DONEGAL GROUP INC 10-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. -62- Index 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) Principal Cash Flows Weighted-Average Interest Rate Fixed-maturity and short-term investments: 2023 $ 96,897 3.54 % 2024 46,799 3.98 2025 63,851 4.00 2026 70,116 4.00 2027 73,460 3.83 Thereafter 967,145 3.04 Total $ 1,318,268 Fair value $ 1,179,158 Debt: 2024 $ 35,000 1.74 % Total $ 35,000 Fair value $ 35,000 Actual cash flows from investments may differ from those depicted above as a result of calls and prepayments. 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. -63- Index Item 8. Financial Statements and Supplementary Data. Index to Consolidated Financial Statements and Schedule Consolidated Balance Sheets 65 Consolidated Statements of Income and Comprehensive Income 66 Consolidated Statements of Stockholders’ Equity 67 Consolidated Statements of Cash Flows 68 Notes to Consolidated Financial Statements 69 Report of Independent Registered Public Accounting Firm ( KPMG LLP , PCAOB ID 185 ) 107 Schedule: Schedule III — Supplementary Insurance Information 115 -64- Index 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 Available for sale, at fair value (amortized cost $ 571,912,727 and $ 523,293,046 ) 523,791,931 532,629,015 Equity securities, at fair value 35,104,840 63,419,973 Short-term investments, at cost, which approximates fair value 57,321,111 12,692,341 Total investments 1,304,657,242 1,276,845,897 Cash 25,123,332 57,709,375 Accrued investment income 8,861,292 8,214,971 Premiums receivable 173,846,294 168,862,580 Reinsurance receivable 456,522,223 455,411,009 Deferred policy acquisition costs 73,170,230 68,028,373 Deferred tax asset, net 21,603,017 6,685,619 Prepaid reinsurance premiums 160,591,399 176,935,842 Property and equipment, net 2,755,105 2,956,930 Accounts receivable - securities 1,842 2,252 Federal income taxes recoverable 8,510,897 5,290,938 Receivable from Michigan Catastrophic Claims Association — 18,112,800 Due from affiliate — 1,922,717 Goodwill 5,625,354 5,625,354 Other intangible assets 958,010 958,010 Other 1,123,098 1,612,732 Total assets $ 2,243,349,335 $ 2,255,175,399 Liabilities and Stockholders’ Equity Liabilities Losses and loss expenses $ 1,121,045,758 $ 1,077,620,301 Unearned premiums 577,653,130 572,958,422 Accrued expenses 4,226,390 4,028,659 Reinsurance balances payable 3,495,824 3,946,105 Borrowings under lines of credit 35,000,000 35,000,000 Cash dividends declared to stockholders 5,296,990 4,915,268 Cash refunds due to Michigan policyholders — 18,112,800 Due to affiliate 5,173,289 — Other 7,864,942 7,557,757 Total liabilities 1,759,756,323 1,724,139,312 Stockholders’ Equity Preferred stock, $ 0.01 par value, authorized 2,000,000 shares; none issued — — Class A common stock, $ 0.01 par value, authorized 50,000,000 shares, issued 30,120,263 and 28,756,203 shares and outstanding 27,117,675 and 25,753,615 shares 301,203 287,562 Class B common stock, $ 0.01 par value, authorized 10,000,000 shares, issued 5,649,240 shares and outstanding 5,576,775 shares 56,492 56,492 Additional paid-in capital 325,601,647 304,889,481 Accumulated other comprehensive (loss) income ( 41,703,747 ) 3,283,551 Retained earnings 240,563,774 263,745,358 Treasury stock, at cost ( 41,226,357 ) ( 41,226,357 ) Total stockholders’ equity 483,593,012 531,036,087 Total liabilities and stockholders’ equity $ 2,243,349,335 $ 2,255,175,399 See accompanying notes to consolidated financial statements. -65- Index Donegal Group Inc. Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income Years Ended December 31, 2022 2021 2020 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 Investment income, net of investment expenses 34,016,112 31,125,631 29,504,466 Installment payment fees 1,516,330 2,416,873 3,063,097 Lease income 383,451 430,800 434,089 Net investment (losses) gains (includes ($ 979,972 ), $ 382,602 and $ 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 7,394,310 Interest 620,558 895,605 1,196,406 Other, net 1,244,948 1,222,728 1,257,747 Total expenses 851,858,645 786,127,283 714,547,407 (Loss) income before income tax (benefit) expense ( 3,638,099 ) 30,338,508 63,272,503 Income tax (benefit) expense (includes ($ 205,794 ), $ 80,346 and $ 120,142 income tax (benefit) expense from reclassification items) ( 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 $ ( 0.06 ) $ 0.83 $ 1.84 Class B common stock $ ( 0.07 ) $ 0.74 $ 1.65 Diluted (loss) earnings per common share: Class A common stock $ ( 0.06 ) $ 0.83 $ 1.83 Class B common stock $ ( 0.07 ) $ 0.74 $ 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 ( 45,761,476 ) ( 7,544,805 ) 11,078,406 Reclassification adjustment for losses (gains) included in net (loss) income, net of income tax (benefit) expense of ($ 205,794 ), $ 80,346 and $ 120,142 774,178 ( 302,256 ) ( 451,964 ) Other comprehensive (loss) income ( 44,987,298 ) ( 7,847,061 ) 10,626,442 Comprehensive (loss) income $ ( 46,946,703 ) $ 17,407,113 $ 63,441,694 See accompanying notes to consolidated financial statements. -66- Index 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 Balance, January 1, 2020 26,203,935 5,649,240 $ 262,040 $ 56,492 $ 268,151,601 $ 504,170 $ 223,267,573 $ ( 41,226,357 ) $ 451,015,519 Issuance of common stock (stock compensation plans) 153,233 1,532 2,057,504 2,059,036 Stock-based compensation 1,294,606 12,946 18,582,085 18,595,031 Net income 52,815,252 52,815,252 