thousands)
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
$ 50,887
$ 51,121
$ 51,122
$ 50,874
$ 50,988
$ 50,971
$ 51,008
$ 51,064
$ 51,053
$
51,021
$
56,916
58,378
57,680
57,332
57,288
57,402
57,367
57,371
63,359
63,925
63,053
63,071
63,099
62,993
63,043
62,443
64,064
63,735
63,355
63,279
63,409
79,283
79,911
79,305
79,247
79,065
81,965
83,385
82,905
82,566
73,294
73,554
73,234
61,633
62,718
67,677
57,353
63,036
63,472
78,815
82,058
72,168
61,595
66,996
82,433
Total
$ 678,947
—
—
10
35
62
230
457
835
1,455
7,556
13
17
14
12
17
18
16
14
11
9
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Unaudited
$ 40,949
$ 49,410
$ 50,210
$ 50,478
$ 51,043
$ 50,902
$ 50,967
$ 50,965
$ 50,955
$
50,923
45,823
56,255
56,990
57,195
56,995
57,243
57,336
57,339
51,885
61,542
62,204
62,590
62,844
62,943
62,936
50,125
61,145
62,760
63,144
63,162
63,217
67,077
77,663
78,006
78,127
78,454
70,385
79,892
80,905
81,464
58,074
69,145
70,416
51,226
60,348
52,161
Total
All outstanding liabilities before 2013, net of reinsurance
57,318
62,938
63,266
78,528
81,568
70,884
60,809
63,920
63,107
653,261
219
Liabilities for claims and claims adjustment expenses, net of reinsurance
$
25,905
-77-
Commercial
Automobile
Accident
Year
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
At December 31, 2022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Total IBNR
Plus Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
(dollars and reported claims in thousands)
Unaudited
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Commercial
Automobile
Accident
Year
(in thousands)
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
$ 32,902
$ 33,749
$ 34,751
$ 35,240
$ 36,404
$ 36,435
$ 36,569
$ 36,181
$ 36,165
$
36,133
$
42,760
44,544
47,326
48,213
49,284
49,168
49,308
49,291
46,526
48,323
51,412
54,259
54,517
54,619
53,793
54,302
57,353
65,905
67,127
66,894
66,085
61,484
67,927
67,697
67,249
65,310
79,307
81,396
82,313
83,043
88,864
91,245
90,290
90,367
87,766
109,824
49,285
53,477
65,922
64,631
82,226
86,140
85,016
99,231
115,287
Total
$ 737,348
27
33
74
179
205
860
3,066
5,973
16,504
38,312
8
11
12
13
14
15
16
14
14
14
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Unaudited
$ 16,306
$ 23,557
$ 26,879
$ 31,053
$ 34,083
$ 36,004
$ 36,106
$ 36,092
$ 36,087
$
36,081
22,707
31,089
39,436
44,374
47,290
48,418
48,603
48,714
23,875
35,342
41,678
48,261
51,605
51,992
52,728
27,033
38,237
48,837
57,237
60,485
64,421
28,707
40,213
49,703
57,128
59,889
33,862
47,941
57,451
69,487
36,948
53,026
63,575
31,884
46,459
39,851
Total
All outstanding liabilities before 2013, net of reinsurance
48,757
53,052
65,076
62,187
74,421
72,139
60,665
56,101
46,242
574,721
56
Liabilities for claims and claims adjustment expenses, net of reinsurance
$ 162,683
-78-
Commercial
Multi-Peril
Accident
Year
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
At December 31, 2022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Total IBNR
Plus Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
(dollars and reported claims in thousands)
Unaudited
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Commercial
Multi-Peril
Accident
Year
(in thousands)
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
$ 35,683
$ 35,679
$ 37,292
$ 37,205
$ 37,981
$ 37,365
$ 37,453
$ 37,495
$ 37,630
$
37,598
$
48,204
50,135
51,843
52,336
53,294
53,116
52,926
52,933
42,070
43,874
44,728
45,104
45,873
45,366
45,420
43,005
46,988
48,267
48,871
48,732
48,823
56,185
56,043
56,517
54,812
55,076
66,265
66,470
67,749
67,810
71,865
73,836
76,326
83,195
79,910
53,502
45,595
48,802
54,244
65,911
75,821
76,490
116,827
117,574
142,395
Total
$ 717,932
—
—
—
137
208
1,632
4,491
8,388
22,939
44,828
6
7
6
6
7
7
7
8
7
6
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Unaudited
$ 19,875
$ 26,216
$ 29,159
$ 33,614
$ 35,104
$ 36,321
$ 37,333
$ 37,436
$ 37,488
$
37,575
27,920
35,520
40,936
47,021
50,017
51,615
52,103
52,252
21,837
29,419
34,323
39,162
42,849
44,090
44,439
19,660
29,402
34,612
41,193
43,435
44,944
27,399
36,926
42,691
46,361
49,488
30,597
42,296
48,050
54,913
28,210
41,266
47,522
34,729
46,193
46,768
Total
All outstanding liabilities before 2013, net of reinsurance
52,875
44,764
47,432
51,494
59,118
55,951
52,646
69,735
57,641
529,231
699
Liabilities for claims and claims adjustment expenses, net of reinsurance
$ 189,400
-79-
Workers’
Compensation
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
At December 31, 2022
Accident Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
(dollars and reported claims in thousands)
Unaudited
Total IBNR
Plus Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
$ 46,325
$ 47,027
$ 44,289
$ 42,828
$ 42,327
$ 42,555
$ 42,651
$ 42,341
$ 42,427
$
43,059
$
51,508
51,553
49,288
48,537
47,540
47,693
47,849
47,620
53,332
49,615
45,991
44,986
43,006
42,597
42,225
58,814
49,802
47,883
44,969
44,098
43,559
60,450
56,351
52,687
51,464
49,557
62,197
55,291
52,514
47,912
60,998
59,624
57,728
57,172
57,850
67,035
47,794
42,043
43,484
48,802
47,007
56,480
57,384
65,530
67,046
Total
$
518,629
1
14
240
561
1,105
1,470
1,897
2,990
6,505
21,062
6
6
5
5
5
6
6
5
6
6
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Workers’
Compensation
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
Accident Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Unaudited
(in thousands)
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
$ 13,052
$ 26,043
$ 32,783
$ 36,351
$ 38,877
$ 39,617
$ 40,361
$ 40,827
$ 41,209
$
41,599
13,932
28,513
36,284
40,393
42,465
43,866
44,403
44,671
13,071
27,531
34,192
36,929
37,936
38,596
39,096
14,709
30,344
37,178
40,570
41,208
41,543
15,581
31,990
39,684
42,954
44,242
17,644
31,928
37,072
41,611
16,939
33,009
41,740
14,591
32,817
20,931
Total
All outstanding liabilities before 2013, net of reinsurance
45,314
39,478
41,809
45,174
43,279
47,121
44,089
42,633
18,643
409,139
4,843
Liabilities for claims and claims adjustment expenses, net of reinsurance
$
114,333
-80-
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,
2022
$
97,163
25,905
162,683
189,400
114,333
30,510
619,994
$
104,349
14,712
101,574
108,853
90,454
7,808
427,750
73,302
1,121,046
$
$
The following table presents supplementary information about average historical claims duration as of December 31, 2022:
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
65.4 % 16.7 %
8.5 %
4.2 %
2.4 %
0.9 %
0.5 %
0.2 %
0.4 %
0.1 %
Homeowners
Commercial automobile
Commercial multi-peril
Workers’ compensation
81.0
42.3
45.3
30.9
15.6
18.1
17.2
32.0
1.3
13.7
9.4
15.7
0.5
11.8
10.8
8.2
0.3
6.0
5.7
3.4
0.1
3.6
3.1
1.8
0.1
0.8
2.4
1.2
—
0.3
0.4
0.9
—
—
0.7
1.1
—
—
0.2
0.9
9 - Borrowings
Lines of Credit
In August 2020, we entered into a credit agreement with Manufacturers and Traders Trust Company (“M&T”) that
related to a $20.0 million unsecured demand line of credit. The line of credit has no expiration date, no annual fees and no
covenants. At December 31, 2022, we had no outstanding borrowings from M&T and had the ability to borrow up to $20.0
million at interest rates equal to the then-current LIBOR rate plus 2.00%.
