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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-03-06 compared with 2023-03-06 · 5 added, 1441 removed, 29 unchanged (98% of the section changed)

11 unchanged sentences

(in thousands)

Principal Cash Flows

Weighted-Average Interest Rate

Weighted-Average

Interest Rate

Fixed-maturity and short-term investments:

5 unchanged sentences

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

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.

8 unchanged sentences

Our insurance subsidiaries maintain reinsurance agreements with Donegal Mutual and with a number of other major unaffiliated authorized reinsurers.

Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements and Schedule

Consolidated Balance Sheets

Consolidated Statements of Income and Comprehensive Income

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm ( KPMG LLP , PCAOB ID 185 )

Schedule III — Supplementary Insurance Information

Donegal Group Inc.

Consolidated Balance Sheets

Fixed maturities

Held to maturity, at amortized cost (fair value $ 598,044,681

and $ 697,400,964 )

Available for sale, at fair value (amortized cost $ 571,912,727

and $ 523,293,046 )

Equity securities, at fair value

Short-term investments, at cost, which approximates fair value

Total investments

1,304,657,242

1,276,845,897

Accrued investment income

Premiums receivable

Reinsurance receivable

Deferred policy acquisition costs

Deferred tax asset, net

Prepaid reinsurance premiums

Property and equipment, net

Accounts receivable - securities

Federal income taxes recoverable

Receivable from Michigan Catastrophic Claims Association

Due from affiliate

Other intangible assets

2,243,349,335

2,255,175,399

Liabilities and Stockholders’ Equity

Losses and loss expenses

1,121,045,758

1,077,620,301

Unearned premiums

Accrued expenses

Reinsurance balances payable

Borrowings under lines of credit

Cash dividends declared to stockholders

Cash refunds due to Michigan policyholders

Due to affiliate

Total liabilities

1,759,756,323

1,724,139,312

Stockholders’ Equity

Preferred stock, $ 0.01 par value, authorized 2,000,000 shares;

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

Class B common stock, $ 0.01 par value, authorized 10,000,000 shares, issued 5,649,240

shares and outstanding 5,576,775 shares

Additional paid-in capital

Accumulated other comprehensive (loss) income

Retained earnings

Treasury stock, at cost

Total stockholders’ equity

Total liabilities and stockholders’ equity

2,243,349,335

2,255,175,399

See accompanying notes to consolidated financial statements.

Donegal Group Inc.

Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income

Years Ended December 31,

Statements of (Loss) Income

Net premiums earned (includes affiliated reinsurance of $ 232,105,306 ,

$ 212,591,341 and $ 192,861,276

- see note 3)

Investment income, net of investment expenses

Installment payment fees

Net investment (losses) gains (includes ($ 979,972 ), $ 382,602 and $ 572,106 accumulated

other comprehensive income reclassification)

Total revenues

Net losses and loss expenses (includes affiliated reinsurance of $ 177,849,040 ,

$ 131,367,599 and $ 87,374,791

- see note 3)

Amortization of deferred policy acquisition costs

Other underwriting expenses

Policyholder dividends

Total expenses

(Loss) income before income tax (benefit) expense

Income tax (benefit) expense (includes ($ 205,794 ), $ 80,346 and $ 120,142 income tax

(benefit) expense from reclassification items)

Net (loss) income

Basic (loss) earnings per common share:

Class A common stock

Class B common stock

Diluted (loss) earnings per common share:

Class A common stock

Class B common stock

Statements of Comprehensive (Loss) Income

Net (loss) income

Other comprehensive (loss) income, net of tax

Unrealized (loss) gain on securities:

Unrealized holding (loss) gain arising during the period, net of income tax (benefit) expense of ($ 12,164,443 ), ($ 2,008,078 ) and $ 2,944,892

Reclassification adjustment for losses (gains) included in net (loss) income, net of income tax (benefit) expense of ($ 205,794 ), $ 80,346 and $ 120,142

Other comprehensive (loss) income

Comprehensive (loss) income

See accompanying notes to consolidated financial statements.

Donegal Group Inc.

Consolidated Statements of Stockholders’ Equity

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

Issuance of common stock (stock compensation plans)

Stock-based compensation

Cash dividends

Grant of stock options

Other comprehensive income

Balance, December 31, 2020

Issuance of common stock (stock compensation plans)

Stock-based compensation

Cash dividends

Grant of stock options

Other comprehensive loss

Balance, December 31, 2021

Issuance of common stock (stock compensation plans)

Stock-based compensation

Cash dividends

Grant of stock options

Other comprehensive loss

Balance, December 31, 2022

See accompanying notes to consolidated financial statements.

Donegal Group Inc.

Consolidated Statements of Cash Flows

Years Ended December 31,

Cash Flows from Operating Activities:

Net (loss) income

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation, amortization and other non-cash items

Net investment losses (gains)

Changes in Assets and Liabilities:

Losses and loss expenses

Unearned premiums

Accrued expenses

Premiums receivable

Deferred policy acquisition costs

Deferred income taxes

Reinsurance receivable

Accrued investment income

Amounts due to affiliate

Reinsurance balances payable

Prepaid reinsurance premiums

Current income taxes

Net adjustments

Net cash provided by operating activities

Cash Flows from Investing Activities:

Purchases of fixed maturities:

Held to maturity

( 125,630,220

( 157,048,527

Available for sale

( 151,994,462

( 163,593,018

( 176,500,255

Purchases of equity securities

Sales of fixed maturities:

Available for sale

Maturity of fixed maturities:

Held to maturity

Available for sale

Sales of equity securities

Net sales (purchases) of property and equipment

Net (purchases) sales of short-term investments

Net cash used in investing activities

Cash Flows from Financing Activities:

Issuance of common stock

Cash dividends paid

Payments on subordinated debentures

Payments on lines of credit

Borrowings under lines of credit

Net cash (used in) provided by financing activities

Net (decrease) increase in cash

Cash at beginning of year

Cash at end of year

See accompanying notes to consolidated financial statements.