Cash dividends ( 17,337,160 ) ( 17,337,160 ) Grant of stock options 358,377 ( 358,377 ) — Other comprehensive income 10,626,442 10,626,442 Balance, December 31, 2020 27,651,774 5,649,240 $ 276,518 $ 56,492 $ 289,149,567 $ 11,130,612 $ 258,387,288 $ ( 41,226,357 ) $ 517,774,120 Issuance of common stock (stock compensation plans) 157,783 1,578 2,161,142 2,162,720 Stock-based compensation 946,646 9,466 13,260,855 13,270,321 Net income 25,254,174 25,254,174 Cash dividends ( 19,578,187 ) ( 19,578,187 ) Grant of stock options 317,917 ( 317,917 ) — Other comprehensive loss ( 7,847,061 ) ( 7,847,061 ) Balance, December 31, 2021 28,756,203 5,649,240 $ 287,562 $ 56,492 $ 304,889,481 $ 3,283,551 $ 263,745,358 $ ( 41,226,357 ) $ 531,036,087 Issuance of common stock (stock compensation plans) 161,254 1,613 2,122,277 2,123,890 Stock-based compensation 1,202,806 12,028 18,252,148 18,264,176 Net loss ( 1,959,405 ) ( 1,959,405 ) Cash dividends ( 20,884,438 ) ( 20,884,438 ) Grant of stock options 337,741 ( 337,741 ) — Other comprehensive loss ( 44,987,298 ) ( 44,987,298 ) Balance, December 31, 2022 30,120,263 5,649,240 $ 301,203 $ 56,492 $ 325,601,647 $ ( 41,703,747 ) $ 240,563,774 $ ( 41,226,357 ) $ 483,593,012 See accompanying notes to consolidated financial statements. -67- Index Donegal Group Inc. Consolidated Statements of Cash Flows Years Ended December 31, 2022 2021 2020 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 4,841,559 5,837,809 6,721,621 Net investment losses (gains) 10,184,797 ( 6,477,286 ) ( 2,777,919 ) Changes in Assets and Liabilities: Losses and loss expenses 43,425,457 115,612,864 92,333,588 Unearned premiums 4,694,708 35,768,824 27,042,113 Accrued expenses 197,731 ( 25,086,539 ) 661,454 Premiums receivable ( 4,983,714 ) 733,752 ( 3,863,383 ) Deferred policy acquisition costs ( 5,141,857 ) ( 8,871,415 ) 127,901 Deferred income taxes ( 2,958,735 ) 1,095,306 6,448 Reinsurance receivable ( 1,111,214 ) ( 46,502,159 ) ( 41,887,382 ) Accrued investment income ( 646,321 ) ( 278,092 ) ( 870,850 ) Amounts due to affiliate 7,096,006 ( 12,216,212 ) 224,324 Reinsurance balances payable ( 450,281 ) 712,582 1,117,439 Prepaid reinsurance premiums 16,344,443 ( 7,517,509 ) ( 26,942,566 ) Current income taxes ( 3,219,959 ) ( 2,201,569 ) ( 3,174,200 ) Other, net 796,805 867,438 ( 399,440 ) Net adjustments 69,069,425 51,477,794 48,319,148 Net cash provided by operating activities 67,110,020 76,731,968 101,134,400 Cash Flows from Investing Activities: Purchases of fixed maturities: Held to maturity ( 74,902,605 ) ( 125,630,220 ) ( 157,048,527 ) Available for sale ( 151,994,462 ) ( 163,593,018 ) ( 176,500,255 ) Purchases of equity securities ( 15,862,888 ) ( 25,354,790 ) ( 6,964,092 ) Sales of fixed maturities: Available for sale 24,381,244 6,281,963 22,172,930 Maturity of fixed maturities: Held to maturity 53,747,886 44,211,076 47,448,424 Available for sale 75,759,806 165,867,395 172,084,542 Sales of equity securities 34,973,196 26,585,663 6,091,288 Net sales (purchases) of property and equipment 28,290 1,224,806 ( 89,702 ) Net (purchases) sales of short-term investments ( 44,628,770 ) 8,207,814 ( 6,869,933 ) Net cash used in investing activities ( 98,498,303 ) ( 62,199,311 ) ( 99,675,325 ) Cash Flows from Financing Activities: Issuance of common stock 19,304,956 14,181,702 19,292,324 Cash dividends paid ( 20,502,716 ) ( 19,099,220 ) ( 16,976,093 ) Payments on subordinated debentures — ( 5,000,000 ) — Payments on lines of credit — ( 50,000,000 ) — Borrowings under lines of credit — — 50,000,000 Net cash (used in) provided by financing activities ( 1,197,760 ) ( 59,917,518 ) 52,316,231 Net (decrease) increase in cash ( 32,586,043 ) ( 45,384,861 ) 53,775,306 Cash at beginning of year 57,709,375 103,094,236 49,318,930 Cash at end of year $ 25,123,332 $ 57,709,375 $ 103,094,236 See accompanying notes to consolidated financial statements. -68- Index 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. -69- Index The same executive management and underwriting personnel administer products, classes of business underwritten, pricing practices and underwriting standards of Donegal Mutual and our insurance subsidiaries. In addition, as the Donegal Insurance Group, Donegal Mutual and our insurance subsidiaries share a combined business plan to achieve market penetration and underwriting profitability objectives. The products our insurance subsidiaries and Donegal Mutual market are generally complementary, thereby allowing the Donegal Insurance Group to offer a broader range of products to a given market and to expand the Donegal Insurance Group’s ability to service an entire personal lines or commercial lines account. Distinctions within the products of Donegal Mutual and our insurance subsidiaries generally relate to specific risk profiles targeted within similar classes of business, such as preferred tier versus standard tier products, but we do not allocate all of the standard risk gradients to one company. Therefore, the underwriting profitability of the business the individual companies write directly will vary. However, the underwriting pool homogenizes the risk characteristics of all business that Donegal Mutual and Atlantic States write directly. The business Atlantic States derives from the underwriting pool represents a significant percentage of our total consolidated revenues. 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. -70- Index 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. 