Atlantic States is a member of the FHLB of Pittsburgh. Through its membership, Atlantic States has the ability to issue
debt to the FHLB of Pittsburgh in exchange for cash advances. Atlantic States has a fixed-rate cash advance of $35.0 million
that was outstanding at December 31, 2022. The cash advance carries a fixed interest rate of 1.74% and is due in August 2024.
In March 2020, Atlantic States issued $50.0 million of debt to the FHLB of Pittsburgh in exchange for a cash advance in the
same amount that carried a fixed interest rate of 0.83%. Atlantic States obtained this contingent liquidity funding in light of
uncertainty surrounding the economic impact of the COVID-19 pandemic. Atlantic States repaid this advance when it became
due in March 2021. The table below presents the amount of FHLB of Pittsburgh stock Atlantic States purchased, collateral
pledged and assets related to Atlantic States’ membership in the FHLB of Pittsburgh at December 31, 2022.
-81-
FHLB stock purchased and owned as part of the agreement
$
1,573,300
Collateral pledged, at par (carrying value $42,471,534)
Borrowing capacity currently available
46,378,384
4,620,984
Subordinated Debentures
In September 2021, upon receipt of approval from the Michigan Department of Insurance and Financial Services, MICO
repaid in full the $5.0 million surplus note held previously by Donegal Mutual, along with accrued interest of $178,082.
10 - Reinsurance
Unaffiliated Reinsurers
Our insurance subsidiaries and Donegal Mutual participate in a consolidated third-party reinsurance program, for which
the coverage and parameters are common to all of our insurance subsidiaries and Donegal Mutual. The program utilizes several
different reinsurers, all of which 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 following information describes the external reinsurance Donegal Mutual and our insurance subsidiaries had in place
for 2022:
•
•
excess of loss reinsurance, under which Donegal Mutual and our insurance subsidiaries recovered losses over a set
retention of $2.0 million; and
catastrophe reinsurance, under which Donegal Mutual and our insurance subsidiaries recovered 100% of an
accumulation of many losses resulting from a single event, including natural disasters, over a set retention of $15.0
million up to aggregate losses of $185.0 million per occurrence.
As many as 29 reinsurers provided coverage for 2022 on any one treaty with no reinsurer taking more than 17.5% of any
one treaty. The amount of coverage provided under each of these types of reinsurance depended upon the amount, nature, size
and location of the risks being reinsured.
In order to write automobile insurance in the State of Michigan, MICO is required to be a member of the Michigan
Catastrophic Claims Association (“MCCA”). The MCCA provides reinsurance to MICO for personal automobile and
commercial automobile personal injury claims in the state of Michigan over a set retention. In November 2021, the MCCA
approved the return of approximately $3.0 billion of its estimated surplus to its member insurance companies and provided
guidance to those companies with respect to the payment of refunds to Michigan policyholders in the first half of 2022. We
recorded a receivable from the MCCA and a corresponding payable for cash refunds due to Michigan policyholders in the
amount of $18.1 million on our balance sheet as of December 31, 2021. In March 2022, we received such payment from the
MCCA and subsequently paid the refunds due to our Michigan policyholders.
In addition to the pooling agreement and third-party reinsurance, our insurance subsidiaries had a catastrophe reinsurance
agreement with Donegal Mutual, under which each of our insurance subsidiaries recovered 100% of an accumulation of
multiple losses resulting from a single event, including natural disasters, over a set retention of $2.0 million up to aggregate
losses of $13.0 million per occurrence. The agreement also provided additional coverage for an accumulation of losses from a
single event including a combination of our insurance subsidiaries over a combined retention of $5.0 million.
Our insurance subsidiaries and Donegal Mutual also purchased facultative reinsurance to cover certain exposures,
including property exposures in excess of the covered limits of their respective treaty reinsurance.