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

our investment function, our commercial lines of insurance and our personal lines of insurance.

The commercial lines products of our insurance subsidiaries consist primarily of commercial automobile, commercial multi-peril and workers’

compensation policies.

The personal lines products of our insurance subsidiaries consist primarily of homeowners and private passenger automobile policies.

At December 31, 2022, Donegal Mutual held approximately 43 %

of our outstanding Class A common stock and approximately 84 % of our outstanding Class B common stock.

This ownership provides Donegal

Mutual with approximately 71 % of the total voting power of our common stock.

Our insurance subsidiaries and Donegal Mutual have

interrelated operations due to a pooling agreement and other intercompany agreements and transactions.

While each company maintains its separate corporate existence, our insurance subsidiaries and Donegal Mutual conduct business together as the

Donegal Insurance Group.

As such, Donegal Mutual and our insurance subsidiaries share the same business philosophy, the same management, the same employees and the same facilities and offer the same types of insurance products.

Atlantic States, our largest subsidiary, participates in a proportional reinsurance agreement, or pooling agreement, with Donegal Mutual.

Under the pooling agreement,

Donegal Mutual and Atlantic States contribute substantially all of their respective premiums, losses and loss expenses to the underwriting pool, and the underwriting pool, acting through Donegal Mutual, then allocates 80 % of the pooled business to Atlantic States.

Thus, Donegal Mutual and Atlantic States share the underwriting results of the pooled business in

proportion to their respective participation in the underwriting pool.

In addition, Donegal Mutual has a 100 % quota-share

reinsurance agreement with Southern Mutual Insurance Company, or Southern Mutual.

Donegal Mutual places its assumed business from Southern Mutual into the underwriting pool.

Donegal Mutual completed the merger of Mountain States Mutual Casualty Company, or Mountain States, with and into Donegal Mutual effective May 25, 2017.

Donegal Mutual

was the surviving company in the merger, and Mountain States’ insurance subsidiaries, Mountain States Indemnity Company and Mountain States Commercial Insurance Company (collectively, the “Mountain States insurance subsidiaries”), became insurance

subsidiaries of Donegal Mutual upon completion of the merger.

Upon completion of the merger, Donegal Mutual assumed all of the policy obligations of Mountain States and began to market its products together with the Mountain States insurance

subsidiaries as the Mountain States Insurance Group in four Southwestern states.

Donegal Mutual also entered into a 100 % quota-share reinsurance agreement with the Mountain States insurance subsidiaries on the merger date.

Beginning with policies effective in 2021,

Donegal Mutual began to place the business of the Mountain States Insurance Group into the underwriting pool.

As a result, our consolidated financial results through December 31, 2020 excluded the results of the Mountain States Insurance Group

operations in those Southwestern states.

The same executive management and underwriting personnel administer products, classes of business underwritten, pricing practices and underwriting standards of Donegal

Mutual and our insurance subsidiaries.

In addition, as the Donegal Insurance Group, Donegal Mutual and our insurance subsidiaries share a combined business plan to achieve market penetration and underwriting profitability objectives.

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.

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.

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.

We classify our debt securities into the following categories:

Held to Maturity - Debt securities that we have the positive intent and ability to hold to maturity;

reported at amortized cost.

Available for Sale - Debt securities not classified as held to maturity;

reported at fair value, with unrealized gains and losses excluded from income and reported as a

separate component of stockholders’ equity (net of tax effects).

Short-term investments are carried at amortized cost, which approximates fair value.

We make estimates concerning the valuation of our investments and the recognition of other-than-temporary declines in the value of our investments.

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.

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

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.

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

We refer to Note 5 - Fair Value Measurements for more information regarding our methods and assumptions in estimating fair values.

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

Premiums and Reinsurance Receivables and Payables - The carrying amounts we report in the balance sheet for these instruments related to premiums and paid losses and

loss expenses approximate their fair values.

Revenue Recognition

Our insurance subsidiaries recognize insurance premiums as income over the terms of the policies they issue.

Our insurance subsidiaries calculate unearned premiums on a

daily pro-rata basis.

Policy Acquisition Costs

We defer our insurance subsidiaries’ policy acquisition costs, consisting primarily of commissions, premium taxes and certain other underwriting costs, reduced by ceding

commissions, related directly to the successful acquisition of new or renewal insurance contracts.

We amortize these deferred policy acquisition costs over the period in which our insurance subsidiaries earn the premiums.

The method we follow in

computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss expenses and certain other costs we

expect to incur as our insurance subsidiaries earn the premium.

Estimates in the calculation of policy acquisition costs have not shown material variability because of uncertainties in applying accounting principles or as a result of sensitivities

to changes in key assumptions.

Property and Equipment

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

Losses and Loss Expenses

Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with respect to incurred policyholder claims

based on facts and circumstances the insurer knows at that point in time.

For example, legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries to

pay losses for damages that their policies explicitly excluded or did not intend to cover.

At 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

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.

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 .

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

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.

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.

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.

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

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

Best rating of A- or better or, with respect to foreign reinsurers, to have a financial condition that, in the opinion of our management, is equivalent to a company with an A.M.

Best rating of A- or better.

We refer to Note 10 -

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

Stock-Based Compensation

We measure all share-based payments to our directors and the directors and employees of our subsidiaries and affiliates, including grants of stock options, using a

fair-value-based method and record such expense in our results of operations.

In determining the expense we record for stock options we grant to our directors and the directors and employees of our subsidiaries and affiliates, we estimate the fair

value of each option award on the date of grant using the Black-Scholes option pricing model.