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. -71- Index 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 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. O ur 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 . -72- Index R eserve 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 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. -73- Index 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. 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. -74- Index 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: 2022 2021 2020 Premiums earned $ 314,321,443 $ 305,729,418 $ 266,400,636 Losses and loss expenses 202,228,589 222,737,225 181,205,743 Prepaid reinsurance premiums 154,472,615 152,323,262 146,387,565 Liability for losses and loss expenses 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: 2022 2021 2020 Premiums earned $ 578,216,706 $ 573,891,394 $ 514,172,448 Losses and loss expenses 395,794,813 383,455,320 309,315,497 Unearned premiums 280,031,908 289,976,879 262,004,199 Liability for losses and loss expenses 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. -75- Index The following amounts represent reinsurance ceded to Donegal Mutual pursuant to these quota-share reinsurance agreements during 2022, 2021 and 2020: 2022 2021 2020 Premiums earned $ 17,989,939 $ 37,996,474 $ 39,315,398 Losses and loss expenses 5,194,974 20,037,608 15,471,037 Prepaid reinsurance premiums — 18,548,821 17,155,909 Liability for losses and loss expenses 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: 2022 2021 2020 Premiums earned $ 13,800,018 $ 17,574,161 $ 15,595,138 Losses and loss expenses 10,517,709 9,309,624 25,259,527 Liability for losses and loss expenses 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: 2022 2021 2020 Assumed $ 578,216,706 $ 573,891,394 $ 514,172,448 Ceded ( 346,111,400 ) ( 361,300,053 ) ( 321,311,172 ) Net $ 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: 2022 2021 2020 Assumed $ 395,790,312 $ 383,452,056 $ 309,311,098 Ceded ( 217,941,272 ) ( 252,084,457 ) ( 221,936,307 ) Net $ 177,849,040 $ 131,367,599 $ 87,374,791 b. Expense Sharing 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. -76- Index 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 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. -77- Index 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 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 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 190,948,922 — 20,510,543 170,438,379 Mortgage-backed securities 12,030,949 — 634,583 11,396,366 Totals $ 688,439,360 $ 1,810,735 $ 92,205,414 $ 598,044,681 2022 Available for Sale Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 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 218,040,945 8,315 15,211,215 202,838,045 Mortgage-backed securities 239,886,169 155,278 22,764,657 217,276,790 Totals $ 571,912,727 $ 306,270 $ 48,427,066 $ 523,791,931 -78- Index 2021 Held to Maturity Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 89,267,988 $ 1,922,976 $ 1,015,040 $ 90,175,924 Obligations of states and political subdivisions 371,435,776 17,856,745 948,113 388,344,408 Corporate securities 191,147,051 11,576,693 772,809 201,950,935 Mortgage-backed securities 16,253,753 675,944 — 16,929,697 Totals $ 668,104,568 $ 32,032,358 $ 2,735,962 $ 697,400,964 2021 Available for Sale Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 32,501,080 $ 144,377 $ 460,831 $ 32,184,626 Obligations of states and political subdivisions 55,458,687 2,002,035 82,631 57,378,091 Corporate securities 215,668,644 6,817,036 874,405 221,611,275 Mortgage-backed securities 219,664,635 3,000,806 1,210,418 221,455,023 Totals $ 523,293,046 $ 11,964,254 $ 2,628,285 $ 532,629,015 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. -79- Index 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. Amortized Cost Estimated Fair Value Held to maturity Due in one year or less $ 24,608,278 $ 24,736,944 Due after one year through five years 86,581,717 83,910,606 Due after five years through ten years 245,818,039 218,039,676 Due after ten years 319,400,377 259,961,089 Mortgage-backed securities 12,030,949 11,396,366 Total held to maturity $ 688,439,360 $ 598,044,681 Available for sale Due in one year or less $ 14,601,260 $ 14,485,681 Due after one year through five years 163,170,354 154,175,256 Due after five years through ten years 123,462,268 111,296,437 Due after ten years 30,792,676 26,557,767 Mortgage-backed securities 239,886,169 217,276,790 Total available for sale $ 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: 2022 2021 2020 Fixed maturities $ 34,945,437 $ 32,343,878 $ 30,750,231 Equity securities 897,429 1,437,948 1,386,343 Short-term investments 817,428 321,117 427,392 Other 29,250 29,250 29,250 Investment income 36,689,544 34,132,193 32,593,216 Investment expenses ( 2,673,432 ) ( 3,006,562 ) ( 3,088,750 ) Net investment income $ 34,016,112 $ 31,125,631 $ 29,504,466 -80- Index We present below gross gains and losses from investments and the change in the difference between fair value and cost of investments: 2022 2021 2020 Gross realized gains: Fixed maturities $ 1,149,761 $ 676,724 $ 818,350 Equity securities 1,765,923 1,430,465 106,075 Real estate 477,287 — — 3,392,971 2,107,189 924,425 Gross realized losses: Fixed maturities 2,129,736 294,126 246,243 Equity securities 4,113,526 462,335 3,555,304 6,243,262 756,461 3,801,547 Net