The following amounts represent ceded reinsurance transactions with unaffiliated reinsurers during 2022, 2021 and 2020:
2022
2021
2020
Premiums written
Premiums earned
Losses and loss expenses
Prepaid reinsurance premiums
Liability for losses and loss expenses
$ 37,002,702 $ 38,173,733 $ 34,165,635
35,358,765
9,835,268
5,874,859
133,158,907
37,984,833
29,999,528
6,063,759
149,628,406 138,909,584
36,947,675
31,096,016
6,118,784
-82-
Total Reinsurance
The following amounts represent total ceded reinsurance transactions with both affiliated and unaffiliated reinsurers during
2022, 2021 and 2020:
Premiums earned
Losses and loss expenses
Prepaid reinsurance premiums
Liability for losses and loss expenses
2022
2021
2020
$ 383,059,075 $ 399,284,886 $ 356,669,937
249,037,288 282,083,985
231,771,575
160,591,399 176,935,842
169,418,333
451,184,222 451,261,306
404,818,480
The following amounts represent the effect of reinsurance on premiums written for 2022, 2021 and 2020:
Direct
Assumed
Ceded
Net premiums written
2022
2021
2020
$ 641,971,207 $ 609,204,706 $ 586,681,839
568,272,026 601,864,198
539,070,557
(366,714,634) (406,802,395) (383,612,503)
$ 843,528,599 $ 804,266,509 $ 742,139,893
The following amounts represent the effect of reinsurance on premiums earned for 2022, 2021 and 2020:
Direct
Assumed
Ceded
Net premiums earned
2022
2021
2020
$627,331,528 $601,408,581
$584,537,580
578,216,997
573,891,506
514,172,696
(383,059,075)
(399,284,886)
(356,669,937)
$822,489,450 $776,015,201
$742,040,339
Percentage of assumed premiums earned to net premiums earned
70.3 %
74.0 %
69.3 %
11 - Income Taxes
Our provision for income tax (benefit) expense for 2022, 2021 and 2020 consisted of the following:
Current federal income tax
Deferred federal income tax
Income tax (benefit) expense
2022
2021
2020
$ 1,280,041 $ 3,998,431 $ 10,450,803
(2,958,735)
1,085,903
6,448
$ (1,678,694) $ 5,084,334 $ 10,457,251
Our effective tax rate is different from the amount computed at the statutory federal rate of 21%. The reasons for such
difference and the related tax effects are as follows:
(Loss) income before income tax (benefit) expense
Computed “expected” taxes
Tax-exempt interest
Proration
Dividends received deduction
Net operating loss carryback
Tax benefit on exercise of options
Other, net
Income tax (benefit) expense
2022
2021
2020
$
(3,638,099) $ 30,338,508 $ 63,272,503
13,287,226
6,371,087
(764,001)
(1,446,102)
(1,491,154)
(1,468,806)
384,944
401,717
395,663
(93,675)
(115,713)
(113,845)
—
(360,452)
600,592
(1,678,694) $
$
—
(1,640,084)
(302,901)
299,998
5,084,334 $ 10,457,251
(438,850)
357,247
-83-
The tax effects of temporary differences that give rise to significant portions of our deferred tax assets and deferred tax
liabilities at December 31, 2022 and 2021 are as follows:
Deferred tax assets:
Unearned premium
Loss reserves
Net unrealized losses
Net operating loss carryforward
Net state operating loss carryforward - DGI Parent
Other
Total gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Deferred policy acquisition costs
Loss reserve transition adjustment
Other
Total gross deferred tax liabilities
Net deferred tax asset
2022
2021
$ 17,560,126 $ 16,674,502
9,712,582
9,568,677
11,088,307
—
—
25,174
8,068,185
7,865,563
1,472,110
1,859,687
47,901,310
35,993,603
(8,068,185)
(7,865,563)
39,833,125
28,128,040
15,365,749
14,285,958
856,267
1,148,529
2,008,092
6,007,934
18,230,108
21,442,421
$ 21,603,017 $
6,685,619
Our income tax expense for 2020 included a $1.6 million income tax benefit related to the carryback of 2018 net operating
losses to past tax years with higher statutory income tax rates than are currently in effect, as allowed under the Coronavirus Aid,
Relief and Economic Security Act that was enacted in March 2020.
We provide a valuation allowance when we believe it is more likely than not that we will not realize some portion of a
deferred tax asset. At December 31, 2022 and 2021, we established a valuation allowance of $8.1 million and $7.9 million,
respectively, for our net state operating loss carryforward. We determined that we were not required to establish a valuation
allowance for the other net deferred tax assets of $39.8 million and $28.1 million at December 31, 2022 and 2021, 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 2016 through 2022 remained open for examination by tax authorities at December 31, 2022. Federal income
taxes recoverable at December 31, 2022 and 2021 included refunds of $2.3 million due to us for tax years prior to 2021.
12 - Stockholders’ Equity
Each share of our Class A common stock outstanding at the time of the declaration of any dividend or other distribution
payable in cash upon the shares of our Class B common stock is entitled to a dividend or distribution payable at the same time
and to stockholders of record on the same date in an amount at least 10% greater than any dividend declared upon each share of
our Class B common stock. In the event of our merger or consolidation with or into another entity, the holders of our Class A
common stock and the holders of our Class B common stock are entitled to receive the same per share consideration in such
merger or consolidation. In the event of our liquidation, dissolution or winding-up, any assets available to common stockholders
will be distributed pro-rata to the holders of our Class A common stock and our Class B common stock after payment of all of
our obligations.
On July 18, 2013, our board of directors authorized a share repurchase program pursuant to which we have the authority to
purchase up to 500,000 additional shares of our Class A common stock at prices prevailing from time to time in the open
market subject to the provisions of the SEC Rule 10b-18 and in privately negotiated transactions. We did not purchase any
shares of our Class A common stock under this program during 2022, 2021 or 2020. We have purchased a total of 57,658
shares of our Class A common stock under this program from its inception through December 31, 2022.
At December 31, 2022 and 2021, our treasury stock consisted of 3,002,588 and 72,465 shares of Class A common stock
and Class B common stock, respectively.
-84-
13 - Stock Compensation Plans
Equity Incentive Plans
Since 1996, we have maintained an Equity Incentive Plan for Employees. During 2019, we adopted a plan that made a total
of 4,500,000 shares of Class A common stock available for issuance to employees of our subsidiaries and affiliates. The plan
provides for the granting of awards by our board of directors in the form of stock options, stock appreciation rights, restricted
stock or any combination of the above. The plan provides that stock options may become exercisable up to five years from their
date of grant, with an option price not less than fair market value on the date preceding the date of grant. We have not granted
any stock appreciation rights.
Since 1996, we have maintained an Equity Incentive Plan for Directors. During 2019, we adopted a plan that made 500,000
shares of Class A common stock available for issuance to our directors and the directors of our subsidiaries and affiliates. We
may make awards in the form of stock options. The plan also provides for the issuance of 500 shares of restricted stock on the
first business day of January in each year to each of our directors and each director of Donegal Mutual who does not serve as
one of our directors. We issued 8,500 shares of restricted stock on January 4, 2022 under our director plan. We issued 10,000
shares of restricted stock on January 4, 2021 under our director plan. We issued 8,500 shares of restricted stock on January 2,
2020 under our director plan.