The significant assumptions we utilize in applying the Black-Scholes option pricing model are the risk-free interest rate, expected term, dividend yield

and expected volatility.

In 2022, 2021 and 2020, we realized $ 360,452 , $ 438,850 and $ 302,901 , respectively, in

tax benefits upon the exercise of stock options.

Earnings Per Share

We calculate basic earnings per share by dividing net income by the weighted-average number of common shares outstanding for the period.

Diluted earnings per share

reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

We have two classes of common stock, which we refer to as Class A common stock and Class B common stock.

Our Class A common stock is entitled to the declaration and

payment of cash dividends that are at least 10 % higher than those we declare and pay on our Class B common stock.

Accordingly, we use

the two-class method for the computation of earnings per common share.

The two-class method is an earnings allocation formula that determines earnings per share separately for each class of common stock based on dividends declared and an allocation

of remaining undistributed earnings using a participation percentage that reflects the dividend rights of each class.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the underlying fair value of acquired entities.

When completing acquisitions, we seek also to identify

separately identifiable intangible assets that we have acquired.

We assess goodwill and intangible assets with an indefinite useful life for impairment annually.

We also assess goodwill and other intangible assets for impairment upon the occurrence

of certain events.

In making our assessment, we consider a number of factors including operating results, business plans, economic projections, anticipated future cash flows and current market data.

Inherent uncertainties exist with respect to

these factors and to our judgment in applying them when we make our assessment.

Impairment of goodwill and other intangible assets could result from changes in economic and operating conditions in future periods.

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.

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.

expect the adoption of this guidance to have a significant impact on our results of operations or cash flows.

3 - Transactions with Affiliates

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

Reinsurance Pooling and Other Reinsurance Arrangements

Atlantic States, our largest insurance subsidiary, and Donegal Mutual have a pooling agreement under which both companies contribute substantially all of their direct

written business to the pool and receive an allocated percentage of the pooled underwriting results, excluding certain reinsurance Donegal Mutual assumes from our insurance subsidiaries.

Beginning with policies effective in 2021, Donegal Mutual

began to place the business of the Mountain States Insurance Group into the underwriting pool.

In addition, Donegal Mutual has a 100 %

quota-share reinsurance agreement with Southern Mutual Insurance Company, or Southern Mutual, and Donegal Mutual places its assumed business from Southern Mutual into the underwriting pool.

Atlantic States has an 80 % share of the results of the pool, and Donegal Mutual has a 20 % share of the results of the pool.

The intent of the pooling agreement is to produce more uniform and stable underwriting results from year to year for each pool participant than they would experience

individually and to spread the risk of loss between the participants based on each participant’s relative amount of surplus and relative access to capital.

Each participant in the pool has at its disposal the capacity of the entire pool, rather

than being limited to policy exposures of a size commensurate with its own capital and surplus.

The following amounts represent reinsurance Atlantic States ceded to the pool during 2022, 2021 and 2020:

Premiums earned

Losses and loss expenses

Prepaid reinsurance premiums

Liability for losses and loss expenses

The following amounts represent reinsurance Atlantic States assumed from the pool during 2022, 2021 and 2020:

Premiums earned

Losses and loss expenses

Unearned premiums

Liability for losses and loss expenses

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.

The following amounts represent reinsurance ceded to Donegal Mutual pursuant to these quota-share reinsurance agreements during 2022, 2021 and 2020:

Premiums earned

Losses and loss expenses

Prepaid reinsurance premiums

Liability for losses and loss expenses

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

The following amounts represent reinsurance that our insurance subsidiaries ceded to Donegal Mutual pursuant to these reinsurance agreements during 2022, 2021 and 2020:

Premiums earned

Losses and loss expenses

Liability for losses and loss expenses

The following amounts represent the effect of affiliated reinsurance transactions on net premiums our insurance subsidiaries earned during 2022, 2021 and 2020:

( 346,111,400

( 361,300,053

( 321,311,172

The following amounts represent the effect of affiliated reinsurance transactions on net losses and loss expenses our insurance subsidiaries incurred during 2022, 2021

( 217,941,272

( 252,084,457

( 221,936,307

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.

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.

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.

Lease Agreement

We lease office equipment with terms ranging from 3 to 10 years to Donegal Mutual under a lease agreement dated January 1, 2011.

4 - Investments

The amortized cost and estimated fair values of our fixed maturities at December 31, 2022 and 2021 are as follows:

Held to Maturity

Estimated Fair

Treasury securities and obligations of U.S.

government corporations and agencies

Obligations of states and political subdivisions

Corporate securities

Mortgage-backed securities

Available for Sale

Estimated Fair

Treasury securities and obligations of U.S.

government corporations and agencies

Obligations of states and political subdivisions

Corporate securities

Mortgage-backed securities

Held to Maturity

Estimated Fair

Treasury securities and obligations of U.S.

government corporations and agencies

Obligations of states and political subdivisions

Corporate securities

Mortgage-backed securities

Available for Sale

Estimated Fair

Treasury securities and obligations of U.S.

government corporations and agencies

Obligations of states and political subdivisions

Corporate securities

Mortgage-backed securities

At December 31, 2022, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $ 240.7 million and an amortized cost of $ 283.5 million.

Our holdings also included special revenue bonds with an aggregate fair value of $ 122.9

million and an amortized cost of $ 144.0 million.

With respect to both categories of bonds, we held no securities of any issuer that

comprised more than 10 % of that category at December 31, 2022.

Education bonds and water and sewer utility bonds represented 48 % and 35 %, respectively, of our total

investments in special revenue bonds based on their carrying values at December 31, 2022.

Many of the issuers of the special revenue bonds we held at December 31, 2022 have the authority to impose ad valorem taxes.

In that respect, many of the

special revenue bonds we held are similar to general obligation bonds.

At December 31, 2021, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $ 284.9 million and an amortized cost of $ 272.7 million.