realized (losses) gains ( 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 $ ( 177,147,840 ) $ ( 27,576,934 ) $ 33,876,212 Equity securities 15,823,189 4,010,973 4,088,003 Totals $ ( 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 298,706,256 22,272,711 72,959,284 13,449,047 Mortgage-backed securities 143,885,626 10,940,722 69,878,986 12,458,518 Totals $ 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: Less than 12 months 12 months or longer Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 27,691,051 $ 412,055 $ 28,426,248 $ 1,063,816 Obligations of states and political subdivisions 56,654,480 899,139 7,090,499 131,605 Corporate securities 92,736,747 1,609,931 1,462,717 37,283 Mortgage-backed securities 90,006,234 1,128,197 2,361,232 82,221 Totals $ 267,088,512 $ 4,049,322 $ 39,340,696 $ 1,314,925 -81- Index 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 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 no t 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. -82- Index 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 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 63,521,312 $ — $ 63,521,312 $ — Obligations of states and political subdivisions 40,155,784 — 40,155,784 — Corporate securities 202,838,045 — 202,838,045 — Mortgage-backed securities 217,276,790 — 217,276,790 — Equity securities 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 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 32,184,626 $ — $ 32,184,626 $ — Obligations of states and political subdivisions 57,378,091 — 57,378,091 — Corporate securities 221,611,275 — 221,611,275 — Mortgage-backed securities 221,455,023 — 221,455,023 — Equity securities 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 $ — -83- Index 6 - Deferred Policy Acquisition Costs Changes in our insurance subsidiaries’ deferred policy acquisition costs are as follows: 2022 2021 2020 Balance, January 1 $ 68,028,373 $ 59,156,958 $ 59,284,859 Acquisition costs deferred 147,571,857 137,604,415 118,944,099 Amortization charged to earnings ( 142,430,000 ) ( 128,733,000 ) ( 119,072,000 ) Balance, December 31 $ 73,170,230 $ 68,028,373 $ 59,156,958 -84- Index 7 - Property and Equipment Property and equipment at December 31, 2022 and 2021 consisted of the following: 2022 2021 Estimated Useful Life Office equipment $ 8,245,030 $ 8,382,877 3 - 15 years Automobiles 42,794 322,703 5 years Real estate 2,575,207 2,575,207 5 - 50 years Software 1,386,936 1,386,936 5 years 12,249,967 12,667,723 Accumulated depreciation ( 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: 2022 2021 2020 Balance at January 1 $ 1,077,620,301 $ 962,007,437 $ 869,673,849 Less reinsurance recoverable ( 451,261,306 ) ( 404,818,480 ) ( 362,768,427 ) Net balance at January 1 626,358,995 557,188,957 506,905,422 Incurred related to: Current year 608,900,206 551,917,571 472,709,060 Prior years ( 44,821,213 ) ( 31,208,029 ) ( 12,944,767 ) Total incurred 564,078,993 520,709,542 459,764,293 Paid related to: Current year 302,272,322 269,316,762 236,984,291 Prior years 218,304,130 182,222,742 172,496,467 Total paid 520,576,452 451,539,504 409,480,758 Net balance at December 31 669,861,536 626,358,995 557,188,957 Plus reinsurance recoverable 451,184,222 451,261,306 404,818,480 Balance at December 31 $ 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 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. -85- Index 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. -86- Index Our insurance subsidiaries generally create a claim file for a policy at the claimant level by type of coverage and generally recognize one count for each claim event. In certain lines of business where it is common for multiple parties to claim damages arising from a single claim event, our insurance subsidiaries recognize one count for each claimant involved in the event. Atlantic States recognizes one count for each claim event, or claimant involved in a multiple-party claim event, related to losses Atlantic States assumes through its participation in its pooling agreement with Donegal Mutual. Our insurance subsidiaries accumulate the claim counts and report them by line of business. For purposes of the claim development tables we present below, our insurance subsidiaries count claims on policies they issue even if they eventually close such claims without making a loss payment. Claims our insurance subsidiaries close without making a loss payment typically generate loss expenses. The methods our insurance subsidiaries have used to summarize claim counts have not changed significantly over the time periods we report in the tables below. The following tables present information about incurred and paid claims development as of December 31, 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. -87- Index Personal Automobile At December 31, 2022 Incurred 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 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2013 $ 124,965 $ 130,737 $ 131,594 $ 132,643 $ 132,604 $ 132,934 $ 132,853 $ 132,690 $ 132,787 $ 132,735 $ 51 66 2014 124,426 124,806 124,210 126,200 126,779 126,734 126,861 126,977 127,108 65 71 2015 137,569 139,333 139,181 142,493 142,408 142,073 142,010 141,965 135 70 2016 150,216 153,937 157,516 157,943 156,935 156,436 156,227 522 73 2017 166,690 127,728 175,939 174,784 173,730 173,032 901 79 2018 186,580 183,358 181,558 180,787 179,732 1,695 81 2019 161,056 157,689 156,300 154,805 2,559 68 