No further shares are available for future option grants for plans in effect prior to 2019.
We measure all share-based payments to employees, including grants of employee stock options, using a fair-value-based
method and record such expense in our results of operations. In determining the expense we record for stock options granted to
directors and employees of our subsidiaries and affiliates, we estimate the fair value of each option award on the date of grant
using the Black-Scholes option pricing model. The significant assumptions we utilize in applying the Black-Scholes option
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 2022 was $1.48. We calculated this fair value
based upon a risk-free interest rate of 3.91%, an expected life of three years, an expected volatility of 22% and an expected
dividend yield of 5%.
The weighted-average grant date fair value of options we granted during 2021 was $1.21. We calculated this fair value
based upon a risk-free interest rate of 0.91%, an expected life of three years, an expected volatility of 20% and an expected
dividend yield of 4%.
The weighted-average grant date fair value of options we granted during 2020 was $1.15. We calculated this fair value
based upon a risk-free interest rate of 0.20%, an expected life of three years, an expected volatility of 20% and an expected
dividend yield of 4%.
We charged compensation expense for our stock compensation plans against income before income taxes of $818,853,
$965,701 and $1.1 million for the years ended December 31, 2022, 2021 and 2020, respectively, with a corresponding income
tax benefit of $171,959, $202,797 and $229,698. At December 31, 2022 and 2021, our total unrecognized compensation cost
related to non-vested share-based compensation granted under our stock compensation plans was $1.7 million and $1.5 million,
respectively. We expect to recognize this cost over a weighted average period of 2.1 years.
During 2022, we received cash from option exercises under all stock compensation plans of $17.4 million. We realized
actual tax benefits for the tax deductions from option exercises of share-based compensation of $360,452 for 2022. During
2021, we received cash from option exercises under all stock compensation plans of $12.3 million. We realized actual tax
benefits for the tax deductions from option exercises of share-based compensation of $438,850 for 2021. During 2020, we
received cash from option exercises under all stock compensation plans of $17.5 million. We realized actual tax benefits for the
tax deductions from option exercises of share-based compensation of $302,901 for 2020.
-85- Information regarding activity in our stock option plans follows:
Outstanding at December 31, 2019
Granted - 2020
Exercised - 2020
Forfeited - 2020
Expired - 2020
Outstanding at December 31, 2020
Granted - 2021
Exercised - 2021
Forfeited - 2021
Expired - 2021
Outstanding at December 31, 2021
Granted - 2022
Exercised - 2022
Forfeited - 2022
Expired - 2022
Outstanding at December 31, 2022
Exercisable at:
December 31, 2020
December 31, 2021
December 31, 2022
Number of
Options
Weighted-
Average
Exercise Price
Per Share
10,435,990
$15.09
935,099
(1,294,606)
(303,908)
(78,223)
9,694,352
906,500
(946,646)
(404,664)
(1,139,816)
8,109,726
956,600
(1,202,806)
(545,618)
(935,723)
14.45
13.52
15.23
13.64
15.24
14.39
13.00
15.69
16.40
15.22
14.08
14.50
15.35
16.81
6,382,179
$14.94
7,786,934
6,297,849
4,627,630
$15.42
$15.43
$15.21
Shares available for future option grants at December 31, 2022 totaled 1.4 million shares under all plans.
The following table summarizes information about stock options outstanding at December 31, 2022:
Grant Date
Exercise Price
Number of
Options
Outstanding
Weighted-Average
Remaining
Contractual Life
Number of
Options
Exercisable
December 19, 2013
December 18, 2014
December 20, 2018
December 19, 2019
December 17, 2020
January 4, 2021
December 16, 2021
February 9, 2022
April 18, 2022
December 15, 2022
15.90
15.80
13.69
14.98
14.43
14.07
14.39
14.15
13.28
14.09
1,492,596
979,839
497,470
868,050
755,424
10,000
825,200
3,000
10,000
940,600
1.0 years
2.0 years
1.0 years
2.0 years
3.0 years
3.0 years
4.0 years
4.1 years
4.3 years
5.0 years
1,492,596
979,839
497,470
868,050
503,611
6,667
275,064
1,000
3,333
—
Total
6,382,179
4,627,630
Employee Stock Purchase Plan
Since 1996, we have maintained an Employee Stock Purchase Plan. During 2011, we adopted a plan that made 300,000
shares of our Class A common stock available for issuance, which we amended in 2019 to make 500,000 shares of our Class A
common stock available for issuance. The 2011 plan expired during 2021. During 2021, we adopted a new plan that made
500,000 shares of our Class A common stock available for issuance and extends over a 10-year period. The plan provides for
shares to be offered to all eligible employees at a purchase price equal to the lesser of 85% of the fair market value of our
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Class A common stock on the last day before the first day of each enrollment period (June 1 and December 1 of each year)
under the plan or 85% of the fair market value of our Class A common stock on the last day of each subscription period
(June 30 and December 31 of each year).
A summary of plan activity follows:
January 1, 2020
July 1, 2020
January 1, 2021
July 1, 2021
January 1, 2022
July 1, 2022
Shares Issued
Price
12.28
12.09
11.96
11.88
12.15
11.56
Shares
20,424
22,662
23,336
24,619
24,907
23,454
On January 1, 2023, we issued 26,545 shares at a price of $12.07 per share under this plan.
Agency Stock Purchase Plan
Since 1996, we have maintained an Agency Stock Purchase Plan. During 2018, we adopted a plan that made 350,000
shares of our Class A common stock available for issuance to agents of our insurance subsidiaries and Donegal Mutual. During
2021, we amended the 2018 plan to make 400,000 shares of our Class A common stock available for issuance. The 2018 plan
expired in 2021. During 2021, we adopted a new plan that made 500,000 shares of our Class A common stock available for
issuance to agents of our insurance subsidiaries and Donegal Mutual. The plan permits an agent to invest up to $12,000 per
subscription period (April 1 to September 30 and October 1 to March 31 of each year) under various methods. We issue stock at
the end of each subscription period at a price equal to 90% of the average market price during the last ten trading days of each
subscription period. During 2022, 2021 and 2020, we issued 104,393, 99,828 and 101,647 shares, respectively, under this plan.