Our holdings also included special revenue bonds with an aggregate fair value of $ 160.8

million and an amortized cost of $ 154.2 million.

With respect to both categories of bonds, we held no securities of any issuer that

comprised more than 10 % of that category at December 31, 2021.

Education bonds and water and sewer utility bonds represented 48 % and 35 %, respectively, of our total

investments in special revenue bonds based on their carrying values at December 31, 2021.

Many of the issuers of the special revenue bonds we held at December 31, 2021 have the authority to impose ad valorem taxes.

In that respect, many of the

special revenue bonds we held are similar to general obligation bonds.

We have segregated within

accumulated other comprehensive income the net unrealized losses of $ 15.1 million arising prior to the November 30, 2013 reclassification

date for fixed maturities reclassified from available for sale to held to maturity.

We are amortizing this balance over the remaining life of the related securities as an adjustment of yield in a manner consistent with the accretion of discount on

the same fixed maturities.

We recorded amortization of $ 510,819 , $ 897,073 and $ 1.4 million in other comprehensive income in 2022,

2021 and 2020, respectively.

At December 31, 2022 and 2021, net unrealized losses of $ 4.7 million and $ 5.2 million, respectively, remained within accumulated other comprehensive (loss) income.

We set forth below the amortized cost and estimated fair value of fixed maturities at December 31, 2022 by contractual maturity.

Expected maturities may differ from

contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized Cost

Estimated Fair

Held to maturity

Due in one year or less

Due after one year through five years

Due after five years through ten years

Due after ten years

Mortgage-backed securities

Total held to maturity

Available for sale

Due in one year or less

Due after one year through five years

Due after five years through ten years

Due after ten years

Mortgage-backed securities

Total available for sale

The cost and estimated fair values of our equity securities at December 31, 2022 were as follows:

Estimated Fair

Equity securities

The cost and estimated fair values of our equity securities at December 31, 2021 were as follows:

Estimated Fair

Equity securities

The amortized cost of fixed maturities on deposit with various regulatory authorities at December 31, 2022 and 2021 amounted to $ 9,473,047 and $ 8,852,886 ,

respectively.

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

Fixed maturities

Equity securities

Short-term investments

Investment income

Investment expenses

Net investment income

We present below gross gains and losses from investments and the change in the difference between fair value and cost of investments:

Gross realized gains:

Fixed maturities

Equity securities

Gross realized losses:

Fixed maturities

Equity securities

Net realized (losses) gains

Gross unrealized gains on equity securities

Gross unrealized losses on equity securities

Net investment (losses) gains

Change in difference between fair value and cost of investments:

Fixed maturities

( 177,147,840

Equity securities

( 161,324,651

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

Unrealized Losses

Treasury securities and obligations of U.S.

government corporations and agencies

Obligations of states and political subdivisions

Corporate securities

Mortgage-backed securities

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

Unrealized Losses

Treasury securities and obligations of U.S.

government corporations and agencies

Obligations of states and political subdivisions

Corporate securities

Mortgage-backed securities

We make estimates concerning the valuation of our investments and the recognition of other-than-temporary declines in the value of our investments.

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

of industry, company or geographic events that have negatively impacted the value of a security and rating agency downgrades.

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;

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

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.

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

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.

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.

carrying amounts reported in the balance sheet for our borrowings under lines of credit approximate their fair values.

We classify these items as Level 3.

We evaluate our assets and liabilities on a regular basis to determine the appropriate level at which to classify them for each reporting period.

Based on our review of

the methodology and summary of inputs the pricing services use, we have concluded that our Level 1 and Level 2 investments were classified properly at December 31, 2022 and 2021.

The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at December 31, 2022:

Fair Value Measurements Using

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

Other Observable

Inputs (Level 2)

Inputs (Level 3)

Treasury securities and obligations of U.S.

government corporations and agencies

Obligations of states and political subdivisions

Corporate securities

Mortgage-backed securities

Equity securities

Total investments in the fair value hierarchy

The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at December 31, 2021:

Fair Value Measurements Using

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

Other Observable

Inputs (Level 2)

Inputs (Level 3)

Treasury securities and obligations of U.S.

government corporations and agencies

Obligations of states and political subdivisions

Corporate securities

Mortgage-backed securities

Equity securities

Total investments in the fair value hierarchy

6 - Deferred Policy Acquisition Costs

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

Balance, January 1

Acquisition costs deferred

Amortization charged to earnings

( 142,430,000

( 128,733,000

( 119,072,000

Balance, December 31

7 - Property and Equipment

Property and equipment

at December 31, 2022 and 2021 consisted of the following:

Office equipment

Accumulated depreciation

Depreciation expense for

2022, 2021 and 2020 amounted to $ 173,535 , $ 208,641

and $ 257,397 , respectively.

8 - Liability for Losses and Loss Expenses

The establishment of an appropriate liability for losses and loss expenses is an inherently uncertain process, and we can provide no assurance that our insurance

subsidiaries’ ultimate liability will not exceed their loss and loss expense reserves and have an adverse effect on our results of operations and financial condition.

For example, legislative, judicial and regulatory actions may expand coverage

definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries to pay losses for damages that their policies explicitly excluded or did not intend to cover.

Furthermore, we cannot predict the timing, frequency and

extent of adjustments to our insurance subsidiaries’ estimated future liabilities, because the historical conditions and events that serve as a basis for our insurance subsidiaries’ estimates of ultimate claim costs may change.

As is the case for

substantially all property and casualty insurance companies, our insurance subsidiaries have found it necessary in the past to increase their estimated future liabilities for losses and loss expenses in certain periods, and, in other periods, their

estimates have exceeded their actual liabilities.

Changes in our insurance subsidiaries’ estimate of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received since the prior

reporting date.