2020 111,483 103,585 100,339 3,324 43 2021 119,364 118,752 6,432 47 2022 126,203 19,934 48 Total $ 1,410,898 Personal Automobile 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 $ 84,241 $ 109,051 $ 120,118 $ 125,946 $ 130,026 $ 131,326 $ 131,642 $ 132,215 $ 132,300 $ 132,420 2014 85,377 104,736 114,893 120,491 123,815 124,926 125,619 125,762 126,701 2015 93,611 116,303 128,395 135,027 139,121 140,028 140,892 141,172 2016 102,433 129,507 143,321 151,159 153,521 154,769 155,521 2017 111,964 142,372 159,879 166,099 169,190 170,895 2018 115,585 150,175 163,036 169,651 173,922 2019 103,101 127,187 141,004 146,667 2020 66,084 81,783 89,736 2021 76,477 93,998 2022 83,616 Total 1,314,648 All outstanding liabilities before 2013, net of reinsurance 913 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 97,163 -88- Index Homeowners At December 31, 2022 Incurred 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 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2013 $ 50,887 $ 51,121 $ 51,122 $ 50,874 $ 50,988 $ 50,971 $ 51,008 $ 51,064 $ 51,053 $ 51,021 $ — 13 2014 56,916 58,378 57,680 57,332 57,288 57,402 57,367 57,371 57,353 — 17 2015 63,359 63,925 63,053 63,071 63,099 62,993 63,043 63,036 10 14 2016 62,443 64,064 63,735 63,355 63,279 63,409 63,472 35 12 2017 79,283 79,911 79,305 79,247 79,065 78,815 62 17 2018 81,965 83,385 82,905 82,566 82,058 230 18 2019 73,294 73,554 73,234 72,168 457 16 2020 61,633 62,718 61,595 835 14 2021 67,677 66,996 1,455 11 2022 82,433 7,556 9 Total $ 678,947 Homeowners 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 $ 40,949 $ 49,410 $ 50,210 $ 50,478 $ 51,043 $ 50,902 $ 50,967 $ 50,965 $ 50,955 $ 50,923 2014 45,823 56,255 56,990 57,195 56,995 57,243 57,336 57,339 57,318 2015 51,885 61,542 62,204 62,590 62,844 62,943 62,936 62,938 2016 50,125 61,145 62,760 63,144 63,162 63,217 63,266 2017 67,077 77,663 78,006 78,127 78,454 78,528 2018 70,385 79,892 80,905 81,464 81,568 2019 58,074 69,145 70,416 70,884 2020 51,226 60,348 60,809 2021 52,161 63,920 2022 63,107 Total 653,261 All outstanding liabilities before 2013, net of reinsurance 219 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 25,905 -89- Index Commercial Automobile At December 31, 2022 Incurred 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 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2013 $ 32,902 $ 33,749 $ 34,751 $ 35,240 $ 36,404 $ 36,435 $ 36,569 $ 36,181 $ 36,165 $ 36,133 $ 27 8 2014 42,760 44,544 47,326 48,213 49,284 49,168 49,308 49,291 49,285 33 11 2015 46,526 48,323 51,412 54,259 54,517 54,619 53,793 53,477 74 12 2016 54,302 57,353 65,905 67,127 66,894 66,085 65,922 179 13 2017 61,484 67,927 67,697 67,249 65,310 64,631 205 14 2018 79,307 81,396 82,313 83,043 82,226 860 15 2019 88,864 91,245 90,290 86,140 3,066 16 2020 90,367 87,766 85,016 5,973 14 2021 109,824 99,231 16,504 14 2022 115,287 38,312 14 Total $ 737,348 Commercial Automobile 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 $ 16,306 $ 23,557 $ 26,879 $ 31,053 $ 34,083 $ 36,004 $ 36,106 $ 36,092 $ 36,087 $ 36,081 2014 22,707 31,089 39,436 44,374 47,290 48,418 48,603 48,714 48,757 2015 23,875 35,342 41,678 48,261 51,605 51,992 52,728 53,052 2016 27,033 38,237 48,837 57,237 60,485 64,421 65,076 2017 28,707 40,213 49,703 57,128 59,889 62,187 2018 33,862 47,941 57,451 69,487 74,421 2019 36,948 53,026 63,575 72,139 2020 31,884 46,459 60,665 2021 39,851 56,101 2022 46,242 Total 574,721 All outstanding liabilities before 2013, net of reinsurance 56 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 162,683 -90- Index Commercial Multi-Peril At December 31, 2022 Incurred 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 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2013 $ 35,683 $ 35,679 $ 37,292 $ 37,205 $ 37,981 $ 37,365 $ 37,453 $ 37,495 $ 37,630 $ 37,598 $ — 6 2014 48,204 50,135 51,843 52,336 53,294 53,116 52,926 52,933 53,502 — 7 2015 42,070 43,874 44,728 45,104 45,873 45,366 45,420 45,595 — 6 2016 43,005 46,988 48,267 48,871 48,732 48,823 48,802 137 6 2017 56,185 56,043 56,517 54,812 55,076 54,244 208 7 2018 66,265 66,470 67,749 67,810 65,911 1,632 7 2019 71,865 73,836 76,326 75,821 4,491 7 2020 83,195 79,910 76,490 8,388 8 2021 116,827 117,574 22,939 7 2022 142,395 44,828 6 Total $ 717,932 Commercial Multi-Peril 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 $ 19,875 $ 26,216 $ 29,159 $ 33,614 $ 35,104 $ 36,321 $ 37,333 $ 37,436 $ 37,488 $ 37,575 2014 27,920 35,520 40,936 47,021 50,017 51,615 52,103 52,252 52,875 2015 21,837 29,419 34,323 39,162 42,849 44,090 44,439 44,764 2016 19,660 29,402 34,612 41,193 43,435 44,944 47,432 2017 27,399 36,926 42,691 46,361 49,488 51,494 2018 30,597 42,296 48,050 54,913 59,118 2019 28,210 41,266 47,522 55,951 2020 34,729 46,193 52,646 2021 46,768 69,735 2022 57,641 Total 529,231 All outstanding liabilities before 2013, net of reinsurance 699 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 189,400 -91- Index Workers’ Compensation At December 31, 2022 Incurred 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 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2013 $ 46,325 $ 47,027 $ 44,289 $ 42,828 $ 42,327 $ 42,555 $ 42,651 $ 42,341 $ 42,427 $ 43,059 $ 1 6 2014 51,508 51,553 49,288 48,537 47,540 47,693 47,849 47,620 47,794 14 6 2015 53,332 49,615 45,991 44,986 43,006 42,597 42,225 42,043 240 5 2016 58,814 49,802 47,883 44,969 44,098 43,559 43,484 561 5 2017 60,450 56,351 52,687 51,464 49,557 48,802 1,105 5 2018 62,197 