The expense we recognized under this plan was not material.
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
Peninsula:
Statutory capital and surplus
Statutory unassigned surplus
Statutory net income
MICO:
Statutory capital and surplus
Statutory unassigned surplus
Statutory net (loss) income
2022
2021
2020
$ 263,579,356 $ 278,883,189 $ 279,796,696
158,056,862 174,073,348
(3,124,687)
(7,417,845)
175,777,393
20,735,871
64,463,124
64,238,221
57,142,228
7,523,951
7,330,382
300,409
(410,561)
6,927,576
4,350,677
52,234,684
47,867,789
49,285,069
33,925,484
29,558,589
30,975,869
4,192,697
3,536,404
10,955,796
75,441,871
53,422,483
(233,391)
75,197,207
53,201,571
7,704,417
72,183,575
45,247,698
12,240,173
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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, 2022 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 2023 are approximately $26.4
million from Atlantic States, $6.5 million from Southern, $6.0 million from Peninsula and $7.5 million from MICO, or a total
of approximately $46.4 million.
15 - Reconciliation of Statutory Filings to Amounts Reported in the Consolidated Financial Statements
Our insurance subsidiaries must file financial statements with state insurance regulatory authorities using accounting
principles and practices prescribed or permitted by those authorities. We refer to these accounting principles and practices as
statutory accounting principles (“SAP”). Accounting principles used to prepare these SAP financial statements differ from those
used to prepare financial statements on the basis of GAAP.
Reconciliations of statutory net income and capital and surplus, as determined using SAP, to the net (loss) income and
stockholders’ equity amounts included in the accompanying consolidated financial statements are as follows:
Statutory net income of insurance subsidiaries
$
424,058 $ 10,750,552 $ 48,282,517
Year Ended December 31,
2022
2021
2020
Increases (decreases):
Deferred policy acquisition costs
Deferred federal income taxes
Salvage and subrogation recoverable
5,141,857
2,958,735
5,195,800
8,871,415
(1,085,903)
2,551,800
(127,901)
(6,448)
713,400
Consolidating eliminations and adjustments
(14,791,466)
(18,769)
(9,516,984)
Parent-only net (loss) income
Net (loss) income
(888,389)
4,185,079
13,470,668
$
(1,959,405) $ 25,254,174 $ 52,815,252
Statutory capital and surplus of insurance subsidiaries
$ 455,719,035 $ 466,186,406 $ 458,407,568
December 31,
2022
2021
2020
Increases (decreases):
Deferred policy acquisition costs
Deferred federal income taxes
Salvage and subrogation recoverable
73,170,230
(23,794,084)
68,028,373
(21,294,388)
59,156,958
(18,586,428)
28,706,200
23,510,400
20,958,600
Non-admitted assets and other adjustments, net
712,623
929,862
1,315,378
Fixed maturities
(49,367,986)
5,958,434
15,309,610
Parent-only equity and other adjustments
(1,553,006)
(12,283,000)
(18,787,566)
Stockholders’ equity
$ 483,593,012 $ 531,036,087 $ 517,774,120
16 - Supplementary Cash Flow Information
The following table reflects net income taxes and interest we paid during 2022, 2021 and 2020:
Income taxes
Interest
2022
2021
2020
$
4,500,000 $
623,947
6,200,000 $ 12,800,000
1,191,800
1,150,211
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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.
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)
Basic (loss) earnings per share:
Numerator:
Year Ended December 31,
2022
2021
2020
Allocation of net (loss) income
$
(1,571) $
21,131 $
43,609
Denominator:
Weighted-average shares outstanding
Basic (loss) earnings per share
Diluted (loss) earnings per share:
Numerator:
Allocation of net (loss) 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
$
$
26,409
25,388
(0.06) $
0.83 $
23,707
1.84
(1,571) $
21,131 $
43,609
26,409
25,388
23,707
—
26,409
146
25,534
180
23,887
1.83
Diluted (loss) earnings per share
$
(0.06) $
0.83 $
We used the following information in the basic and diluted per share computations for our Class B common stock:
(in thousands)
Basic and diluted (loss) earnings per share:
Numerator:
Allocation of net (loss) income
Denominator:
Weighted-average shares outstanding
Basic and diluted (loss) earnings per share
Year Ended December 31,
2022
2021
2020
$
$
(388) $
4,123 $
9,206
5,577
(0.07) $
5,577
0.74 $
5,577
1.65
We did not include any effect of dilutive securities in the computation of diluted loss per share for 2022 because we
sustained a net loss for the period.
-89-
18 - Condensed Financial Information of Parent Company
December 31,
Assets
Condensed Balance Sheets
(in thousands)
2022
2021
Investment in subsidiaries/affiliates (equity method)
$ 509,513 $ 554,804
Short-term investments
Cash
Property and equipment
Other
Total assets
Liabilities and Stockholders’ Equity
Liabilities
Cash dividends declared to stockholders
Notes payable to subsidiary
Other
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
7,325
3,288
586
4,589
9
14,375
716
2,455
$ 525,301 $ 572,359
$
5,297 $
4,915
35,000
35,000
1,411
1,408
41,708
41,323
483,593
531,036
$ 525,301 $ 572,359
Condensed Statements of (Loss) Income and Comprehensive (Loss) Income
(in thousands)
Year Ended December 31,
Statements of (Loss) Income
Revenues
Dividends from subsidiaries
Realized investment gains
Other
Total revenues
Expenses
Operating expenses
Interest
Total expenses
(Loss) income before income tax benefit and equity in
undistributed net (loss) income of subsidiaries
Income tax benefit
(Loss) income before equity in undistributed net (loss) income of
subsidiaries
Equity in undistributed net (loss) income of subsidiaries
Net (loss) income
Statements of Comprehensive (Loss) Income
Net (loss) income
Other comprehensive (loss) income, net of tax
Unrealized (loss) gain - subsidiaries
Other comprehensive (loss) income, net of tax
Comprehensive (loss) income
2022
2021
2020
$
— $
5,000 $
14,000
—
526
526
1,245
787
2,032
—
481
—
463
5,481
14,463
1,223
787
2,010
1,258
794
2,052
(1,506)
3,471
12,411
(618)
(714)
(1,059)
(888)
4,185
(1,071)
21,069
13,470
39,345
$
(1,959) $
25,254 $
52,815
$
(1,959) $
25,254 $
52,815
(44,988)
(44,988)
(46,947) $
(7,847)
(7,847)
17,407 $
10,627
10,627
63,442
$
-90-
Condensed Statements of Cash Flows
(in thousands)
Year Ended December 31,
Cash flows from operating activities:
Net (loss) income
Adjustments:
2022
2021
2020
$
(1,959) $
25,254 $
52,815
Equity in undistributed net loss (income) of subsidiaries
1,071
(21,069)
(39,345)
Other
Net adjustments
Net cash (used) provided
Cash flows from investing activities:
Net (purchases) sale of short-term investments
Net purchase of property and equipment
Investment in subsidiaries
Other
Net cash (used) received
Cash flows from financing activities:
Cash dividends paid
Issuance of common stock
Net cash (used) received
Net change in cash
Cash at beginning of year
Cash at end of year
(1,972)
(536)
(5,615)
(901)
(21,605)
(44,960)
(2,860)
3,649
7,855
(7,316)
—
(768)
(28)
—
(13)
(916)
—
2,493
(18)
(1,037)
—
(8,112)
(929)
1,438
(20,503)
(19,099)
(16,976)
20,388
15,433
(115)
(3,666)
20,654
3,678
(11,087)
(946)
12,971
14,375
15,321
2,350
$
3,288 $
14,375 $
15,321
19 - Segment Information
We have three reportable segments, which consist of our investment function, our commercial lines of insurance and our
personal lines of insurance. Using independent agents, our insurance subsidiaries market commercial lines of insurance to small
and medium-sized businesses and personal lines of insurance to individuals.