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

Balance at January 1

1,077,620,301

Less reinsurance recoverable

( 451,261,306

( 404,818,480

( 362,768,427

Net balance at January 1

Incurred related to:

Total incurred

Paid related to:

Net balance at December 31

Plus reinsurance recoverable

Balance at December 31

1,121,045,758

1,077,620,301

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.

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.

majority of the 2020 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO.

Short-duration contracts are contracts for which our insurance subsidiaries receive premiums that they recognize as revenue over the period of the contract in proportion

to the amount of insurance protection our insurance subsidiaries provide.

Our insurance subsidiaries consider the policies they issue to be short-duration contracts.

We consider our insurance subsidiaries’ material lines of business to be personal

automobile, homeowners, commercial automobile, commercial multi-peril and workers’ compensation.

Our insurance subsidiaries determine incurred but not reported (“IBNR”) reserves by subtracting the cumulative loss and loss expense amounts our insurance subsidiaries

have paid and the case reserves our insurance subsidiaries have established at the balance sheet date from their actuaries’ estimate of the ultimate cost of losses and loss expenses.

Accordingly, our insurance subsidiaries’ IBNR reserves include

their actuaries’ projections of the cost of unreported claims as well as their actuaries’ projected development of case reserves on known claims and reopened claims.

Our insurance subsidiaries’ methodology for estimating IBNR reserves has been in

place for many years, and their actuaries made no significant changes to that methodology during 2022.

The actuaries for our insurance subsidiaries generally prepare an initial estimate for ultimate losses and loss expenses for the current accident year by multiplying

earned premium by an “ a priori ,” or expected, loss ratio for each line of business our insurance subsidiaries write.

Expected loss ratios represent the actuaries’ expectation of losses at the time our

insurance subsidiaries price and write their policies, before the emergence of any actual claims experience.

The actuaries determine an expected loss ratio by analyzing historical experience and adjusting for loss cost trends, loss frequency and

severity trends, premium rate level changes, reported and paid loss emergence patterns and other known or observed factors.

The actuaries use a variety of actuarial methods to estimate the ultimate cost of losses and loss expenses.

These methods include paid loss development, incurred loss

development and the Bornhuetter-Ferguson method from which the actuaries select loss development factor assumptions.

The actuaries base their selection of a point estimate on a judgmental weighting of estimates each of these methods produce.

The actuaries consider loss frequency and severity trends when they develop expected loss ratios and point estimates.

Loss frequency is a measure of the number of claims

per unit of insured exposure, and loss severity is a measure of the average size of claims.

Factors that affect loss frequency include changes in weather patterns or economic activity.

Factors that affect loss severity include changes in policy

limits, reinsurance retentions, inflation rates and judicial interpretations.

Our insurance subsidiaries create a claim file when they receive notice of an actual demand for payment, an event that may lead to a demand for payment or when they

otherwise determine that a demand for payment could potentially lead to a future demand for payment on another coverage under the same policy or another policy they have issued.

In recent years, our insurance subsidiaries have noted an increase in

the period of time between the occurrence of a casualty loss event and the date on which they receive notice of a liability claim.

Changes in the length of time between the loss occurrence date and the claim reporting date affect the actuaries’

ability to accurately predict loss frequency and the amount of IBNR reserves our insurance subsidiaries require.

Our insurance subsidiaries generally create a claim file for a policy at the claimant level by type of coverage and generally recognize one count for each claim event.

In certain lines of business where it is common for multiple parties to claim damages arising from a single claim event, our insurance subsidiaries recognize one count for each claimant involved in the event.

Atlantic States recognizes one count

for each claim event, or claimant involved in a multiple-party claim event, related to losses Atlantic States assumes through its participation in its pooling agreement with Donegal Mutual.

Our insurance subsidiaries accumulate the claim counts and

report them by line of business.

For purposes of the claim development tables we present below, our insurance subsidiaries count claims on policies they issue even if they eventually close such claims without making a loss payment.

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

The following tables present information about incurred and paid claims development as of December 31, 2022, net of reinsurance, as well as cumulative claim frequency

and the total of IBNR reserves plus expected development on reported claims that our insurance subsidiaries included within their net incurred claims amounts.

The tables include unaudited information about incurred and paid claims development for

the years ended December 31, 2013 through 2021, which we present as supplementary information.

Personal Automobile

At December 31, 2022

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

For the Year Ended December 31,

Accident Year

Total IBNR Plus Expected Development on Reported Claims

Cumulative Number of Reported Claims

(dollars and reported claims in thousands)

Personal Automobile

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

For the Year Ended December 31,

Accident Year

(in thousands)

All outstanding liabilities before 2013, net of reinsurance

Liabilities for claims and claims adjustment expenses, net of reinsurance

At December 31, 2022

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

For the Year Ended December 31,

Accident Year

Total IBNR Plus Expected Development on Reported Claims

Cumulative Number of Reported Claims

(dollars and reported claims in thousands)

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

For the Year Ended December 31,

Accident Year

(in thousands)

All outstanding liabilities before 2013, net of reinsurance

Liabilities for claims and claims adjustment expenses, net of reinsurance

Commercial Automobile

At December 31, 2022

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

For the Year Ended December 31,

Accident Year

Total IBNR Plus Expected Development on Reported Claims

Cumulative Number of Reported Claims

(dollars and reported claims in thousands)

Commercial Automobile

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

For the Year Ended December 31,

Accident Year

(in thousands)

All outstanding liabilities before 2013, net of reinsurance

Liabilities for claims and claims adjustment expenses, net of reinsurance

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

Total IBNR Plus Expected Development on Reported Claims

Cumulative Number of Reported Claims

(dollars and reported claims in thousands)

Commercial Multi-Peril

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

For the Year Ended December 31,

Accident Year

(in thousands)