55,291 52,514 47,912 47,007 1,470 6 2019 60,998 59,624 57,728 56,480 1,897 6 2020 57,172 57,850 57,384 2,990 5 2021 67,035 65,530 6,505 6 2022 67,046 21,062 6 Total $ 518,629 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 $ 13,052 $ 26,043 $ 32,783 $ 36,351 $ 38,877 $ 39,617 $ 40,361 $ 40,827 $ 41,209 $ 41,599 2014 13,932 28,513 36,284 40,393 42,465 43,866 44,403 44,671 45,314 2015 13,071 27,531 34,192 36,929 37,936 38,596 39,096 39,478 2016 14,709 30,344 37,178 40,570 41,208 41,543 41,809 2017 15,581 31,990 39,684 42,954 44,242 45,174 2018 17,644 31,928 37,072 41,611 43,279 2019 16,939 33,009 41,740 47,121 2020 14,591 32,817 44,089 2021 20,931 42,633 2022 18,643 Total 409,139 All outstanding liabilities before 2013, net of reinsurance 4,843 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 114,333 -92- Index The following table presents a reconciliation of the net incurred and paid claims development tables to the liability for claims and claims adjustment expenses in our consolidated balance sheet: At December 31, (in thousands) 2022 Net outstanding liabilities: Personal automobile $ 97,163 Homeowners 25,905 Commercial automobile 162,683 Commercial multi-peril 189,400 Workers ’ compensation 114,333 Other 30,510 619,994 Reinsurance recoverable: Personal automobile $ 104,349 Homeowners 14,712 Commercial automobile 101,574 Commercial multi-peril 108,853 Workers ’ compensation 90,454 Other 7,808 427,750 Unallocated loss adjustment expenses $ 73,302 Gross liability for unpaid losses and loss expenses $ 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 81.0 15.6 1.3 0.5 0.3 0.1 0.1 — — — Commercial automobile 42.3 18.1 13.7 11.8 6.0 3.6 0.8 0.3 — — Commercial multi-peril 45.3 17.2 9.4 10.8 5.7 3.1 2.4 0.4 0.7 0.2 Workers’ compensation 30.9 32.0 15.7 8.2 3.4 1.8 1.2 0.9 1.1 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 %. -93- Index 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. FHLB stock purchased and owned as part of the agreement $ 1,573,300 Collateral pledged, at par (carrying value $ 42,471,534 ) 46,378,384 Borrowing capacity currently available 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. -94- Index 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 $ 37,002,702 $ 38,173,733 $ 34,165,635 Premiums earned 36,947,675 37,984,833 35,358,765 Losses and loss expenses 31,096,016 29,999,528 9,835,268 Prepaid reinsurance premiums 6,118,784 6,063,759 5,874,859 Liability for losses and loss expenses 149,628,406 138,909,584 133,158,907 Total Reinsurance The following amounts represent total ceded reinsurance transactions with both affiliated and unaffiliated reinsurers during 2022, 2021 and 2020: 2022 2021 2020 Premiums earned $ 383,059,075 $ 399,284,886 $ 356,669,937 Losses and loss expenses 249,037,288 282,083,985 231,771,575 Prepaid reinsurance premiums 160,591,399 176,935,842 169,418,333 Liability for losses and loss expenses 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: 2022 2021 2020 Direct $ 641,971,207 $ 609,204,706 $ 586,681,839 Assumed 568,272,026 601,864,198 539,070,557 Ceded ( 366,714,634 ) ( 406,802,395 ) ( 383,612,503 ) Net premiums written $ 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: 2022 2021 2020 Direct $ 627,331,528 $ 601,408,581 $ 584,537,580 Assumed 578,216,997 573,891,506 514,172,696 Ceded ( 383,059,075 ) ( 399,284,886 ) ( 356,669,937 ) Net premiums earned $ 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: 2022 2021 2020 Current federal income tax $ 1,280,041 $ 3,998,431 $ 10,450,803 Deferred federal income tax ( 2,958,735 ) 1,085,903 6,448 Income tax (benefit) expense $ ( 1,678,694 ) $ 5,084,334 $ 10,457,251 -95- Index 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: 2022 2021 2020 (Loss) income before income tax (benefit) expense $ ( 3,638,099 ) $ 30,338,508 $ 63,272,503 Computed “expected” taxes ( 764,001 ) 6,371,087 13,287,226 Tax-exempt interest ( 1,446,102 ) ( 1,491,154 ) ( 1,468,806 ) Proration 384,944 401,717 395,663 Dividends received deduction ( 93,675 ) ( 115,713 ) ( 113,845 ) Net operating loss carryback — — ( 1,640,084 ) Tax benefit on exercise of options ( 360,452 ) ( 438,850 ) ( 302,901 ) Other, net 600,592 357,247 299,998 Income tax (benefit) expense $ ( 1,678,694 ) $ 5,084,334 $ 10,457,251 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: 2022 2021 Deferred tax assets: Unearned premium $ 17,560,126 $ 16,674,502 Loss reserves 9,712,582 9,568,677 Net unrealized losses 11,088,307 — Net operating loss carryforward — 25,174 Net state operating loss carryforward - DGI Parent 8,068,185 7,865,563 Other 1,472,110 1,859,687 Total gross deferred tax assets 47,901,310 35,993,603 Less valuation allowance ( 8,068,185 ) ( 7,865,563 ) Net deferred tax assets 39,833,125 28,128,040 Deferred tax liabilities: Deferred policy acquisition costs 15,365,749 14,285,958 Loss reserve transition adjustment 856,267 1,148,529 Other 2,008,092 6,007,934 Total gross deferred tax liabilities 18,230,108 21,442,421 Net deferred tax asset $ 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. -96- Index 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 no t 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. 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. -97- Index 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. -98- Index Information regarding activity in our stock option plans follows: Number of Options Weighted-Average Exercise Price Per Share Outstanding at December 31, 2019 10,435,990 $ 15.09 Granted - 2020 935,099 14.45 Exercised - 2020 ( 1,294,606 ) 13.52 Forfeited - 2020 ( 303,908 ) 15.23 Expired - 2020 ( 78,223 ) 13.64 Outstanding at December 31, 2020 9,694,352 15.24 Granted - 2021 906,500 14.39 Exercised - 2021 ( 946,646 ) 13.00 Forfeited - 2021 ( 404,664 ) 15.69 Expired - 2021 ( 1,139,816 ) 16.40 Outstanding at December 31, 2021 8,109,726 15.22 Granted - 2022 956,600 14.08 Exercised - 2022 ( 1,202,806 ) 14.50 Forfeited - 2022 ( 545,618 ) 15.35 Expired - 2022 ( 935,723 ) 16.81 Outstanding at December 31, 2022 6,382,179 $ 14.94 Exercisable at: December 31, 2020 7,786,934 $ 15.42 December 31, 2021 6,297,849 $ 15.43 December 31, 2022 4,627,630 $ 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 15.90 1,492,596 1.0 years 1,492,596 December 18, 2014 15.80 979,839 2.0 years 979,839 December 20, 2018 13.69 497,470 1.0 years 497,470 December 19, 2019 14.98 868,050 2.0 years 868,050 December 17, 2020 14.43 755,424 3.0 years 503,611 January 4, 2021 14.07 10,000 3.0 years 6,667 December 16, 2021 14.39 825,200 4.0 years 275,064 February 9, 2022 14.15 3,000 4.1 years 1,000 April 18, 2022 13.28 10,000 4.3 years 3,333 December 15, 2022 14.09 940,600 5.0 years — 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 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). -99- Index A summary of plan activity follows: Shares Issued Price Shares January 1, 2020 12.28 20,424 July 1, 2020 12.09 22,662 January 1, 2021 11.96 23,336 July 1, 2021 11.88 24,619 January 1, 2022 12.15 24,907 July 1, 2022 11.56 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: -100- Index 2022 2021 2020 Atlantic States: Statutory capital and surplus $ 263,579,356 $ 278,883,189 $ 279,796,696 Statutory unassigned surplus 158,056,862 174,073,348 175,777,393 Statutory net (loss) income ( 3,124,687 ) ( 7,417,845 ) 20,735,871 Southern: Statutory capital and surplus 64,463,124 64,238,221 57,142,228 Statutory unassigned surplus 7,523,951 7,330,382 300,409 Statutory net (loss) income ( 410,561 ) 6,927,576 4,350,677 Peninsula: Statutory capital and surplus 52,234,684 47,867,789 49,285,069 Statutory unassigned surplus 33,925,484 29,558,589 30,975,869 Statutory net income 4,192,697 3,536,404 10,955,796 MICO: Statutory capital and surplus 75,441,871 75,197,207 72,183,575 Statutory unassigned surplus 53,422,483 53,201,571 45,247,698 Statutory net (loss) income ( 233,391 ) 7,704,417 12,240,173 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. -101- Index 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: Year Ended December 31, 2022 2021 2020 Statutory net income of insurance subsidiaries $ 424,058 $ 10,750,552 $ 48,282,517 Increases (decreases): Deferred policy acquisition costs 5,141,857 8,871,415 ( 127,901 ) Deferred federal income taxes 2,958,735 ( 1,085,903 ) ( 6,448 ) Salvage and subrogation recoverable 5,195,800 2,551,800 713,400 Consolidating eliminations and adjustments ( 14,791,466 ) ( 18,769 ) ( 9,516,984 ) Parent-only net (loss) income ( 888,389 ) 4,185,079 13,470,668 Net (loss) income $ ( 1,959,405 ) $ 25,254,174 $ 52,815,252 December 31, 2022 2021 2020 Statutory capital and surplus of insurance subsidiaries $ 455,719,035 $ 466,186,406 $ 458,407,568 Increases (decreases): Deferred policy acquisition costs 73,170,230 68,028,373 59,156,958 Deferred federal income taxes ( 23,794,084 ) ( 21,294,388 ) ( 18,586,428 ) Salvage and subrogation recoverable 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: 2022 2021 2020 Income taxes $ 4,500,000 $ 6,200,000 $ 12,800,000 Interest 623,947 1,150,211 1,191,800 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. -102- Index We present below a reconciliation of the numerators and denominators we used in the basic and diluted per share computations for our Class A common stock: Year Ended December 31, (in thousands) 2022 2021 2020 Basic (loss) earnings per share: Numerator: Allocation of net (loss) income $ ( 1,571 ) $ 21,131 $ 43,609 Denominator: Weighted-average shares outstanding 26,409 25,388 23,707 Basic (loss) earnings per share $ ( 0.06 ) $ 0.83 $ 1.84 Diluted (loss) earnings per share: Numerator: Allocation of net (loss) income $ ( 1,571 ) $ 21,131 $ 43,609 Denominator: Number of shares used in basic computation 26,409 25,388 23,707 Weighted-average effect of dilutive securities Add: Director and employee stock options — 146 180 Number of shares used in per share computations 26,409 25,534 23,887 Diluted (loss) earnings per share $ ( 0.06 ) $ 0.83 $ 1.83 We used the following information in the basic and diluted per share computations for our Class B common stock: Year Ended December 31, (in thousands) 2022 2021 2020 Basic and diluted (loss) earnings per share: Numerator: Allocation of net (loss) income $ ( 388 ) $ 4,123 $ 9,206 Denominator: Weighted-average shares outstanding 5,577 5,577 5,577 Basic and diluted (loss) earnings per share $ ( 0.07 ) $ 0.74 $ 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. -103- Index 18 - Condensed Financial Information of Parent Company Condensed Balance Sheets (in thousands) December 31, 2022 2021 Assets Investment in subsidiaries/affiliates (equity method) $ 509,513 $ 554,804 Short-term investments 7,325 9 Cash 3,288 14,375 Property and equipment 586 716 Other 4,589 2,455 Total assets $ 525,301 $ 572,359 Liabilities and Stockholders’ Equity Liabilities Cash dividends declared to stockholders $ 5,297 $ 4,915 Notes payable to subsidiary 35,000 35,000 Other 1,411 1,408 Total liabilities 41,708 41,323 Stockholders’ equity 483,593 531,036 Total liabilities and stockholders’ equity $ 525,301 $ 572,359 Condensed Statements of (Loss) Income and Comprehensive (Loss) Income (in thousands) Year Ended December 31, 2022 2021 2020 Statements of (Loss) Income Revenues Dividends from subsidiaries $ — $ 5,000 $ 14,000 Realized investment gains — — — Other 526 481 463 Total revenues 526 5,481 14,463 Expenses Operating expenses 1,245 1,223 1,258 Interest 787 787 794 Total expenses 2,032 2,010 2,052 (Loss) income before income tax benefit and equity in undistributed net (loss) income of subsidiaries ( 1,506 ) 3,471 12,411 Income tax benefit ( 618 ) ( 714 ) ( 1,059 ) (Loss) income before equity in undistributed net (loss) income of subsidiaries ( 888 ) 4,185 13,470 Equity in undistributed net (loss) income of subsidiaries ( 1,071 ) 21,069 39,345 Net (loss) income $ ( 1,959 ) $ 25,254 $ 52,815 Statements of Comprehensive (Loss) Income Net (loss) income $ ( 1,959 ) $ 25,254 $ 52,815 Other comprehensive (loss) income, net of tax Unrealized (loss) gain - subsidiaries ( 44,988 ) ( 7,847 ) 10,627 Other comprehensive (loss) income, net of tax ( 44,988 ) ( 7,847 ) 10,627 Comprehensive (loss) income $ ( 46,947 ) $ 17,407 $ 63,442 -104- Index Condensed Statements of Cash Flows (in thousands) Year Ended December 31, 2022 2021 2020 Cash flows from operating activities: Net (loss) income $ ( 1,959 ) $ 25,254 $ 52,815 Adjustments: Equity in undistributed net loss (income) of subsidiaries 1,071 ( 21,069 ) ( 39,345 ) Other ( 1,972 ) ( 536 ) ( 5,615 ) Net adjustments ( 901 ) ( 21,605 ) ( 44,960 ) Net cash (used) provided ( 2,860 ) 3,649 7,855 Cash flows from investing activities: Net (purchases) sale of short-term investments ( 7,316 ) — 2,493 Net purchase of property and equipment — ( 13 ) ( 18 ) Investment in subsidiaries ( 768 ) ( 916 ) ( 1,037 ) Other ( 28 ) — — Net cash (used) received ( 8,112 ) ( 929 ) 1,438 Cash flows from financing activities: Cash dividends paid ( 20,503 ) ( 19,099 ) ( 16,976 ) Issuance of common stock 20,388 15,433 20,654 Net cash (used) received ( 115 ) ( 3,666 ) 3,678 Net change in cash ( 11,087 ) ( 946 ) 12,971 Cash at beginning of year 14,375 15,321 2,350 Cash at end of year $ 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. -105- Index Financial data by segment is as follows: 2022 2021 2020 (in thousands) Revenues: Premiums earned: Commercial lines $ 510,153 $ 468,433 $ 412,877 Personal lines 312,337 307,582 329,163 GAAP premiums earned 822,490 776,015 742,040 Net investment income 34,016 31,126 29,504 Investment (losses) gains ( 10,185 ) 6,477 2,778 Other 1,900 2,848 3,497 Total revenues $ 848,221 $ 816,466 $ 777,819 2022 2021 2020 (in thousands) (Loss) income before income taxes: Underwriting (loss) income: Commercial lines $ ( 22,665 ) $ ( 35,174 ) $ ( 858 ) Personal lines ( 13,506 ) 17,235 31,764 SAP underwriting (loss) income ( 36,171 ) ( 17,939 ) 30,906 GAAP adjustments 8,667 9,945 ( 959 ) GAAP underwriting (loss) income ( 27,504 ) ( 7,994 ) 29,947 Net investment income 34,016 31,126 29,504 Investment (losses) gains ( 10,185 ) 6,477 2,778 Other 35 730 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. -106- Index 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. -107- Index We identified the evaluation of the estimate of reserves as a critical audit matter. The evaluation of the Company’s estimate of reserves involved a high degree of auditor judgment due to the inherent uncertainties in the use of actuarial methods and assumptions, which considered internal and external factors. Assumptions included the selection of loss development factors, a priori ratios, and the weighting of actuarial methods when more than one was used. Evaluating the actuarial methods and assumptions required specialized skills and auditor judgment. The following are the primary procedures we performed to address this critical audit matter. We evaluated, with the involvement of actuarial professionals, when appropriate, the design and tested the operating effectiveness of certain internal controls related to the Company’s reserving process. These included controls related to the Company’s actuarial analyses and determination of the Company’s estimate of recorded reserves. We involved actuarial professionals with specialized skills and knowledge, who assisted in: • evaluating the Company’s actuarial methods by comparing them to generally accepted actuarial practices • developing an independent estimate of reserves for certain lines of business using methods consistent with generally accepted actuarial practices by independently forming assumptions of loss development factors, a priori ratios, and the weighting of actuarial methods when more than one was used, considering internal and external factors • assessing the Company's internal actuarial analysis for certain lines of business by reviewing the assumptions and actuarial methods used, which included the selection of loss development factors, a priori ratios, and the weighting of actuarial methods when more than one was used, considering internal and external factors • developing a range of reserves and comparing to the Company’s recorded reserves and assessing movement of the Company’s recorded reserves within that range. We or our predecessor firms have served as the Company’s auditor since 1986. Philadelphia, Pennsylvania March 6, 2023 -108- Index Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.