We evaluate the performance of the commercial lines and personal lines primarily based upon our insurance subsidiaries’
underwriting results as determined under SAP for our total business.
We do not allocate assets to the commercial and personal 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.
-91-
Financial data by segment is as follows:
Revenues:
Premiums earned:
Commercial lines
Personal lines
GAAP premiums earned
Net investment income
Investment (losses) gains
Other
Total revenues
(Loss) income before income taxes:
Underwriting (loss) income:
Commercial lines
Personal lines
SAP underwriting (loss) income
GAAP adjustments
GAAP underwriting (loss) income
Net investment income
Investment (losses) gains
Other
2022
2021
2020
(in thousands)
$ 510,153 $ 468,433 $ 412,877
312,337
822,490
34,016
(10,185)
1,900
307,582
776,015
31,126
6,477
2,848
329,163
742,040
29,504
2,778
3,497
$ 848,221 $ 816,466 $ 777,819
2022
2021
2020
(in thousands)
$
(22,665) $
(35,174) $
(858)
(13,506)
17,235
(36,171)
(17,939)
8,667
9,945
(27,504)
(7,994)
34,016
(10,185)
35
31,126
6,477
730
31,764
30,906
(959)
29,947
29,504
2,778
1,043
(Loss) income before income taxes
$
(3,638) $
30,339 $
63,272
20 - Guaranty Fund and Other Insurance-Related Assessments
Our insurance subsidiaries’ liabilities for guaranty fund and other insurance-related assessments were $1.9 million and $1.7
million at December 31, 2022 and 2021, respectively. These liabilities included $663,883 and $602,523 related to surcharges
collected by our insurance subsidiaries on behalf of regulatory authorities for 2022 and 2021, respectively.
-92-
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, 2022 and 2021, 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, 2022, and the related notes and
financial statement schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and
the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, 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, 2022, 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 6, 2023 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
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 provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Estimate of Liabilities for Losses and Loss Expenses
As discussed in Notes 1 and 8 to the consolidated financial statements, the Company estimates the liabilities for losses
and loss expenses (reserves) through an internal reserve analysis that relies upon generally accepted actuarial practices. The
Company develops reserve estimates by line of business and, as experience emerges and other information develops, the
reserve estimates are assessed in aggregate and adjusted as necessary. As of December 31, 2022, the Company recorded a
liability of $1.121 billion for reserves.
We identified the evaluation of the estimate of reserves as a critical audit matter. The evaluation of the Company’s
estimate of reserves involved a high degree of auditor judgment due to the inherent uncertainties in the use of actuarial
methods and assumptions, which considered internal and external factors. Assumptions included the selection of loss
development factors, a priori ratios, and the weighting of actuarial methods when more than one was used. Evaluating the
actuarial methods and assumptions required specialized skills and auditor judgment.
The following are the primary procedures we performed to address this critical audit matter. We evaluated, with the
involvement of actuarial professionals, when appropriate, the design and tested the operating effectiveness of certain
-93-
internal controls related to the Company’s reserving process. These included controls related to the Company’s actuarial
analyses and determination of the Company’s estimate of recorded reserves. We involved actuarial professionals with
specialized skills and knowledge, who assisted in:
•
•
•
•
evaluating the Company’s actuarial methods by comparing them to generally accepted actuarial practices
developing an independent estimate of reserves for certain lines of business using methods consistent with
generally accepted actuarial practices by independently forming assumptions of loss development factors, a priori
ratios, and the weighting of actuarial methods when more than one was used, considering internal and external
factors
assessing the Company's internal actuarial analysis for certain lines of business by reviewing the assumptions and
actuarial methods used, which included the selection of loss development factors, a priori ratios, and the
weighting of actuarial methods when more than one was used, considering internal and external factors
developing a range of reserves and comparing to the Company’s recorded reserves and assessing movement of the
Company’s recorded reserves within that range.
We or our predecessor firms have served as the Company’s auditor since 1986.
Philadelphia, Pennsylvania
March 6, 2023
-94- 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, 2022 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, 2022, 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, 2022.
The effectiveness of our internal control over financial reporting at December 31, 2022 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
Donegal Mutual implemented a new application system that Donegal Mutual and our insurance subsidiaries began to
utilize during 2021 for the allocation of expenses and, beginning in 2022, for reinsurance premiums and commissions. The new
application system provides for further automation of, and enhanced internal controls over these processes. The implementation
of the new system is part of a multi-year accounting systems and process modernization initiative Donegal Mutual is
implementing to achieve various benefits for Donegal Mutual and our insurance subsidiaries, including streamlined financial
reporting workflows and a more efficient control environment.
Such changes resulted in changes to procedures related to our financial reporting. Prior to the implementation of the new
systems, we identified and designed new internal controls that we incorporated into our internal controls over financial
reporting. Following the implementation, we validated these new controls according to our established processes. We did not
implement these changes in internal controls to respond to any actual or perceived significant deficiencies in our internal
control over financial reporting.