All outstanding liabilities before 2013, net of reinsurance

Liabilities for claims and claims adjustment expenses, net of reinsurance

Workers’ Compensation

At December 31, 2022

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

For the Year Ended December 31,

Accident Year

Total IBNR Plus Expected Development on Reported Claims

Cumulative Number of Reported Claims

(dollars and reported claims in thousands)

Workers’ Compensation

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

For the Year Ended December 31,

Accident Year

(in thousands)

All outstanding liabilities before 2013, net of reinsurance

Liabilities for claims and claims adjustment expenses, net of reinsurance

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)

Net outstanding liabilities:

Personal automobile

Commercial automobile

Commercial multi-peril

Workers ’ compensation

Reinsurance recoverable:

Personal automobile

Commercial automobile

Commercial multi-peril

Workers ’ compensation

Unallocated loss adjustment expenses

Gross liability for unpaid losses and loss expenses

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

Personal automobile

Commercial automobile

Commercial multi-peril

Workers’ compensation

9 - Borrowings

Lines of Credit

In August 2020, we entered into a credit agreement with Manufacturers and Traders Trust Company (“M&T”) that related to a $ 20.0 million unsecured demand line of credit.

The line of credit has no expiration date, no annual fees and no covenants.

At December 31, 2022, we had no outstanding borrowings from M&T and had the ability to borrow up to $ 20.0 million at interest rates equal to the then-current LIBOR rate plus 2.00 %.

Atlantic States is a member of the FHLB of Pittsburgh.

Through its membership, Atlantic States has the ability to issue debt to the FHLB of Pittsburgh in exchange for

cash advances.

Atlantic States has a fixed-rate cash advance of $ 35.0 million that was outstanding at December 31, 2022.

The cash advance

carries a fixed interest rate of 1.74 % and is due in August 2024 .

In March 2020, Atlantic States issued $ 50.0 million of debt to the FHLB of Pittsburgh in

exchange for a cash advance in the same amount that carried a fixed interest rate of 0.83 %.

Atlantic States obtained this contingent

liquidity funding in light of uncertainty surrounding the economic impact of the COVID-19 pandemic.

Atlantic States repaid this advance when it became due in March 2021 .

The table below presents the amount of FHLB of Pittsburgh stock Atlantic States purchased, collateral pledged and assets related to Atlantic States’ membership in the FHLB of

Pittsburgh at December 31, 2022.

FHLB stock purchased and owned as part of the agreement

Collateral pledged, at par (carrying value $ 42,471,534 )

Borrowing capacity currently available

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.

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

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.

March 2022, we received such payment from the MCCA and subsequently paid the refunds due to our Michigan policyholders.

In addition to the pooling agreement and third-party reinsurance, our insurance subsidiaries had a catastrophe reinsurance agreement with Donegal Mutual, under which

each of our insurance subsidiaries recovered 100 % of an accumulation of multiple losses resulting from a single event, including natural

disasters, over a set retention of $ 2.0 million up to aggregate losses of $ 13.0 million per occurrence.

The agreement also provided additional coverage for an accumulation of losses from a single event including a combination of our insurance

subsidiaries over a combined retention of $ 5.0 million.

Our insurance subsidiaries and Donegal Mutual also purchased facultative reinsurance to cover certain exposures, including property exposures in excess of the covered

limits of their respective treaty reinsurance.

The following amounts represent ceded reinsurance transactions with unaffiliated reinsurers during 2022, 2021 and 2020:

Premiums written

Premiums earned

Losses and loss expenses

Prepaid reinsurance premiums

Liability for losses and loss expenses

Total Reinsurance

The following amounts represent total ceded reinsurance transactions with both affiliated and unaffiliated reinsurers during 2022, 2021 and 2020:

Premiums earned

Losses and loss expenses

Prepaid reinsurance premiums

Liability for losses and loss expenses

The following amounts represent the effect of reinsurance on premiums written for 2022, 2021 and 2020:

( 366,714,634

( 406,802,395

( 383,612,503

Net premiums written

The following amounts represent the effect of reinsurance on premiums earned for 2022, 2021 and 2020:

( 383,059,075

( 399,284,886

( 356,669,937

Net premiums earned

Percentage of assumed premiums earned to net premiums earned

11 - Income Taxes

Our provision for income tax (benefit) expense for 2022, 2021 and 2020 consisted of the following:

Current federal income tax

Deferred federal income tax

Income tax (benefit) expense

Our effective tax rate is different from the amount computed at the statutory federal rate of 21 %.

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

(Loss) income before income tax (benefit) expense

Computed “expected” taxes

Tax-exempt interest

Dividends received deduction

Net operating loss carryback

Tax benefit on exercise of options

Income tax (benefit) expense

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

Deferred tax assets:

Unearned premium

Loss reserves

Net unrealized losses

Net operating loss carryforward

Net state operating loss carryforward - DGI Parent

Total gross deferred tax assets

Less valuation allowance

Net deferred tax assets

Deferred tax liabilities:

Deferred policy acquisition costs

Loss reserve transition adjustment

Total gross deferred tax liabilities

Net deferred tax asset

Our income tax expense for 2020 included a $ 1.6 million

income tax benefit related to the carryback of 2018 net operating losses to past tax years with higher statutory income tax rates than are currently in effect, as allowed under the Coronavirus Aid, Relief and Economic Security Act that was enacted

in March 2020.

We provide a valuation allowance when we believe it is more likely than not that we will not realize some portion of a deferred tax asset.

At December 31, 2022 and 2021,

we established a valuation allowance of $ 8.1 million and $ 7.9 million, respectively, for our net state operating loss carryforward.

We determined that we were not required to establish a valuation allowance for the other net deferred tax assets of $ 39.8 million and $ 28.1 million at

December 31, 2022 and 2021, respectively, since it is more likely than not that we will realize these deferred tax assets through reversals of existing temporary differences, future taxable income and our implementation of tax-planning strategies.