Item 9B. Other Information.
None.
-95-
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
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, 2022, 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, 2022, 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, 2022 and December 31, 2021, 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, 2022, and the related notes and financial statement schedule III (collectively,
the consolidated financial statements), and our report dated March 6, 2023 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. 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 6, 2023
-96-
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Other than the information we provide below and the information regarding executive officers included in Part I of this
Form 10-K Report, we incorporate the response to this Item 10 by reference to our proxy statement we will file with the SEC on
or about March 17, 2023 relating to our annual meeting of stockholders that we will hold on April 20, 2023, or our Proxy
Statement.
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.
-97-
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Financial statements, financial statement schedule and exhibits filed:
(i)
Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Donegal Group Inc. and Subsidiaries:
Consolidated Balance Sheets at December 31, 2022 and 2021
Consolidated Statements of Income and Comprehensive Income for each of the years in the three-year period
ended December 31, 2022, 2021 and 2020
Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended
December 31, 2022, 2021 and 2020
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31,
2022, 2021 and 2020
Notes to Consolidated Financial Statements
Report and Consent of Independent Registered Public Accounting Firm
(Filed as Exhibit 23.1)
(b) Financial Statement Schedule
Schedule III — Supplementary Insurance Information
Report of Independent Registered Public Accounting Firm
Page
93
57
58
59
60
61
101
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
Exhibit No.
Description of Exhibits
Reference
3.1
3.2
3.3
4.1
Certificate of Incorporation of Donegal Group Inc., as amended.
Second Amended and Restated By-laws of Donegal Group Inc.
State of Delaware Certificate of Change of Registered Agent and/or Registered Office
Description of Donegal Group Inc’s Securities Registered pursuant to Section 12 of the Exchange
Act.
Management Contracts and Compensatory Plans or Arrangements
Donegal Group Inc. 2013 Equity Incentive Plan for Employees.
Donegal Group Inc. 2013 Equity Incentive Plan for Directors.
Employment Agreement dated as of October 1, 2020 among Donegal Mutual Insurance Company,
Donegal Group Inc. and Kevin G. Burke.
Employment Agreement dated as of October 1, 2020 among Donegal Mutual Insurance Company,
Donegal Group Inc. and Jeffrey D. Miller.
(i)
(q)
(r)
(m)
(g)
(g)
(l)
(l)
Form of Employment Agreement dated as of October 1, 2020 among Donegal Mutual Insurance
Company, Donegal Group Inc. and Our Executive Officers Other Than Kevin G. Burke and Jeffrey
D. Miller.
Filed
herewith
10.6
Donegal Mutual Insurance Company 401(k) Plan.
(a)
10.1
10.2
10.3
10.4
10.5
-98-
10.7
10.8
10.9
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.
10.10
Amendment No. 4 effective January 1, 2002 to Donegal Mutual Insurance Company 401(k) Plan.
10.11
Amendment No. 5 effective December 31, 2001 to Donegal Mutual Insurance Company 401(k)
Plan.
10.12
Amendment No. 6 effective July 1, 2002 to Donegal Mutual Insurance Company 401(k) Plan.
10.13
Donegal Group Inc. 2015 Equity Incentive Plan for Employees.
10.14
Donegal Group Inc. 2015 Equity Incentive Plan for Directors.
10.15
Donegal Group Inc. 2019 Equity Incentive Plan for Employees.
10.16
Donegal Group Inc. 2019 Equity Incentive Plan for Directors.
10.17
Donegal Group Inc. Cash Incentive Bonus Plan for 2020.
10.18
Donegal Group Inc. 2020 Long-Term Executive Incentive Plan.
10.19
Donegal Group Inc. Cash Incentive Bonus Plan for 2021.
10.20
Donegal Group Inc. 2021 Employee Stock Purchase Plan.
10.21
Donegal Group Inc. Cash Incentive Bonus Plan for 2022.
10.22
Donegal Group Inc. Cash Incentive Bonus Plan for 2023.
10.23
Donegal Group Inc. 2023 Long-Term Executive Incentive Plan.
Other Material Contracts
10.24
10.25
10.26
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 September 1, 2021 among Donegal
Mutual Insurance Company, Donegal Group Inc., Atlantic States Insurance Company, Southern
Insurance Company of Virginia, The Peninsula Insurance Company, Peninsula Indemnity
Company and Michigan Insurance Company.
10.27
Quota-share Reinsurance Agreement dated December 1, 2010 between Donegal Mutual Insurance
Company and Michigan Insurance Company.
10.28
Donegal Group Inc. 2021 Agency Stock Purchase Plan.
10.29
Discretionary Loan Agreement between Donegal Group Inc. and M&T Bank dated August 1, 2020.
14
21
Code of Business Conduct and Ethics.
Subsidiaries of Registrant.
23.1
Report and 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.
(a)
(b)
(b)
(b)
(b)
(c)
(h)
(h)
(j)
(j)
(k)
(k)
(m)
(n)
(p)
Filed
herewith
Filed
herewith
(e)
(f)
(p)
(f)
(o)
(m)
(d)
Filed
herewith
Filed
herewith
Filed
herewith
Filed
herewith
-99-
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
Filed
herewith
Filed
herewith
Filed
herewith
Filed
herewith
Filed
herewith
Filed
herewith
Filed
herewith
Filed
herewith
(a) 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.
(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 10-K Report for the year ended
December 31, 2002.
(d) 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.
(e) 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.
(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, 2010.
(g) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated April 22, 2013.
(h) We incorporate such exhibit by reference to the copy of such plan in Registrant’s definitive proxy statement for its Annual Meeting
of Stockholders held on April 16, 2015 filed on March 16, 2015.
(i) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-Q Report for the quarter ended
June 30, 2019.
(j) We incorporate such exhibit by reference to the copy of such plan in Registrant’s definitive proxy statement for its Annual
Meeting of Stockholders held on April 18, 2019 filed on March 18, 2019.
(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, 2019.
(l) We incorporate such exhibit by reference to the like-described exhibit in Registrant's Form 8-K Report dated October 1, 2020.
(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, 2020.
(n) We incorporate such exhibit by reference to the copy of such plan in Registrant’s definitive proxy statement for its Annual Meeting
of Stockholders held on April 15, 2021 filed on March 15, 2021.
(o) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form S-3 Registration Statement filed on
September 30, 2021.
(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, 2021.
(q) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated July 22, 2022.
(r) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated August 10, 2022.
Item 16. Form 10-K Summary.
None.
-100-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION
Years Ended December 31, 2022, 2021 and 2020
($ in thousands)
Segment
Year Ended December 31, 2022
Commercial lines
Personal lines
Investments
Year Ended December 31, 2021
Commercial lines
Personal lines
Investments
Year Ended December 31, 2020
Commercial lines
Personal 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
$ 510,153 $
— $ 342,456 $
91,965 $
89,056 $ 519,797
312,337
—
221,623
50,465
48,868
323,733
—
34,016
—
—
—
—
$ 822,490 $
34,016 $ 564,079 $ 142,430 $ 137,924 $ 843,530
$ 468,433 $
— $ 321,483 $
84,927 $
85,345 $ 501,785
307,582
—
199,227
43,806
44,023
302,482
—
31,126
—
—
—
—
$ 776,015 $
31,126 $ 520,710 $ 128,733 $ 129,368 $ 804,267
$ 412,877 $
— $ 264,053 $
66,253 $
72,245 $ 425,986
329,163
—
195,711
52,819
53,618
316,154
—
29,504
—
—
—
—
$ 742,040 $
29,504 $ 459,764 $ 119,072 $ 125,863 $ 742,140
-101-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
($ in thousands)
Segment
2022
Commercial lines
Personal lines
Investments
2021
Commercial lines
Personal lines
Investments
At December 31,
Deferred
Policy
Acquisition
Costs
Liability
For Losses
and Loss
Expenses
Unearned
Premiums
Other Policy
Claims and
Benefits
Payable
$
43,756 $ 859,842 $ 345,437 $
29,414
261,204
232,216
—
—
—
$
73,170 $ 1,121,046 $ 577,653 $
$
41,225 $ 814,681 $ 347,213 $
26,803
262,939
225,745
—
—
—
$
68,028 $ 1,077,620 $ 572,958 $
—
—
—
—
—
—
—
—
-102-
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 6, 2023
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
Title
President, Chief Executive Officer and a Director
(principal executive officer)
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
Director
/s/ Dennis J. Bixenman
Director
Dennis J. Bixenman
/s/ Jack L. Hess
Jack L. Hess
/s/ Barry C. Huber
Barry C. Huber
/s/ David C. King
David C. King
/s/ Kevin M. Kraft, Sr.
Kevin M. Kraft, Sr.
/s/ Jon M. Mahan
Jon M. Mahan
Director
Director
Director
Director
Director
/s/ S. Trezevant Moore, Jr.
Director
S. Trezevant Moore, Jr.
/s/ Annette B. Szady
Annette B. Szady
Director
/s/ Richard D. Wampler, II
Director
Richard D. Wampler, II
Date
March 6, 2023
March 6, 2023
March 6, 2023
March 6, 2023
March 6, 2023
March 6, 2023
March 6, 2023
March 6, 2023
March 6, 2023
March 6, 2023
March 6, 2023
March 4, 2022
March 6, 2023
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Donegal Group Inc. is an insurance holding company that offers property and casualty insurance through its wholly owned insurance subsidiaries. Our Class A common stock and Class B common stock trade on the NASDAQ Global Select Market under the symbols DGICA and DGICB, respectively.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 commercial and personal insurance products through a network of independent insurance agencies in 24 states.We are focused on several primary strategies, including achieving sustained excellent financial performance, strategically modernizing our operations and processes to transform our business, capitalizing on opportunities to grow profitably and delivering a superior experience to our agents and customers.DONEGAL GROUP INC ANNUAL REPORTBeing there when it matters most.BOARD OF DIRECTORSKevin G. Burke Chairman of the Board and a DirectorScott A. Berlucchi DirectorDennis J. Bixenman DirectorJack L. Hess DirectorBarry C. Huber DirectorDavid C. King DirectorKevin M. Kraft, Sr. DirectorJon M. Mahan DirectorS. Trezevant Moore, Jr. DirectorAnnette B. Szady DirectorRichard D. Wampler, II DirectorOFFICERS Kevin G. Burke President and Chief Executive OfficerJeffrey D. Miller Executive Vice President and Chief Financial OfficerKristi S. Altshuler Senior Vice President and Chief Analytics Officer W. Daniel DeLamater Senior Vice President William A. Folmar Senior Vice President Jeffery T. Hay Senior Vice President Christina M. Hoffman Senior Vice President and Chief Risk OfficerMatthew T. Hudnall Senior Vice PresidentRobert R. Long, Jr. Senior Vice President and General Counsel Sanjay Pandey Senior Vice President and Chief Information OfficerDavid W. Sponic Senior Vice PresidentV. Anthony Viozzi Senior Vice President and Chief Investment OfficerDaniel J. Wagner Senior Vice President and TreasurerDavid B. Bawel Vice President Jason M. Crumbling Vice President and ControllerKaren L. Groff Vice President and Assistant Treasurer Sheri O. Smith Vice President and SecretaryJennifer R. Miller Assistant Secretary ANNUAL MEETINGApril 20, 2023 at 10:00 a.m. Virtual meeting via online webcast at: www.virtualshareholdermeeting.com/DGICA2023CORPORATE OFFICES1195 River Road P.O. Box 302 Marietta, Pennsylvania 17547-0302 (800) 877-0600 E-mail Address: investors@donegalgroup.com Donegal Web Site: www.donegalgroup.comTRANSFER AGENTComputershare Trust Company, N.A. P.O. Box 43006 Providence, Rhode Island 02940-3006 (800) 317-4445 Web Site: www.computershare.com Hearing Impaired: TDD: 800-952-9245DIVIDEND REINVESTMENT AND STOCK PURCHASE PLANWe 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 43006 Providence, Rhode Island 02940-3006STOCKHOLDERSThe following represent the number of our common stockholders of record as of December 31, 2022: Class A common stock 1,657 Class B common stock 225Corporate Information2022DG22 Report Cover_030323 PRESS.indd 2DG22 Report Cover_030323 PRESS.indd 23/3/23 3:38 PM3/3/23 3:38 PM Providing peace of mind to our policyholders. ANNUAL REPORT20221195 River Road, P.O. Box 302Marietta, PA 17547-0302(800) 877-0600www.donegalgroup.comDG22 Report Cover_030323 PRESS.indd 1DG22 Report Cover_030323 PRESS.indd 13/3/23 3:38 PM3/3/23 3:38 PM