Tax years 2016 through 2022 remained open for

examination by tax authorities at December 31, 2022.

Federal income taxes recoverable at December 31, 2022 and 2021 included refunds of $ 2.3

million due to us for tax years prior to 2021.

12 - Stockholders’ Equity

Each share of our Class A common stock outstanding at the time of the declaration of any dividend or other distribution payable in cash upon the shares of our Class B

common stock is entitled to a dividend or distribution payable at the same time and to stockholders of record on the same date in an amount at least 10 %

greater than any dividend declared upon each share of our Class B common stock.

In the event of our merger or consolidation with or into another entity, the holders of our Class A common stock and the holders of our Class B common stock are

entitled to receive the same per share consideration in such merger or consolidation.

In the event of our liquidation, dissolution or winding-up, any assets available to common stockholders will be distributed pro-rata to the holders of our Class A

common stock and our Class B common stock after payment of all of our obligations.

On July 18, 2013, our board of directors authorized a share repurchase program pursuant to which we have the authority to purchase up to 500,000 additional shares of our Class A common stock at prices prevailing from time to time in the open market subject to the provisions of the SEC

Rule 10b-18 and in privately negotiated transactions.

We did 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

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

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

The significant assumptions we utilize in applying the Black-Scholes option pricing model are the risk-free interest rate, expected term, dividend yield and expected volatility.

The risk-free interest rate is the implied yield currently

available on U.S.

Treasury zero coupon issues with a remaining term equal to the expected term used as the assumption in the model.

We base the expected term of an option award on our historical experience for similar awards.

We determine the

dividend yield by dividing the per share dividend by the grant date stock price.

We base the expected volatility on the volatility of our stock price over a historical period comparable to the expected term.

The weighted-average grant date fair value of options we granted during 2022 was $ 1.48 .

We calculated this fair value based upon a risk-free interest rate of 3.91 %,

an expected life of three years , an expected volatility of 22 % and an expected dividend yield of 5 %.

The weighted-average grant date fair value of options we granted during 2021 was $ 1.21 .

We calculated this fair value based upon a risk-free interest rate of 0.91 %,

an expected life of three years , an expected volatility of 20 % and an expected dividend yield of 4 %.

The weighted-average grant date fair value of options we granted during 2020 was $ 1.15 .

We calculated this fair value based upon a risk-free interest rate of 0.20 %,

an expected life of three years , an expected volatility of 20 % and an expected dividend yield of 4 %.

We charged compensation expense for our stock compensation plans against income before income taxes of $ 818,853 , $ 965,701 and $ 1.1 million for the years ended December 31, 2022, 2021 and 2020, respectively, with a corresponding income tax benefit of $ 171,959 , $ 202,797 and $ 229,698 .

At December 31, 2022 and 2021, our total unrecognized compensation cost related to non-vested share-based compensation granted under our stock compensation plans was $ 1.7 million and $ 1.5 million,

respectively.

We expect to recognize this cost over a weighted average period of 2.1 years.

During 2022, we received cash from option exercises under all stock compensation plans of $ 17.4 million.

We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of $ 360,452 for 2022.

During 2021, we received cash from option exercises under all stock compensation plans of $ 12.3 million.

We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of $ 438,850 for 2021.

During 2020, we received cash from option exercises under all stock compensation plans of $ 17.5 million.

We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of $ 302,901 for 2020.

Information regarding activity in our stock option plans follows:

Number of Options

Weighted-Average Exercise

Price Per Share

Outstanding at December 31, 2019

Granted - 2020

Exercised - 2020

Forfeited - 2020

Expired - 2020

Outstanding at December 31, 2020

Granted - 2021

Exercised - 2021

Forfeited - 2021

Expired - 2021

Outstanding at December 31, 2021

Granted - 2022

Exercised - 2022

Forfeited - 2022

Expired - 2022

Outstanding at December 31, 2022

Exercisable at:

December 31, 2020

December 31, 2021

December 31, 2022

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:

Exercise Price

Number of Options Outstanding

Weighted-Average

Contractual Life

Number of Options Exercisable

December 19, 2013

December 18, 2014

December 20, 2018

December 19, 2019

December 17, 2020

January 4, 2021

December 16, 2021

February 9, 2022

April 18, 2022

December 15, 2022

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).

A summary of plan activity follows:

Shares Issued

January 1, 2020

January 1, 2021

January 1, 2022

On January 1, 2023, we issued 26,545 shares at a price of

$ 12.07 per share under this plan.

Agency Stock Purchase Plan

Since 1996, we have

maintained an Agency Stock Purchase Plan.

During 2018, we adopted a plan that made 350,000 shares of our Class A common stock available

for issuance to agents of our insurance subsidiaries and Donegal Mutual.

During 2021, we amended the 2018 plan to make 400,000 shares of

our Class A common stock available for issuance.

The 2018 plan expired in 2021.

During 2021, we adopted a new plan that made 500,000

shares of our Class A common stock available for issuance to agents of our insurance subsidiaries and Donegal Mutual.

The plan permits an agent to invest up to $ 12,000 per subscription period (April 1 to September 30 and October 1 to March 31 of each year) under various methods.

We issue stock at the end of each subscription period at a price equal

to 90 % of the average market price during the last ten trading days of each subscription period.

During 2022, 2021 and 2020, we issued 104,393 ,

99,828 and 101,647

shares, respectively, under this plan.

The expense we recognized under this plan was not material.

14 - Statutory Net Income, Capital and Surplus and Dividend Restrictions

The following table presents selected information, as filed with state insurance regulatory authorities, for our insurance subsidiaries as determined in accordance with

accounting practices prescribed or permitted by such insurance regulatory authorities:

Atlantic States:

Statutory capital and surplus

Statutory unassigned surplus

Statutory net (loss) income

Statutory capital and surplus

Statutory unassigned surplus

Statutory net (loss) income

Statutory capital and surplus

Statutory unassigned surplus

Statutory net income

Statutory capital and surplus

Statutory unassigned surplus

Statutory net (loss) income

Our principal source of cash for payment of dividends is dividends from our insurance subsidiaries.

State insurance laws require our insurance subsidiaries to maintain

certain minimum capital and surplus amounts on a statutory basis.

Our insurance subsidiaries are subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval of their domiciliary insurance

regulatory authorities.

Our insurance subsidiaries are also subject to risk-based capital (“RBC”) requirements that may further impact their ability to pay dividends.

Our insurance subsidiaries’ statutory capital and surplus at December 31, 2022

exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin.

Amounts available for distribution to us as dividends from our insurance subsidiaries

without prior approval of insurance regulatory authorities in 2023 are approximately $ 26.4 million from Atlantic States, $ 6.5 million from Southern, $ 6.0 million

from Peninsula and $ 7.5 million from MICO, or a total of approximately $ 46.4 million.

15 - Reconciliation of Statutory Filings to Amounts Reported in the Consolidated Financial Statements

Our insurance subsidiaries must file financial statements with state insurance regulatory authorities using accounting principles and practices prescribed or permitted

by those authorities.

We refer to these accounting principles and practices as statutory accounting principles (“SAP”).

Accounting principles used to prepare these SAP financial statements differ from those used to prepare financial statements on

the basis of GAAP.

Reconciliations of statutory net income and capital and surplus, as determined using SAP, to the net (loss) income and stockholders’ equity amounts included in the

accompanying consolidated financial statements are as follows:

Year Ended December 31,

Statutory net income of insurance subsidiaries

Increases (decreases):

Deferred policy acquisition costs

Deferred federal income taxes

Salvage and subrogation recoverable

Consolidating eliminations and adjustments

Parent-only net (loss) income

Net (loss) income

Statutory capital and surplus of insurance subsidiaries

Increases (decreases):

Deferred policy acquisition costs

Deferred federal income taxes

Salvage and subrogation recoverable

Non-admitted assets and other adjustments, net

Fixed maturities

Parent-only equity and other adjustments

Stockholders’ equity

16 - Supplementary Cash Flow Information

The following table reflects net income taxes and interest we paid during 2022, 2021 and 2020:

17 - Earnings Per Share

We have two classes of common stock, which we refer to as Class A common stock and Class B common stock.

Our Class A common stock is entitled to be paid cash dividends

that are at least 10 % higher than the cash dividends we pay on our Class B common stock.

Accordingly, we use the two-class method for

the computation of earnings per common share.

The two-class method is an earnings allocation formula that determines earnings per share separately for each class of common stock based on dividends declared and an allocation of remaining

undistributed earnings using a participation percentage reflecting the dividend rights of each class.

We present below a reconciliation of the numerators and denominators we used in the basic and diluted per share computations for our Class A common stock:

Year Ended December 31,

(in thousands)

Basic (loss) earnings per share:

Allocation of net (loss) income

Weighted-average shares outstanding

Basic (loss) earnings per share

Diluted (loss) earnings per share:

Allocation of net (loss) income

Number of shares used in basic computation

Weighted-average effect of dilutive securities

Director and employee stock options

Number of shares used in per share computations

Diluted (loss) earnings per share

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)

Basic and diluted (loss) earnings per share:

Allocation of net (loss) income

Weighted-average shares outstanding

Basic and diluted (loss) earnings per share

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.

18 - Condensed Financial Information of Parent Company

Condensed Balance Sheets

(in thousands)

Investment in subsidiaries/affiliates (equity method)

Short-term investments

Property and equipment

Liabilities and Stockholders’ Equity

Cash dividends declared to stockholders

Notes payable to subsidiary

Total liabilities

Stockholders’ equity

Total liabilities and stockholders’ equity

Condensed Statements of (Loss) Income and Comprehensive (Loss) Income

(in thousands)

Year Ended December 31,

Statements of (Loss) Income

Dividends from subsidiaries

Realized investment gains

Total revenues

Operating expenses

Total expenses

(Loss) income before income tax benefit and equity in undistributed net (loss) income of subsidiaries

Income tax benefit

(Loss) income before equity in undistributed net (loss) income of subsidiaries

Equity in undistributed net (loss) income of subsidiaries

Net (loss) income

Statements of Comprehensive (Loss) Income

Net (loss) income

Other comprehensive (loss) income, net of tax

Unrealized (loss) gain - subsidiaries

Other comprehensive (loss) income, net of tax

Comprehensive (loss) income

Condensed Statements of Cash Flows

(in thousands)

Year Ended December 31,

Cash flows from operating activities:

Net (loss) income

Equity in undistributed net loss (income) of subsidiaries

Net adjustments

Net cash (used) provided

Cash flows from investing activities:

Net (purchases) sale of short-term investments

Net purchase of property and equipment

Investment in subsidiaries

Net cash (used) received

Cash flows from financing activities:

Cash dividends paid

Issuance of common stock

Net cash (used) received

Net change in cash

Cash at beginning of year

Cash at end of year

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.

Financial data by segment is as follows:

(in thousands)

Premiums earned:

Commercial lines

Personal lines

GAAP premiums earned

Net investment income

Investment (losses) gains

Total revenues

(in thousands)

(Loss) income before income taxes:

Underwriting (loss) income:

Commercial lines

Personal lines

SAP underwriting (loss) income

GAAP adjustments

GAAP underwriting (loss) income

Net investment income

Investment (losses) gains

(Loss) income before income taxes

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.

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.

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.

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

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.

of Liabilities for Losses and Loss Expenses

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.

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.

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.

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

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

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk