DONEGAL GROUP INC 10-K

Item 8. Financial Statements and Supplementary Data. Index to Consolidated Financial Statements and Schedule Consolidated Balance Sheets 65 Consolidated Statements of Income and Comprehensive Income 66 Consolidated Statements of Stockholders’ Equity 67 Consolidated Statements of Cash Flows 68 Notes to Consolidated Financial Statements 69 Report of Independent Registered Public Accounting Firm ( KPMG LLP , PCAOB ID 185 ) 106 Schedule: Schedule III — Supplementary Insurance Information 116 -64- Index Donegal Group Inc. Consolidated Balance Sheets December 31, 2023 2022 Assets Investments Fixed maturities Held to maturity, at amortized cost (fair value $ 611,526,338 and $ 598,044,681 ; net of allowance for expected credit losses of $ 1,325,847 and $ 0 ) $ 679,497,038 $ 688,439,360 Available for sale, at fair value (amortized cost $ 629,727,513 and $ 571,912,727 ) 589,348,243 523,791,931 Equity securities, at fair value 25,902,956 35,104,840 Short-term investments, at cost, which approximates fair value 32,305,408 57,321,111 Total investments 1,327,053,645 1,304,657,242 Cash 23,792,273 25,123,332 Accrued investment income 9,945,714 8,861,292 Premiums receivable 179,591,821 173,846,294 Reinsurance receivable (net of allowance for expected credit losses of $ 1,394,074 and $ 0 ) 441,431,334 456,522,223 Deferred policy acquisition costs 75,043,404 73,170,230 Deferred tax asset, net 19,532,525 21,603,017 Prepaid reinsurance premiums 168,724,465 160,591,399 Property and equipment, net 2,633,405 2,755,105 Accounts receivable - securities 1,501,079 1,842 Federal income taxes recoverable 8,102,321 8,510,897 Due from affiliate 1,907,527 — Goodwill 5,625,354 5,625,354 Other intangible assets 958,010 958,010 Other 451,011 1,123,098 Total assets $ 2,266,293,888 $ 2,243,349,335 Liabilities and Stockholders’ Equity Liabilities Losses and loss expenses $ 1,126,156,838 $ 1,121,045,758 Unearned premiums 599,411,468 577,653,130 Accrued expenses 3,946,974 4,226,390 Reinsurance balances payable 8,758,976 3,495,824 Borrowings under lines of credit 35,000,000 35,000,000 Cash dividends declared to stockholders 5,569,992 5,296,990 Due to affiliate — 5,173,289 Other 7,704,286 7,864,942 Total liabilities 1,786,548,534 1,759,756,323 Stockholders’ Equity Preferred stock, $ 0.01 par value, authorized 2,000,000 shares; none issued — — Class A common stock, $ 0.01 par value, authorized 50,000,000 shares, issued 30,764,555 and 30,120,263 shares and outstanding 27,761,967 and 27,117,675 shares 307,646 301,203 Class B common stock, $ 0.01 par value, authorized 10,000,000 shares, issued 5,649,240 shares and outstanding 5,576,775 shares 56,492 56,492 Additional paid-in capital 335,694,478 325,601,647 Accumulated other comprehensive loss ( 32,881,822 ) ( 41,703,747 ) Retained earnings 217,794,917 240,563,774 Treasury stock, at cost ( 41,226,357 ) ( 41,226,357 ) Total stockholders’ equity 479,745,354 483,593,012 Total liabilities and stockholders’ equity $ 2,266,293,888 $ 2,243,349,335 See accompanying notes to consolidated financial statements. -65- Index Donegal Group Inc. Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Years Ended December 31, 2023 2022 2021 Statements of Income (Loss) Revenues Net premiums earned (includes affiliated reinsurance of $ 237,903,029 , $ 232,105,306 and $ 212,591,341 - see note 3) $ 882,071,386 $ 822,489,450 $ 776,015,201 Investment income, net of investment expenses 40,853,215 34,016,112 31,125,631 Installment payment fees 894,137 1,516,330 2,416,873 Lease income 346,439 383,451 430,800 Net investment gains (losses) (includes ($ 2,242,190 ), ($ 979,972 ) and $ 382,602 accumulated other comprehensive income reclassification) 3,172,807 ( 10,184,797 ) 6,477,286 Total revenues 927,337,984 848,220,546 816,465,791 Expenses Net losses and loss expenses (includes affiliated reinsurance of $ 150,198,479 , $ 177,849,040 and $ 131,367,599 - see note 3) 609,177,699 564,078,993 520,709,542 Amortization of deferred policy acquisition costs 154,214,000 142,430,000 128,733,000 Other underwriting expenses 151,747,579 137,923,739 129,367,893 Policyholder dividends 5,313,430 5,560,407 5,198,515 Interest 619,813 620,558 895,605 Other, net 1,201,987 1,244,948 1,222,728 Total expenses 922,274,508 851,858,645 786,127,283 Income (loss) before income tax expense (benefit) 5,063,476 ( 3,638,099 ) 30,338,508 Income tax expense (benefit) (includes ($ 470,860 ), ($ 205,794 ) and $ 80,346 income tax (benefit) expense from reclassification items) 637,972 ( 1,678,694 ) 5,084,334 Net income (loss) $ 4,425,504 $ ( 1,959,405 ) $ 25,254,174 Basic earnings (loss) per common share: Class A common stock $ 0.14 $ ( 0.06 ) $ 0.83 Class B common stock $ 0.11 $ ( 0.07 ) $ 0.74 Diluted earnings (loss) per common share: Class A common stock $ 0.14 $ ( 0.06 ) $ 0.83 Class B common stock $ 0.11 $ ( 0.07 ) $ 0.74 Statements of Comprehensive Income (Loss) Net income (loss) $ 4,425,504 $ ( 1,959,405 ) $ 25,254,174 Other comprehensive income (loss), net of tax Unrealized gain (loss) on securities: Unrealized holding gain (loss) arising during the period, net of income tax expense (benefit) of $ 1,285,390 , ($ 12,164,443 ) and ($ 2,008,078 ) 4,246,693 ( 45,761,476 ) ( 7,544,805 ) Reclassification adjustment for losses (gains) included in net income (loss), net of income tax (benefit) expense of ($ 470,860 ), ($ 205,794 ) and $ 80,346 1,771,330 774,178 ( 302,256 ) Other comprehensive income (loss) 6,018,023 ( 44,987,298 ) ( 7,847,061 ) Comprehensive income (loss) $ 10,443,527 $ ( 46,946,703 ) $ 17,407,113 See accompanying notes to consolidated financial statements. -66- Index Donegal Group Inc. Consolidated Statements of Stockholders’ Equity Common Stock Class A Shares Class B Shares Class A Amount Class B Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Treasury Stock Total Stockholders’ Equity Balance, January 1, 2021 27,651,774 5,649,240 $ 276,518 $ 56,492 $ 289,149,567 $ 11,130,612 $ 258,387,288 $ ( 41,226,357 ) $ 517,774,120 Issuance of common stock (stock compensation plans) 157,783 1,578 2,161,142 2,162,720 Stock-based compensation 946,646 9,466 13,260,855 13,270,321 Net income 25,254,174 25,254,174 Cash dividends ( 19,578,187 ) ( 19,578,187 ) Grant of stock options 317,917 ( 317,917 ) — Other comprehensive loss ( 7,847,061 ) ( 7,847,061 ) Balance, December 31, 2021 28,756,203 5,649,240 $ 287,562 $ 56,492 $ 304,889,481 $ 3,283,551 $ 263,745,358 $ ( 41,226,357 ) $ 531,036,087 Issuance of common stock (stock compensation plans) 161,254 1,613 2,122,277 2,123,890 Stock-based compensation 1,202,806 12,028 18,252,148 18,264,176 Net loss ( 1,959,405 ) ( 1,959,405 ) Cash dividends ( 20,884,438 ) ( 20,884,438 ) Grant of stock options 337,741 ( 337,741 ) — Other comprehensive loss ( 44,987,298 ) ( 44,987,298 ) Balance, December 31, 2022 30,120,263 5,649,240 $ 301,203 $ 56,492 $ 325,601,647 $ ( 41,703,747 ) $ 240,563,774 $ ( 41,226,357 ) $ 483,593,012 Issuance of common stock (stock compensation plans) 150,426 1,504 2,081,186 2,082,690 Stock-based compensation 493,866 4,939 7,683,782 7,688,721 Net income 4,425,504 4,425,504 Cash dividends ( 22,166,694 ) ( 22,166,694 ) Grant of stock options 327,863 ( 327,863 ) — Cumulative effect of adoption of updated guidance for credit losses at January 1, 2023 ( 1,895,902 ) ( 1,895,902 ) Reclassification of held-to-maturity transfer 2,803,902 ( 2,803,902 ) — Other comprehensive income 6,018,023 6,018,023 Balance, December 31, 2023 30,764,555 5,649,240 $ 307,646 $ 56,492 $ 335,694,478 $ ( 32,881,822 ) $ 217,794,917 $ ( 41,226,357 ) $ 479,745,354 See accompanying notes to consolidated financial statements. -67- Index Donegal Group Inc. Consolidated Statements of Cash Flows Years Ended December 31, 2023 2022 2021 Cash Flows from Operating Activities: Net income (loss) $ 4,425,504 $ ( 1,959,405 ) $ 25,254,174 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, amortization and other non-cash items 4,326,446 4,841,559 5,837,809 Net investment (gains) losses ( 3,172,807 ) 10,184,797 ( 6,477,286 ) Changes in Assets and Liabilities: Losses and loss expenses 5,111,080 43,425,457 115,612,864 Unearned premiums 21,758,338 4,694,708 35,768,824 Accrued expenses ( 279,416 ) 197,731 ( 25,086,539 ) Premiums receivable ( 5,745,527 ) ( 4,983,714 ) 733,752 Deferred policy acquisition costs ( 1,873,174 ) ( 5,141,857 ) ( 8,871,415 ) Deferred income taxes 229,397 ( 2,958,735 ) 1,095,306 Reinsurance receivable 13,959,053 ( 1,111,214 ) ( 46,502,159 ) Accrued investment income ( 1,084,422 ) ( 646,321 ) ( 278,092 ) Amounts due to affiliate ( 7,080,816 ) 7,096,006 ( 12,216,212 ) Reinsurance balances payable 5,263,152 ( 450,281 ) 712,582 Prepaid reinsurance premiums ( 8,133,066 ) 16,344,443 ( 7,517,509 ) Current income taxes 408,576 ( 3,219,959 ) ( 2,201,569 ) Other, net 511,426 796,805 867,438 Net adjustments 24,198,240 69,069,425 51,477,794 Net cash provided by operating activities 28,623,744 67,110,020 76,731,968 Cash Flows from Investing Activities: Purchases of fixed maturities: Held to maturity ( 25,226,609 ) ( 74,902,605 ) ( 125,630,220 ) Available for sale ( 150,423,864 ) ( 151,994,462 ) ( 163,593,018 ) Purchases of equity securities ( 5,128,994 ) ( 15,862,888 ) ( 25,354,790 ) Sales of fixed maturities: Available for sale 28,154,556 24,381,244 6,281,963 Maturity of fixed maturities: Held to maturity 32,923,991 53,747,886 44,211,076 Available for sale 58,277,402 75,759,806 165,867,395 Sales of equity securities 19,745,875 34,973,196 26,585,663 Net (purchases) sales of property and equipment ( 44,701 ) 28,290 1,224,806 Net sales (purchases) of short-term investments 25,015,703 ( 44,628,770 ) 8,207,814 Net cash used in investing activities ( 16,706,641 ) ( 98,498,303 ) ( 62,199,311 ) Cash Flows from Financing Activities: Issuance of common stock 8,645,530 19,304,956 14,181,702 Cash dividends paid ( 21,893,692 ) ( 20,502,716 ) ( 19,099,220 ) Payments on subordinated debentures — — ( 5,000,000 ) Payments on lines of credit — — ( 50,000,000 ) Net cash used in financing activities ( 13,248,162 ) ( 1,197,760 ) ( 59,917,518 ) Net decrease in cash ( 1,331,059 ) ( 32,586,043 ) ( 45,384,861 ) Cash at beginning of year 25,123,332 57,709,375 103,094,236 Cash at end of year $ 23,792,273 $ 25,123,332 $ 57,709,375 See accompanying notes to consolidated financial statements. -68- Index Donegal Group Inc. Notes to Consolidated Financial Statements 1 - Summary of Significant Accounting Policies Organization and Business Donegal Mutual Insurance Company (“Donegal Mutual”) organized us as an insurance holding company on August 26, 1986. Our insurance subsidiaries are Atlantic States Insurance Company (“Atlantic States”), Michigan Insurance Company (“MICO”), the Peninsula Insurance Group (“Peninsula”), which consists of The Peninsula Insurance Company and its wholly owned subsidiary Peninsula Indemnity Company, and Southern Insurance Company of Virginia (“Southern”). Our insurance subsidiaries and their affiliates write commercial and personal lines of property and casualty coverages exclusively through a network of independent insurance agents in certain Mid-Atlantic, Midwestern, New England, Southern and Southwestern states. At December 31, 2023, we had three segments: our investment function, our commercial lines of insurance and our personal lines of insurance. The commercial lines products of our insurance subsidiaries consist primarily of commercial automobile, commercial multi-peril and workers’ compensation policies. The personal lines products of our insurance subsidiaries consist primarily of homeowners and private passenger automobile policies. At December 31, 2023, Donegal Mutual held approximately 44 % 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 (the “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 (“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 (“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. -69- Index The same executive management and underwriting personnel administer products, classes of business underwritten, pricing practices and underwriting standards of Donegal Mutual and our insurance subsidiaries. In addition, as the Donegal Insurance Group, Donegal Mutual and our insurance subsidiaries share a combined business plan to achieve market penetration and underwriting profitability objectives. The products our insurance subsidiaries and Donegal Mutual market are generally complementary, thereby allowing the Donegal Insurance Group to offer a broader range of products to a given market and to expand the Donegal Insurance Group’s ability to service an entire personal lines or commercial lines account. Distinctions within the products of Donegal Mutual and our insurance subsidiaries generally relate to specific risk profiles targeted within similar classes of business, such as preferred tier versus standard tier products, but we do not allocate all of the standard risk gradients to one company. Therefore, the underwriting profitability of the business the individual companies write directly will vary. However, the underwriting pool homogenizes the risk characteristics of all business that Donegal Mutual and Atlantic States write directly. The business Atlantic States derives from the underwriting pool represents a significant percentage of our total consolidated revenues. We refer to Note 3 - Transactions with Affiliates for more information regarding the pooling agreement. Basis of Consolidation Our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), include our accounts and those of our wholly owned subsidiaries. We have eliminated all significant inter-company accounts and transactions in consolidation. The terms “we,” “us,” “our” or the “Company” as we use them in the notes to our consolidated financial statements refer to the consolidated entity. Use of Estimates In preparing our consolidated financial statements, our management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet and revenues and expenses for the period then ended. Actual results could differ significantly from those estimates. We make estimates and assumptions that could have a significant effect on amounts and disclosures we report in our consolidated financial statements. The most significant estimates relate to our insurance subsidiaries’ reserves for property and casualty insurance unpaid losses and loss expenses. While we believe our estimates and the estimates of our insurance subsidiaries are appropriate, the ultimate amounts may differ from the estimates provided. We regularly review our methods for making these estimates as well as the continuing appropriateness of the estimated amounts, and we reflect any adjustment we consider necessary in our current results of operations. Reclassification We have made certain reclassifications in our prior period financial statements to conform to the current year presentation. Investments We classify our debt securities into the following categories: Held to Maturity - Debt securities that we have the positive intent and ability to hold to maturity; reported at amortized cost. Available for Sale - Debt securities not classified as held to maturity; reported at fair value, with unrealized gains and losses excluded from income and reported as a separate component of stockholders’ equity (net of tax effects). Short-term investments are carried at amortized cost, which approximates fair value. -70- Index We make estimates concerning the valuation of our investments and, as applicable, the recognition of declines in the value of our investments. For equity securities, we measure investments at fair value, and we recognize changes in fair value in our results of operations. With respect to an available-for-sale 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 the 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 with respect to that security. 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 establish an allowance for credit loss. We then recognize the amount of the allowance in our results of operations, and we recognize the remaining portion of the impairment loss in our other comprehensive income, net of applicable taxes. We regularly review the allowance for credit losses and recognize changes in the allowance in our results of operations. 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, issuer or geographic events that have negatively impacted the value of a security and rating agency downgrades. For held-to-maturity debt securities, we make estimates concerning expected credit losses at an aggregated level rather that monitoring individual debt securities for credit losses. We establish an allowance for expected credit losses based on an ongoing review of securities held, historical loss data, changes in issuer credit standing and other relevant factors. We utilize a probability-of-default methodology, which reflects current and forecasted economic conditions, to estimate the allowance for expected credit losses and recognize changes to the allowance in our results of operations. We amortize premiums and discounts on debt securities over the life of the security as an adjustment to yield using the effective interest method. We compute investment gains and losses using the specific identification method. We amortize premiums and discounts for mortgage-backed debt securities using anticipated prepayments. Fair Values of Financial Instruments We use the following methods and assumptions in estimating our fair value disclosures: Investments - We present our investments in available-for-sale fixed maturity and equity securities at estimated fair value. The estimated fair value of a security may differ from the amount that we could realize if we sold the security in a forced transaction. In addition, the valuation of fixed maturity investments is more subjective when markets are less liquid, increasing the potential that the estimated fair value does not reflect the price at which an actual transaction would occur. We utilize nationally recognized independent pricing services to estimate fair values for our fixed maturity and equity investments. We generally obtain two prices per security. The pricing services utilize market quotations for fixed maturity and equity securities that have quoted prices in active markets. For fixed maturity securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements based predominantly on observable market inputs. The pricing services do not use broker quotes in determining the fair values of our investments. Our investment personnel review the estimates of fair value the pricing services provide to determine if the estimates we obtain are representative of fair values based upon the general knowledge of our investment personnel of the market, their research findings related to unusual fluctuations in value and their comparison of such values to execution prices for similar securities. Our investment personnel monitor the market and are familiar with current trading ranges for similar securities and the pricing of specific investments. Our investment personnel review all pricing estimates that we receive from the pricing services against their expectations with respect to pricing based on fair market curves, security ratings, coupon rates, security type and recent trading activity. Our investment personnel review documentation with respect to the pricing services’ pricing methodology that they obtain periodically to determine if the primary pricing sources, market inputs and pricing frequency for various security types are reasonable. We refer to Note 5 - Fair Value Measurements for more information regarding our methods and assumptions in estimating fair values. Cash and Short-Term Investments - The carrying amounts we report in the balance sheet for these instruments approximate their fair values. Premiums and Reinsurance Receivables and Payables - The carrying amounts we report in the balance sheet for these instruments related to premiums and paid losses and loss expenses approximate their fair values. -71- Index 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 estimates. Our insurance subsidiaries base their estimates of liabilities for losses and loss expenses on assumptions as to future loss trends, expected claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, our insurance subsidiaries may learn additional facts regarding individual claims, and, consequently, it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates for these liabilities. We reflect any adjustments to the liabilities for losses and loss expenses of our insurance subsidiaries in our consolidated results of operations in the period in which our insurance subsidiaries make adjustments to their estimates. O ur insurance subsidiaries maintain liabilities for the payment of losses and loss expenses with respect to both reported and unreported claims. Our insurance subsidiaries establish these liabilities for the purpose of covering the ultimate costs of settling all losses, including investigation and litigation costs. Our insurance subsidiaries base the amount of their liability for reported losses primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss the policyholder incurred. Our insurance subsidiaries determine the amount of their liability for unreported claims and loss expenses on the basis of historical information by line of insurance. Our insurance subsidiaries account for inflation in the reserving function through analysis of costs and trends and reviews of historical reserving results. Our insurance subsidiaries monitor their liabilities closely and recompute them periodically using new information on reported claims and a variety of statistical techniques. Our insurance subsidiaries do not discount their liabilities for losses and loss expenses . -72- Index R eserve estimates can change over time because of unexpected changes in assumptions related to our insurance subsidiaries’ external environment and, to a lesser extent, assumptions related to our insurance subsidiaries’ internal operations. For example, our insurance subsidiaries have experienced an increase in claims severity and a lengthening of the claim settlement periods on bodily injury claims during the past several years. In addition, the COVID-19 pandemic and related government mandates and restrictions resulted in various changes from historical claims reporting and settlement trends during 2020 and resulted in significant increases in loss costs in 2022 and 2023 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. While these trend changes have begun to normalize, they caused significant disruption to historical loss patterns and give rise to greater uncertainty as to the pattern of future loss settlements. Related uncertainties regarding future trends include social inflation, availability and cost of replacement automobile parts and building materials, availability of skilled labor, the rate of plaintiff attorney involvement in claims and the cost of medical technologies and procedures. Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded . Our insurance subsidiaries seek to enhance their underwriting results by carefully selecting the product lines they underwrite. Our insurance subsidiaries’ personal lines products primarily include standard and preferred risks in private passenger automobile and homeowners lines. Our insurance subsidiaries’ commercial lines products primarily include business offices, wholesalers, service providers, contractors, artisans and light manufacturing operations. Our insurance subsidiaries have limited exposure to asbestos and other environmental liabilities. Income Taxes We currently file a consolidated federal income tax return that includes us and our insurance subsidiaries. We account for income taxes using the asset and liability method. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at enacted tax rates we expect to be in effect when we realize or settle such amounts. Credit Risk Our objective is to earn competitive returns by investing in a diversified portfolio of securities. Our portfolio of fixed maturity securities and, to a lesser extent, short-term investments is subject to credit risk. We define this risk as the potential loss in fair value resulting from adverse changes in the borrower’s ability to repay its debt to us. We manage this risk by performing an analysis of prospective investments and through regular reviews of our portfolio by our investment personnel. We also limit the amount of our total investment portfolio that we invest in any one security. Our insurance subsidiaries provide property and liability insurance coverages through independent insurance agencies located throughout their operating areas. Our insurance subsidiaries bill the majority of this business directly to their policyholders, although our insurance subsidiaries bill a portion of their commercial business through their agents, to whom they extend credit in the normal course of business. Our insurance subsidiaries have reinsurance agreements with Donegal Mutual and with a number of major unaffiliated reinsurers. -73- Index Reinsurance Accounting and Reporting Our insurance subsidiaries rely upon reinsurance agreements to limit their maximum net loss from large single risks or risks in concentrated areas and to increase their capacity to write insurance. Reinsurance does not relieve our insurance subsidiaries from liability to their respective policyholders. To the extent that a reinsurer cannot pay losses for which it is liable under the terms of a reinsurance agreement with one or more of our insurance subsidiaries, our insurance subsidiaries retain continued liability for such losses. However, in an effort to reduce the risk of non-payment, our insurance subsidiaries require all of their reinsurers to have an A.M. Best rating of A- or better or, with respect to foreign reinsurers, to have a financial condition that, in the opinion of our management, is equivalent to a company with an A.M. Best rating of A- or better. We refer to Note 10 - Reinsurance for more information regarding the reinsurance agreements of our insurance subsidiaries. We report reinsurance receivable net of an allowance for expected credit losses. We establish an allowance for expected credit losses based upon our ongoing review of amounts outstanding, historical loss data, changes in reinsurer credit standing and other relevant factors. We utilize a probability-of-default methodology, which reflects current and forecasted economic conditions, to estimate the allowance for expected credit losses and recognize changes to the allowance in our results of operations. 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 2023, 2022 and 2021, we realized $ 139,135 , $ 360,452 and $ 438,850 , 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. -74- Index 2 - Impact of New Accounting Standards In September 2016, the FASB issued guidance that amended previous guidance on the impairment of financial instruments by adding an impairment model that requires an entity to recognize expected credit losses as an allowance rather than impairments as credit losses are incurred. The intent of this guidance is to reduce complexity and result in a more timely recognition of expected credit losses. In November 2019, the FASB issued guidance that delayed 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 were a smaller reporting company at the time this guidance was issued, and our adoption of this guidance on January 1, 2023 resulted in an after-tax decrease in retained earnings of $ 1.9 million. The adoption of this guidance did not have a significant impact on our results of operations or cash flows. 3 - Transactions with Affiliates Our insurance subsidiaries conduct business and have various agreements with Donegal Mutual that we describe in the following subparagraphs: a. Reinsurance Pooling and Other Reinsurance Arrangements Atlantic States, our largest insurance subsidiary, and Donegal Mutual have a pooling agreement under which both companies contribute substantially all of their direct written business to the pool and receive an allocated percentage of the pooled underwriting results, excluding certain reinsurance Donegal Mutual assumes from our insurance subsidiaries. Beginning with policies effective in 2021, Donegal Mutual began to place the business of the Mountain States Insurance Group into the underwriting pool. In addition, Donegal Mutual has a 100 % quota-share reinsurance agreement with Southern Mutual Insurance Company, or Southern Mutual, and Donegal Mutual places its assumed business from Southern Mutual into the underwriting pool. Atlantic States has an 80 % share of the results of the pool, and Donegal Mutual has a 20 % share of the results of the pool. The intent of the pooling agreement is to produce more uniform and stable underwriting results from year to year for each pool participant than they would experience individually and to spread the risk of loss between the participants based on each participant’s relative amount of surplus and relative access to capital. Each participant in the pool has at its disposal the capacity of the entire pool, rather than being limited to policy exposures of a size commensurate with its own capital and surplus. The following amounts represent reinsurance Atlantic States ceded to the pool during 2023, 2022 and 2021: 2023 2022 2021 Premiums earned $ 332,272,662 $ 314,321,443 $ 305,729,418 Losses and loss expenses 238,055,099 202,228,589 222,737,225 Prepaid reinsurance premiums 161,991,511 154,472,615 152,323,262 Liability for losses and loss expenses 299,947,390 277,641,902 274,033,812 -75- Index The following amounts represent reinsurance Atlantic States assumed from the pool during 2023, 2022 and 2021: 2023 2022 2021 Premiums earned $ 583,559,746 $ 578,216,706 $ 573,891,394 Losses and loss expenses 409,051,306 395,794,813 383,455,320 Unearned premiums 286,147,727 280,031,908 289,976,879 Liability for losses and loss expenses 507,527,839 496,849,769 455,564,733 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 2023, 2022 and 2021: 2023 2022 2021 Premiums earned $ 168,243 $ 17,989,939 $ 37,996,474 Losses and loss expenses 2,902,422 5,194,974 20,037,608 Prepaid reinsurance premiums — — 18,548,821 Liability for losses and loss expenses 17,852,153 22,642,908 36,659,853 In 2023, 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 $ 3,000,000 , with a combined retention of $ 6,000,000 for a catastrophe involving a combination of our insurance subsidiaries, up to the amount Donegal Mutual and our insurance subsidiaries retained under catastrophe reinsurance agreements with unaffiliated reinsurers. Through December 31, 2022, each of our insurance subsidiaries had a catastrophe reinsurance agreement with Donegal Mutual that provided coverage under any one catastrophic occurrence above a set retention of $ 2,000,000 , with a combined retention of $ 5,000,000 for a catastrophe involving a combination of our insurance subsidiaries, up to the amount Donegal Mutual and our insurance subsidiaries retained under catastrophe reinsurance agreements with unaffiliated reinsurers. The following amounts represent reinsurance that our insurance subsidiaries ceded to Donegal Mutual pursuant to these reinsurance agreements during 2023, 2022 and 2021: 2023 2022 2021 Premiums earned $ 13,215,814 $ 13,800,018 $ 17,574,161 Losses and loss expenses 17,895,306 10,517,709 9,309,624 Liability for losses and loss expenses 2,497,244 1,271,006 1,658,057 The following amounts represent the effect of affiliated reinsurance transactions on net premiums our insurance subsidiaries earned during 2023, 2022 and 2021: 2023 2022 2021 Assumed $ 583,559,746 $ 578,216,706 $ 573,891,394 Ceded ( 345,656,717 ) ( 346,111,400 ) ( 361,300,053 ) Net $ 237,903,029 $ 232,105,306 $ 212,591,341 -76- Index The following amounts represent the effect of affiliated reinsurance transactions on net losses and loss expenses our insurance subsidiaries incurred during 2023, 2022 and 2021: 2023 2022 2021 Assumed $ 409,051,306 $ 395,790,312 $ 383,452,056 Ceded ( 258,852,827 ) ( 217,941,272 ) ( 252,084,457 ) Net $ 150,198,479 $ 177,849,040 $ 131,367,599 b. Expense Sharing Donegal Mutual provides facilities, management and other services to us and our insurance subsidiaries. In addition, Donegal Mutual purchases and maintains the information technology systems that support the business of Donegal Mutual and our insurance subsidiaries. Donegal Mutual allocates certain related expenses to Atlantic States in relation to the relative participation of Atlantic States and Donegal Mutual in the pooling agreement. Our insurance subsidiaries other than Atlantic States reimburse Donegal Mutual for allocated costs of services Donegal Mutual provides on their behalf based on their proportion of the total direct premiums written of the Donegal Insurance Group and other metrics. Donegal Mutual allocates costs related to its development and maintenance of information technology systems over the estimated useful life of those systems (generally five years) and charges a proportionate share of those costs to our insurance subsidiaries based on their percentage of the total net premiums written of the Donegal Insurance Group. Allocated expenses from Donegal Mutual for services it provided to our insurance subsidiaries totaled $ 218,974,132 , $ 199,177,393 and $ 186,568,897 for 2023, 2022 and 2021, respectively. 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 three releases of new systems into service in 2020, 2021 and 2023, respectively. Donegal Mutual allocated $ 10.5 million, $ 7.6 million and $ 5.1 million of related costs to our insurance subsidiaries in 2023, 2022 and 2021, respectively. Donegal Mutual will allocate to our insurance subsidiaries their proportionate share of the remaining $ 40.9 million of related costs over the next five years. Donegal Mutual incurred an additional $ 888,904 of deferred costs related to releases under development that were not yet ready for their intended use at December 31, 2023. 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. c. Lease Agreement We lease office equipment with terms ranging from 3 to 10 years to Donegal Mutual under a lease agreement dated January 1, 2011. -77- Index 4 - Investments The amortized cost and estimated fair values of our fixed maturities at December 31, 2023 and 2022 are as follows: 2023 Carrying Value Allowance for Credit Losses Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (in thousands) Held to Maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 91,517,359 $ 54,668 $ 91,572,027 $ — $ 8,885,420 $ 82,686,607 Obligations of states and political subdivisions 376,897,952 265,977 377,163,929 1,448,585 46,844,714 331,767,800 Corporate securities 201,847,288 999,685 202,846,973 207,628 14,804,569 188,250,032 Mortgage-backed securities 9,234,439 5,517 9,239,956 — 418,057 8,821,899 Totals $ 679,497,038 $ 1,325,847 $ 680,822,885 $ 1,656,213 $ 70,952,760 $ 611,526,338 2023 Available for Sale Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 89,367,383 $ 199,299 $ 4,146,999 $ 85,419,683 Obligations of states and political subdivisions 41,957,742 11,665 3,853,623 38,115,784 Corporate securities 211,882,285 100,014 15,189,332 196,792,967 Mortgage-backed securities 286,520,103 594,023 18,094,317 269,019,809 Totals $ 629,727,513 $ 905,001 $ 41,284,271 $ 589,348,243 2022 Held to Maturity Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 103,362,028 $ 856 $ 10,566,154 $ 92,796,730 Obligations of states and political subdivisions 382,097,461 1,809,879 60,494,134 323,413,206 Corporate securities 190,948,922 — 20,510,543 170,438,379 Mortgage-backed securities 12,030,949 — 634,583 11,396,366 Totals $ 688,439,360 $ 1,810,735 $ 92,205,414 $ 598,044,681 2022 Available for Sale Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 68,537,456 $ 108,683 $ 5,124,827 $ 63,521,312 Obligations of states and political subdivisions 45,448,157 33,994 5,326,367 40,155,784 Corporate securities 218,040,945 8,315 15,211,215 202,838,045 Mortgage-backed securities 239,886,169 155,278 22,764,657 217,276,790 Totals $ 571,912,727 $ 306,270 $ 48,427,066 $ 523,791,931 -78- Index At December 31, 2023, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $ 245.1 million and an amortized cost of $ 278.3 million. Our holdings also included special revenue bonds with an aggregate fair value of $ 124.8 million and an amortized cost of $ 140.8 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, 2023. Education bonds and water and sewer utility bonds represented 47 % and 35 %, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, 2023. Many of the issuers of the special revenue bonds we held at December 31, 2023 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, 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. We have segregated within accumulated other comprehensive loss the net unrealized losses of $ 15.1 million arising prior to the November 30, 2013 reclassification date for fixed maturities reclassified from available for sale to held to maturity. We 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 $ 284,095 , $ 510,819 and $ 897,073 in other comprehensive income in 2023, 2022 and 2021, respectively. At December 31, 2023 and 2022, net unrealized losses of $ 1.3 million and $ 4.7 million, respectively, remained within accumulated other comprehensive loss. We set forth below the amortized cost and estimated fair value of fixed maturities at December 31, 2023 by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost Estimated Fair Value Held to maturity Due in one year or less $ 19,007,881 $ 18,869,262 Due after one year through five years 105,894,799 102,016,841 Due after five years through ten years 251,405,744 230,975,966 Due after ten years 295,274,505 250,842,370 Mortgage-backed securities 9,239,956 8,821,899 Total held to maturity $ 680,822,885 $ 611,526,338 Available for sale Due in one year or less $ 35,774,037 $ 35,384,044 Due after one year through five years 175,526,581 166,257,527 Due after five years through ten years 105,858,004 95,629,511 Due after ten years 26,048,788 23,057,352 Mortgage-backed securities 286,520,103 269,019,809 Total available for sale $ 629,727,513 $ 589,348,243 -79- Index The cost and estimated fair values of our equity securities at December 31, 2023 were as follows: Cost Gross Gains Gross Losses Estimated Fair Value Equity securities $ 18,843,929 $ 7,059,027 $ — $ 25,902,956 The cost and estimated fair values of our equity securities at December 31, 2022 were as follows: Cost Gross Gains Gross Losses Estimated Fair Value Equity securities $ 30,770,633 $ 5,666,467 $ 1,332,260 $ 35,104,840 The amortized cost of fixed maturities on deposit with various regulatory authorities at December 31, 2023 and 2022 amounted to $ 10,499,430 and $ 9,473,047 , respectively. We derived net investment income, consisting primarily of interest and dividends, from the following sources: 2023 2022 2021 Fixed maturities $ 40,445,697 $ 34,945,437 $ 32,343,878 Equity securities 765,881 897,429 1,437,948 Short-term investments 2,471,998 817,428 321,117 Other 29,250 29,250 29,250 Investment income 43,712,826 36,689,544 34,132,193 Investment expenses ( 2,859,611 ) ( 2,673,432 ) ( 3,006,562 ) Net investment income $ 40,853,215 $ 34,016,112 $ 31,125,631 We present below gross gains and losses from investments and the change in the difference between fair value and cost of investments: 2023 2022 2021 Gross realized gains: Fixed maturities $ 1,059,244 $ 1,149,761 $ 676,724 Equity securities 2,662,661 1,765,923 1,430,465 Real estate — 477,287 — 3,721,905 3,392,971 2,107,189 Gross realized losses: Fixed maturities 3,300,351 2,129,736 294,126 Equity securities 732,940 4,113,526 462,335 4,033,291 6,243,262 756,461 Net realized (losses) gains ( 311,386 ) ( 2,850,291 ) 1,350,728 Gross unrealized gains on equity securities 3,651,125 258,532 5,627,949 Gross unrealized losses on equity securities ( 109,125 ) ( 7,593,038 ) ( 501,391 ) Increase in allowance for credit losses ( 57,807 ) — — Net investment gains (losses) $ 3,172,807 $ ( 10,184,797 ) $ 6,477,286 Change in difference between fair value and cost of investments: Fixed maturities $ 28,839,658 $ ( 177,147,840 ) $ ( 27,576,934 ) Equity securities 2,724,820 15,823,189 4,010,973 Totals $ 31,564,478 $ ( 161,324,651 ) $ ( 23,565,961 ) -80- Index We held fixed maturities with unrealized losses representing declines that we considered temporary at December 31, 2023 as follows: Less than 12 months 12 months or longer Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 32,223,934 $ 217,164 $ 116,537,998 $ 12,815,255 Obligations of states and political subdivisions 13,097,410 67,913 307,429,319 50,630,424 Corporate securities 13,065,558 324,293 353,862,937 29,669,608 Mortgage-backed securities 46,964,057 220,436 178,112,881 18,291,938 Totals $ 105,350,959 $ 829,806 $ 955,943,135 $ 111,407,225 We held fixed maturities with unrealized losses representing declines that we considered temporary at December 31, 2022 as follows: Less than 12 months 12 months or longer Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 90,245,322 $ 5,326,954 $ 47,237,638 $ 10,364,027 Obligations of states and political subdivisions 261,464,427 49,327,324 47,945,038 16,493,177 Corporate securities 298,706,256 22,272,711 72,959,284 13,449,047 Mortgage-backed securities 143,885,626 10,940,722 69,878,986 12,458,518 Totals $ 794,301,631 $ 87,867,711 $ 238,020,946 $ 52,764,769 We held 869 debt securities that were in an unrealized loss position at December 31, 2023. 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 on specific securities in 2023, 2022 or 2021. We had no sales or transfers from our held to maturity portfolio in 2023, 2022 or 2021. We had no derivative instruments or hedging activities during 2023, 2022 or 2021. -81- Index 5 - Fair Value Measurements We account for financial assets using a framework that establishes a hierarchy that ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value, and we classify financial assets and liabilities carried at fair value in one of the following three categories: Level 1 - quoted prices in active markets for identical assets and liabilities; Level 2 - directly or indirectly observable inputs other than Level 1 quoted prices; and Level 3 - unobservable inputs not corroborated by market data. For investments that have quoted market prices in active markets, we use the quoted market price as fair value and include these investments in Level 1 of the fair value hierarchy. We classify publicly traded equity securities as Level 1. When quoted market prices in active markets are not available, we base fair values on quoted market prices of comparable instruments or price estimates we obtain from independent pricing services. We classify our fixed maturity investments and non-publicly traded equity securities as Level 2. Our fixed maturity investments consist of U.S. Treasury securities and obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, corporate securities and mortgage-backed securities. At December 31, 2023, 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, 2023, 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. The carrying amounts reported in the balance sheet for our borrowings under lines of credit approximate their fair values. We classify these items as Level 3. We evaluate our assets and liabilities on a regular basis to determine the appropriate level at which to classify them for each reporting period. Based on our review of the methodology and summary of inputs the pricing services use, we have concluded that our Level 1 and Level 2 investments were classified properly at December 31, 2023 and 2022. The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at December 31, 2023: Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 85,419,683 $ — $ 85,419,683 $ — Obligations of states and political subdivisions 38,115,784 — 38,115,784 — Corporate securities 196,792,967 — 196,792,967 — Mortgage-backed securities 269,019,809 — 269,019,809 — Equity securities 25,902,956 23,910,968 1,991,988 — Total investments in the fair value hierarchy $ 615,251,199 $ 23,910,968 $ 591,340,231 $ — -82- Index The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at December 31, 2022: Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 63,521,312 $ — $ 63,521,312 $ — Obligations of states and political subdivisions 40,155,784 — 40,155,784 — Corporate securities 202,838,045 — 202,838,045 — Mortgage-backed securities 217,276,790 — 217,276,790 — Equity securities 35,104,840 32,820,452 2,284,388 — Total investments in the fair value hierarchy $ 558,896,771 $ 32,820,452 $ 526,076,319 $ — 6 - Deferred Policy Acquisition Costs Changes in our insurance subsidiaries’ deferred policy acquisition costs are as follows: 2023 2022 2021 Balance, January 1 $ 73,170,230 $ 68,028,373 $ 59,156,958 Acquisition costs deferred 156,087,174 147,571,857 137,604,415 Amortization charged to earnings ( 154,214,000 ) ( 142,430,000 ) ( 128,733,000 ) Balance, December 31 $ 75,043,404 $ 73,170,230 $ 68,028,373 7 - Property and Equipment Property and equipment at December 31, 2023 and 2022 consisted of the following: 2023 2022 Estimated Useful Life Office equipment $ 8,289,730 $ 8,245,030 3 - 15 years Automobiles 42,794 42,794 5 years Real estate 2,575,207 2,575,207 5 - 50 years Software 1,386,936 1,386,936 5 years 12,294,667 12,249,967 Accumulated depreciation ( 9,661,262 ) ( 9,494,862 ) $ 2,633,405 $ 2,755,105 Depreciation expense for 2023, 2022 and 2021 amounted to $ 166,400 , $ 173,535 and $ 208,641 , respectively. -83- Index 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: 2023 2022 2021 Balance at January 1 $ 1,121,045,758 $ 1,077,620,301 $ 962,007,437 Less reinsurance recoverable ( 451,184,222 ) ( 451,261,306 ) ( 404,818,480 ) Cumulative effect of adoption of updated accounting guidance for credit losses at January 1 1,131,836 — — Net balance at January 1 670,993,372 626,358,995 557,188,957 Incurred related to: Current year 625,831,043 608,900,206 551,917,571 Prior years ( 16,653,344 ) ( 44,821,213 ) ( 31,208,029 ) Total incurred 609,177,699 564,078,993 520,709,542 Paid related to: Current year 330,290,039 302,272,322 269,316,762 Prior years 260,738,168 218,304,130 182,222,742 Total paid 591,028,207 520,576,452 451,539,504 Net balance at December 31 689,142,864 669,861,536 626,358,995 Plus reinsurance recoverable 437,013,974 451,184,222 451,261,306 Balance at December 31 $ 1,126,156,838 $ 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 $ 16.7 million, $ 44.8 million and $ 31.2 million in 2023, 2022 and 2021, 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 2023 development represented 2.5 % of the December 31, 2022 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 2023. The majority of the 2023 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO. 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. 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. -84- Index 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 2023. The actuaries for our insurance subsidiaries generally prepare an initial estimate for ultimate losses and loss expenses for the current accident year by multiplying earned premium by an “ a priori ,” or expected, loss ratio for each line of business our insurance subsidiaries write. Expected loss ratios represent the actuaries’ expectation of losses at the time our insurance subsidiaries price and write their policies, before the emergence of any actual claims experience. The actuaries determine an expected loss ratio by analyzing historical experience and adjusting for loss cost trends, loss frequency and severity trends, premium rate level changes, reported and paid loss emergence patterns and other known or observed factors. The actuaries use a variety of actuarial methods to estimate the ultimate cost of losses and loss expenses. These methods include paid loss development, incurred loss development and the Bornhuetter-Ferguson method from which the actuaries select loss development factor assumptions. The actuaries base their selection of a point estimate on a judgmental weighting of estimates each of these methods produce. The actuaries consider loss frequency and severity trends when they develop expected loss ratios and point estimates. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors that affect loss frequency include changes in weather patterns or economic activity. Factors that affect loss severity include changes in policy limits, reinsurance retentions, inflation rates and judicial interpretations. Our insurance subsidiaries create a claim file when they receive notice of an actual demand for payment, an event that may lead to a demand for payment or when they otherwise determine that a demand for payment could potentially lead to a future demand for payment on another coverage under the same policy or another policy they have issued. In recent years, our insurance subsidiaries have noted an increase in the period of time between the occurrence of a casualty loss event and the date on which they receive notice of a liability claim. Changes in the length of time between the loss occurrence date and the claim reporting date affect the actuaries’ ability to accurately predict loss frequency and the amount of IBNR reserves our insurance subsidiaries require. Our insurance subsidiaries generally create a claim file for a policy at the claimant level by type of coverage and generally recognize one count for each claim event. In certain lines of business where it is common for multiple parties to claim damages arising from a single claim event, our insurance subsidiaries recognize one count for each claimant involved in the event. Atlantic States recognizes one count for each claim event, or claimant involved in a multiple-party claim event, related to losses Atlantic States assumes through its participation in its pooling agreement with Donegal Mutual. Our insurance subsidiaries accumulate the claim counts and report them by line of business. For purposes of the claim development tables we present below, our insurance subsidiaries count claims on policies they issue even if they eventually close such claims without making a loss payment. Claims our insurance subsidiaries close without making a loss payment typically generate loss expenses. The methods our insurance subsidiaries have used to summarize claim counts have not changed significantly over the time periods we report in the tables below. The following tables present information about incurred and paid claims development as of December 31, 2023, 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, 2014 through 2022, which we present as supplementary information. -85- Index Personal Automobile At December 31, 2023 Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2014 $ 124,426 $ 124,806 $ 124,210 $ 126,200 $ 126,779 $ 126,734 $ 126,861 $ 126,977 $ 127,108 $ 127,148 $ 37 71 2015 137,569 139,333 139,181 142,493 142,408 142,073 142,010 141,965 141,894 61 70 2016 150,216 153,937 157,516 157,943 156,935 156,436 156,227 155,834 192 73 2017 166,690 176,728 175,939 174,784 173,730 173,032 172,712 353 79 2018 186,580 183,358 181,558 180,787 179,732 178,990 627 81 2019 161,056 157,689 156,300 154,805 153,883 1,227 68 2020 111,483 103,585 100,339 99,253 1,543 43 2021 119,364 118,752 114,707 2,792 47 2022 126,203 134,834 5,639 50 2023 152,740 27,416 50 Total $ 1,431,995 Personal Automobile Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Unaudited (in thousands) 2014 $ 85,377 $ 104,736 $ 114,893 $ 120,491 $ 123,815 $ 124,926 $ 125,619 $ 125,762 $ 126,701 $ 127,026 2015 93,611 116,303 128,395 135,027 139,121 140,028 140,892 141,172 141,298 2016 102,433 129,507 143,321 151,159 153,521 154,769 155,521 155,505 2017 111,964 142,372 159,879 166,099 169,190 170,895 171,513 2018 115,585 150,175 163,036 169,651 173,922 176,233 2019 103,101 127,187 141,004 146,667 150,017 2020 66,084 81,783 89,736 94,094 2021 76,477 93,998 103,427 2022 83,616 109,845 2023 99,574 Total 1,328,532 All outstanding liabilities before 2014, net of reinsurance 994 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 104,457 -86- Index Homeowners At December 31, 2023 Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2014 $ 56,916 $ 58,378 $ 57,680 $ 57,332 $ 57,288 $ 57,402 $ 57,367 $ 57,371 $ 57,353 $ 57,362 $ — 17 2015 63,359 63,925 63,053 63,071 63,099 62,993 63,043 63,036 63,042 — 14 2016 62,443 64,064 63,735 63,355 63,279 63,409 63,472 63,478 3 12 2017 79,283 79,911 79,305 79,247 79,065 78,815 78,819 24 17 2018 81,965 83,385 82,905 82,566 82,058 81,977 78 19 2019 73,294 73,554 73,234 72,168 72,176 187 16 2020 61,633 62,718 61,595 61,495 385 14 2021 67,677 66,996 65,451 496 11 2022 82,433 82,045 1,846 10 2023 86,693 8,046 10 Total $ 712,538 Homeowners Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Unaudited (in thousands) 2014 $ 45,823 $ 56,255 $ 56,990 $ 57,195 $ 56,995 $ 57,243 $ 57,336 $ 57,339 $ 57,318 $ 57,327 2015 51,885 61,542 62,204 62,590 62,844 62,943 62,936 62,938 63,042 2016 50,125 61,145 62,760 63,144 63,162 63,217 63,266 63,296 2017 67,077 77,663 78,006 78,127 78,454 78,528 78,556 2018 70,385 79,892 80,905 81,464 81,568 81,826 2019 58,074 69,145 70,416 70,884 71,209 2020 51,226 60,348 60,809 61,189 2021 52,161 63,920 64,124 2022 63,107 79,187 2023 67,636 Total 687,392 All outstanding liabilities before 2014, net of reinsurance 148 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 25,294 -87- Index Commercial Automobile At December 31, 2023 Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2014 $ 42,760 $ 44,544 $ 47,326 $ 48,213 $ 49,284 $ 49,168 $ 49,308 $ 49,291 $ 49,285 $ 49,212 $ 8 11 2015 46,526 48,323 51,412 54,259 54,517 54,619 53,793 53,477 53,431 33 12 2016 54,302 57,353 65,905 67,127 66,894 66,085 65,922 65,602 71 13 2017 61,484 67,927 67,697 67,249 65,310 64,631 65,022 105 14 2018 79,307 81,396 82,313 83,043 82,226 82,368 207 15 2019 88,864 91,245 90,290 86,140 84,566 729 16 2020 90,367 87,766 85,016 83,590 2,528 14 2021 109,824 99,231 96,947 6,346 14 2022 115,287 108,690 17,627 15 2023 112,135 37,768 14 Total $ 801,563 Commercial Automobile Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Unaudited (in thousands) 2014 $ 22,707 $ 31,089 $ 39,436 $ 44,374 $ 47,290 $ 48,418 $ 48,603 $ 48,714 $ 48,757 $ 48,829 2015 23,875 35,342 41,678 48,261 51,605 51,992 52,728 53,052 53,047 2016 27,033 38,237 48,837 57,237 60,485 64,421 65,076 65,273 2017 28,707 40,213 49,703 57,128 59,889 62,187 64,074 2018 33,862 47,941 57,451 69,487 74,421 79,308 2019 36,948 53,026 63,575 72,139 80,617 2020 31,884 46,459 60,665 70,669 2021 39,851 56,101 69,908 2022 46,242 67,367 2023 45,387 Total 644,479 All outstanding liabilities before 2014, net of reinsurance 88 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 157,172 -88- Index Commercial Multi-Peril At December 31, 2023 Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2014 $ 48,204 $ 50,135 $ 51,843 $ 52,336 $ 53,294 $ 53,116 $ 52,926 $ 52,933 $ 53,502 $ 53,395 $ — 7 2015 42,070 43,874 44,728 45,104 45,873 45,366 45,420 45,595 46,181 — 6 2016 43,005 46,988 48,267 48,871 48,732 48,823 48,802 48,374 135 6 2017 56,185 56,043 56,517 54,812 55,076 54,244 55,002 187 7 2018 66,265 66,470 67,749 67,810 65,911 65,900 624 7 2019 71,865 73,836 76,326 75,821 76,015 2,093 7 2020 83,195 79,910 76,490 74,796 4,524 8 2021 116,827 117,574 119,321 14,055 7 2022 142,395 141,935 27,544 7 2023 129,069 43,788 5 Total $ 809,988 Commercial Multi-Peril Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Unaudited (in thousands) 2014 $ 27,920 $ 35,520 $ 40,936 $ 47,021 $ 50,017 $ 51,615 $ 52,103 $ 52,252 $ 52,875 $ 53,074 2015 21,837 29,419 34,323 39,162 42,849 44,090 44,439 44,764 45,572 2016 19,660 29,402 34,612 41,193 43,435 44,944 47,432 48,048 2017 27,399 36,926 42,691 46,361 49,488 51,494 52,422 2018 30,597 42,296 48,050 54,913 59,118 62,253 2019 28,210 41,266 47,522 55,951 63,156 2020 34,729 46,193 52,646 58,754 2021 46,768 69,735 82,580 2022 57,641 86,664 2023 56,238 Total 608,761 All outstanding liabilities before 2014, net of reinsurance 521 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 201,748 -89- Index Workers’ Compensation At December 31, 2023 Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2014 $ 51,508 $ 51,553 $ 49,288 $ 48,537 $ 47,540 $ 47,693 $ 47,849 $ 47,620 $ 47,794 $ 47,623 $ 7 6 2015 53,332 49,615 45,991 44,986 43,006 42,597 42,225 42,043 41,875 141 6 2016 58,814 49,802 47,883 44,969 44,098 43,559 43,484 43,447 387 6 2017 60,450 56,351 52,687 51,464 49,557 48,802 48,668 753 6 2018 62,197 55,291 52,514 47,912 47,007 46,742 924 6 2019 60,998 59,624 57,728 56,480 55,893 1,003 7 2020 57,172 57,850 57,384 56,714 1,824 6 2021 67,035 65,530 64,225 3,550 7 2022 67,046 67,331 6,428 7 2023 62,401 21,881 5 Total $ 534,919 Workers’ Compensation Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Unaudited (in thousands) 2014 $ 13,932 $ 28,513 $ 36,284 $ 40,393 $ 42,465 $ 43,866 $ 44,403 $ 44,671 $ 45,314 $ 45,905 2015 13,071 27,531 34,192 36,929 37,936 38,596 39,096 39,478 39,762 2016 14,709 30,344 37,178 40,570 41,208 41,543 41,809 42,195 2017 15,581 31,990 39,684 42,954 44,242 45,174 45,935 2018 17,644 31,928 37,072 41,611 43,279 44,359 2019 16,939 33,009 41,740 47,121 50,079 2020 14,591 32,817 44,089 48,259 2021 20,931 42,633 51,781 2022 18,643 41,225 2023 17,546 Total 427,046 All outstanding liabilities before 2014, net of reinsurance 5,251 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 113,124 -90- Index The following table presents a reconciliation of the net incurred and paid claims development tables to the liability for claims and claims adjustment expenses in our consolidated balance sheet: At December 31, (in thousands) 2023 Net outstanding liabilities: Personal automobile $ 104,457 Homeowners 25,294 Commercial automobile 157,172 Commercial multi-peril 201,748 Workers ’ compensation 113,124 Other 34,916 636,711 Reinsurance recoverable: Personal automobile $ 98,157 Homeowners 15,325 Commercial automobile 94,517 Commercial multi-peril 118,979 Workers ’ compensation 84,766 Other 6,643 418,387 Unallocated loss adjustment expenses $ 71,059 Gross liability for unpaid losses and loss expenses $ 1,126,157 The following table presents supplementary information about average historical claims duration as of December 31, 2023: Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance Years 1 2 3 4 5 6 7 8 9 10 Personal automobile 65.6 % 16.9 % 8.5 % 4.2 % 2.2 % 0.9 % 0.5 % 0.1 % 0.4 % 0.3 % Homeowners 81.1 16.0 1.2 0.5 0.2 0.2 0.1 — 0.1 — Commercial automobile 42.3 18.1 14.4 11.9 6.2 3.7 1.4 0.4 — 0.1 Commercial multi-peril 44.3 17.6 9.8 10.3 6.6 3.4 2.1 0.8 1.5 0.4 Workers’ compensation 30.9 32.6 15.6 8.1 3.3 1.9 1.1 0.8 1.0 1.2 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, 2023, 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 Term SOFR rate plus 2.11 %. -91- Index Atlantic States is a member of the FHLB of Pittsburgh. Through its membership, Atlantic States has the ability to issue debt to the FHLB of Pittsburgh in exchange for cash advances. Atlantic States has a fixed-rate cash advance of $ 35.0 million that was outstanding at December 31, 2023. 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, 2023. FHLB stock purchased and owned as part of the agreement $ 1,591,800 Collateral pledged, at par (carrying value $ 42,729,397 ) 45,690,038 Borrowing capacity currently available 5,107,416 Subordinated Debentures In September 2021, upon receipt of approval from the Michigan Department of Insurance and Financial Services, MICO repaid in full the $ 5.0 million surplus note held previously by Donegal Mutual, along with accrued interest of $ 178,082 . 10 - Reinsurance Unaffiliated Reinsurers Our insurance subsidiaries and Donegal Mutual participate in a consolidated third-party reinsurance program, for which the coverage and parameters are common to all of our insurance subsidiaries and Donegal Mutual. The program utilizes several different reinsurers, all of which have an A.M. Best rating of A- (Excellent) or better or, with respect to foreign reinsurers, have a financial condition that, in the opinion of our management, is equivalent to a company with at least an A- rating from A.M. Best. The following information describes the external reinsurance Donegal Mutual and our insurance subsidiaries had in place for 2023: • excess of loss reinsurance, under which Donegal Mutual and our insurance subsidiaries recovered losses over a set retention of $ 3.0 million for all losses other than workers’ compensation and a retention of $ 2.0 million for workers’ compensation losses; and • catastrophe reinsurance, under which Donegal Mutual and our insurance subsidiaries recovered 100 % of an accumulation of many losses resulting from a single event, including natural disasters, over a set retention of $ 25.0 million up to aggregate losses of $ 175.0 million per occurrence. As many as 24 reinsurers provided coverage for 2023 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 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 $ 3.0 million up to aggregate losses of $ 22.0 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 $ 6.0 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. -92- Index The following amounts represent ceded reinsurance transactions with unaffiliated reinsurers during 2023, 2022 and 2021: 2023 2022 2021 Premiums written $ 43,030,879 $ 37,002,702 $ 38,173,733 Premiums earned 42,416,710 36,947,675 37,984,833 Losses and loss expenses 16,318,760 31,096,016 29,999,528 Prepaid reinsurance premiums 6,732,955 6,118,784 6,063,759 Liability for losses and loss expenses 116,717,187 149,628,406 138,909,584 Total Reinsurance The following amounts represent total ceded reinsurance transactions with both affiliated and unaffiliated reinsurers during 2023, 2022 and 2021: 2023 2022 2021 Premiums earned $ 388,073,427 $ 383,059,075 $ 399,284,886 Losses and loss expenses 275,171,587 249,037,288 282,083,985 Prepaid reinsurance premiums 168,724,466 160,591,399 176,935,842 Liability for losses and loss expenses 437,013,974 451,184,222 451,261,306 The following amounts represent the effect of reinsurance on premiums written for 2023, 2022 and 2021: 2023 2022 2021 Direct $ 702,227,408 $ 641,971,207 $ 609,204,706 Assumed 589,675,724 568,272,026 601,864,198 Ceded ( 396,206,492 ) ( 366,714,634 ) ( 406,802,395 ) Net premiums written $ 895,696,640 $ 843,528,599 $ 804,266,509 The following amounts represent the effect of reinsurance on premiums earned for 2023, 2022 and 2021: 2023 2022 2021 Direct $ 686,584,907 $ 627,331,528 $ 601,408,581 Assumed 583,559,906 578,216,997 573,891,506 Ceded ( 388,073,427 ) ( 383,059,075 ) ( 399,284,886 ) Net premiums earned $ 882,071,386 $ 822,489,450 $ 776,015,201 Percentage of assumed premiums earned to net premiums earned 66.2 % 70.3 % 74.0 % 11 - Income Taxes Our provision for income tax expense (benefit) for 2023, 2022 and 2021 consisted of the following: 2023 2022 2021 Current federal income tax $ 408,575 $ 1,280,041 $ 3,998,431 Deferred federal income tax 229,397 ( 2,958,735 ) 1,085,903 Income tax expense (benefit) $ 637,972 $ ( 1,678,694 ) $ 5,084,334 -93- Index Our effective tax rate is different from the amount computed at the statutory federal rate of 21 %. The reasons for such difference and the related tax effects are as follows: 2023 2022 2021 Income (loss) before income tax expense (benefit) $ 5,063,476 $ ( 3,638,099 ) $ 30,338,508 Tax at federal statutory rate 1,063,330 ( 764,001 ) 6,371,087 Tax-exempt interest ( 1,328,312 ) ( 1,446,102 ) ( 1,491,154 ) Proration 351,415 384,944 401,717 Dividends received deduction ( 77,348 ) ( 93,675 ) ( 115,713 ) Stock options 595,602 216,893 148,320 Additional tax paid for prior year 159,261 ( 6,071 ) ( 15,874 ) Other, net ( 125,976 ) 29,318 ( 214,049 ) Income tax expense (benefit) $ 637,972 $ ( 1,678,694 ) $ 5,084,334 The tax effects of temporary differences that give rise to significant portions of our deferred tax assets and deferred tax liabilities at December 31, 2023 and 2022 are as follows: 2023 2022 Deferred tax assets: Unearned premium $ 18,130,477 $ 17,560,126 Loss reserves 10,067,846 9,712,582 Net unrealized losses 8,743,238 11,088,307 Net state operating loss carryforward - DGI Parent 8,072,420 8,068,185 Other 1,492,635 1,472,110 Total gross deferred tax assets 46,506,616 47,901,310 Less valuation allowance ( 8,072,420 ) ( 8,068,185 ) Net deferred tax assets 38,434,196 39,833,125 Deferred tax liabilities: Deferred policy acquisition costs 15,759,115 15,365,749 Loss reserve transition adjustment 564,002 856,267 Other 2,578,554 2,008,092 Total gross deferred tax liabilities 18,901,671 18,230,108 Net deferred tax asset $ 19,532,525 $ 21,603,017 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, 2023 and 2022, we established a valuation allowance of $ 8.1 million for our net state operating loss carryforward, which will expire between 2024 and 2043 . We determined that we were not required to establish a valuation allowance for the other net deferred tax assets of $ 38.4 million and $ 39.8 million at December 31, 2023 and 2022, 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. We are no longer subject to income tax examinations for tax years prior to 2016. In 2019, the Internal Revenue Service (“IRS”) began a federal income tax audit of our consolidated tax returns for tax years 2016 to 2018. No material issues have been raised and no adjustments have been proposed as a result of this ongoing audit. -94- Index 12 - Stockholders’ Equity Each share of our Class A common stock outstanding at the time of the declaration of any dividend or other distribution payable in cash upon the shares of our Class B common stock is entitled to a dividend or distribution payable at the same time and to stockholders of record on the same date in an amount at least 10 % greater than any dividend declared upon each share of our Class B common stock. In the event of our merger or consolidation with or into another entity, the holders of our Class A common stock and the holders of our Class B common stock are entitled to receive the same per share consideration in such merger or consolidation. In the event of our liquidation, dissolution or winding-up, any assets available to common stockholders will be distributed pro-rata to the holders of our Class A common stock and our Class B common stock after payment of all of our obligations. On July 18, 2013, our board of directors authorized a share repurchase program pursuant to which we have the authority to purchase up to 500,000 additional shares of our Class A common stock at prices prevailing from time to time in the open market subject to the provisions of the SEC Rule 10b-18 and in privately negotiated transactions. We did no t purchase any shares of our Class A common stock under this program during 2023, 2022 or 2021. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through December 31, 2023. At December 31, 2023 and 2022, our treasury stock consisted of 3,002,588 and 72,465 shares of Class A common stock and Class B common stock, respectively. 13 - Stock Compensation Plans Equity Incentive Plans Since 1996, we have maintained an Equity Incentive Plan for Employees. During 2019, we adopted a plan that made a total of 4,500,000 shares of Class A common stock available for issuance to employees of our subsidiaries and affiliates. The plan provides for the granting of awards by our board of directors in the form of stock options, stock appreciation rights, restricted stock or any combination of the above. The plan provides that stock options may become exercisable up to five years from their date of grant, with an option price not less than fair market value on the date preceding the date of grant. We have not granted any stock appreciation rights. Since 1996, we have maintained an Equity Incentive Plan for Directors. During 2019, we adopted a plan that made 500,000 shares of Class A common stock available for issuance to our directors and the directors of our subsidiaries and affiliates. We may make awards in the form of stock options. The plan also provides for the issuance of 500 shares of restricted stock on the first business day of January in each year to each of our directors and each director of Donegal Mutual who does not serve as one of our directors. We issued 8,500 shares of restricted stock on January 3, 2023 under our director plan. 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. No further shares are available for future option grants for plans in effect prior to 2019. We measure all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and record such expense in our results of operations. In determining the expense we record for stock options granted to directors and employees of our subsidiaries and affiliates, we estimate the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The significant assumptions we utilize in applying the Black-Scholes option pricing model are the risk-free interest rate, expected term, dividend yield and expected volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected term used as the assumption in the model. We base the expected term of an option award on our historical experience for similar awards. We determine the dividend yield by dividing the per share dividend by the grant date stock price. We base the expected volatility on the volatility of our stock price over a historical period comparable to the expected term. -95- Index The weighted-average grant date fair value of options we granted during 2023 was $ 1.51 . We calculated this fair value based upon a risk-free interest rate of 4.12 %, an expected life of three years , an expected volatility of 20 % and an expected dividend yield of 5 %. 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 %. We charged compensation expense for our stock compensation plans against income before income taxes of $ 876,569 , $ 818,853 and $ 965,701 for the years ended December 31, 2023, 2022 and 2021, respectively, with a corresponding income tax benefit of $ 184,079 , $ 171,959 and $ 202,797 . At December 31, 2023 and 2022, our total unrecognized compensation cost related to non-vested share-based compensation granted under our stock compensation plans was $ 1.9 million and $ 1.7 million, respectively. We expect to recognize this cost over a weighted average period of 2.0 years. During 2023, we received cash from option exercises under all stock compensation plans of $ 6.8 million. We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of $ 139,135 for 2023. 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. -96- Index Information regarding activity in our stock option plans follows: Number of Options Weighted-Average Exercise Price Per Share Outstanding at December 31, 2020 9,694,352 $ 15.24 Granted - 2021 906,500 14.39 Exercised - 2021 ( 946,646 ) 13.00 Forfeited - 2021 ( 404,664 ) 15.69 Expired - 2021 ( 1,139,816 ) 16.40 Outstanding at December 31, 2021 8,109,726 15.22 Granted - 2022 956,600 14.08 Exercised - 2022 ( 1,202,806 ) 14.50 Forfeited - 2022 ( 545,618 ) 15.35 Expired - 2022 ( 935,723 ) 16.81 Outstanding at December 31, 2022 6,382,179 14.94 Granted - 2023 959,200 13.87 Exercised - 2023 ( 493,866 ) 13.79 Forfeited - 2023 ( 379,288 ) 15.29 Expired - 2023 ( 1,415,897 ) 15.81 Outstanding at December 31, 2023 5,052,328 $ 14.58 Exercisable at: December 31, 2021 6,297,849 $ 15.43 December 31, 2022 4,627,630 $ 15.21 December 31, 2023 3,234,327 $ 14.90 Shares available for future option grants at December 31, 2023 totaled 569,540 shares under all plans. The following table summarizes information about stock options outstanding at December 31, 2023: Grant Date Exercise Price Number of Options Outstanding Weighted-Average Remaining Contractual Life Number of Options Exercisable December 18, 2014 $ 15.80 883,839 1.0 years 883,839 December 19, 2019 14.98 819,765 1.0 years 819,765 December 17, 2020 14.43 701,024 2.0 years 701,024 January 4, 2021 14.07 10,000 2.0 years 10,000 December 16, 2021 14.39 764,500 3.0 years 509,666 February 9, 2022 14.15 2,000 3.1 years 2,000 April 18, 2022 13.28 10,000 3.3 years 6,667 December 15, 2022 14.09 904,100 4.0 years 301,366 December 21, 2023 13.87 957,100 5.0 years — Total 5,052,328 3,234,327 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). -97- Index A summary of plan activity follows: Shares Issued Price Shares January 1, 2021 $ 11.96 23,336 July 1, 2021 11.88 24,619 January 1, 2022 12.15 24,907 July 1, 2022 11.56 23,454 January 1, 2023 12.07 26,545 July 1, 2023 12.27 28,912 On January 1, 2024, we issued 29,787 shares at a price of $ 11.89 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 2023, 2022 and 2021, we issued 86,469 , 104,393 and 99,828 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: -98- Index 2023 2022 2021 Atlantic States: Statutory capital and surplus $ 273,626,140 $ 263,579,356 $ 278,883,189 Statutory unassigned surplus 167,301,333 158,056,862 174,073,348 Statutory net income (loss) 7,193,716 ( 3,124,687 ) ( 7,417,845 ) MICO: Statutory capital and surplus 71,608,571 75,441,871 75,197,207 Statutory unassigned surplus 49,582,271 53,422,483 53,201,571 Statutory net income (loss) 3,298,940 ( 233,391 ) 7,704,417 Peninsula: Statutory capital and surplus 50,398,403 52,234,684 47,867,789 Statutory unassigned surplus 32,089,203 33,925,484 29,558,589 Statutory net income 4,121,754 4,192,697 3,536,404 Southern: Statutory capital and surplus 68,041,175 64,463,124 64,238,221 Statutory unassigned surplus ( 8,907,602 ) 7,523,951 7,330,382 Statutory net (loss) income ( 16,927,267 ) ( 410,561 ) 6,927,576 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, 2023 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 2024 are approximately $ 27.4 million from Atlantic States, $ 7.2 million from MICO and $ 5.0 million from Peninsula, or a total of approximately $ 39.6 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 (loss) income and capital and surplus, as determined using SAP, to the net income (loss) and stockholders’ equity amounts included in the accompanying consolidated financial statements are as follows: Year Ended December 31, 2023 2022 2021 Statutory net (loss) income of insurance subsidiaries $ ( 2,312,857 ) $ 424,058 $ 10,750,552 Increases (decreases): Deferred policy acquisition costs 1,873,174 5,141,857 8,871,415 Deferred federal income taxes ( 229,397 ) 2,958,735 ( 1,085,903 ) Salvage and subrogation recoverable 3,644,800 5,195,800 2,551,800 Consolidating eliminations and adjustments ( 10,574,579 ) ( 14,791,466 ) ( 18,769 ) Parent-only net income (loss) 12,024,363 ( 888,389 ) 4,185,079 Net income (loss) $ 4,425,504 $ ( 1,959,405 ) $ 25,254,174 -99- Index December 31, 2023 2022 2021 Statutory capital and surplus of insurance subsidiaries $ 463,674,289 $ 455,719,035 $ 466,186,406 Increases (decreases): Deferred policy acquisition costs 75,043,404 73,170,230 68,028,373 Deferred federal income taxes ( 13,072,768 ) ( 23,794,084 ) ( 21,294,388 ) Salvage and subrogation recoverable 32,351,000 28,706,200 23,510,400 Non-admitted assets and other adjustments, net 1,328,142 712,623 929,862 Fixed maturities ( 41,036,366 ) ( 49,367,986 ) 5,958,434 Parent-only equity and other adjustments ( 38,542,347 ) ( 1,553,006 ) ( 12,283,000 ) Stockholders’ equity $ 479,745,354 $ 483,593,012 $ 531,036,087 16 - Supplementary Cash Flow Information The following table reflects net income taxes and interest we paid during 2023, 2022 and 2021: 2023 2022 2021 Income taxes $ — $ 4,500,000 $ 6,200,000 Interest 618,519 623,947 1,150,211 -100- Index 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) 2023 2022 2021 Basic earnings (loss) per share: Numerator: Allocation of net income (loss) $ 3,788 $ ( 1,571 ) $ 21,131 Denominator: Weighted-average shares outstanding 27,469 26,409 25,388 Basic earnings (loss) per share $ 0.14 $ ( 0.06 ) $ 0.83 Diluted earnings (loss) per share: Numerator: Allocation of net income (loss) $ 3,788 $ ( 1,571 ) $ 21,131 Denominator: Number of shares used in basic computation 27,469 26,409 25,388 Weighted-average effect of dilutive securities Add: Director and employee stock options 94 — 146 Number of shares used in per share computations 27,563 26,409 25,534 Diluted earnings (loss) per share $ 0.14 $ ( 0.06 ) $ 0.83 We used the following information in the basic and diluted per share computations for our Class B common stock: Year Ended December 31, (in thousands) 2023 2022 2021 Basic and diluted earnings (loss) per share: Numerator: Allocation of net income (loss) $ 638 $ ( 388 ) $ 4,123 Denominator: Weighted-average shares outstanding 5,577 5,577 5,577 Basic and diluted earnings (loss) per share $ 0.11 $ ( 0.07 ) $ 0.74 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. -101- Index 18 - Condensed Financial Information of Parent Company Condensed Balance Sheets (in thousands) December 31, 2023 2022 Assets Investment in subsidiaries/affiliates (equity method) $ 506,855 $ 509,513 Short-term investments 1,469 7,325 Cash 8,043 3,288 Property and equipment 504 586 Other 4,866 4,589 Total assets $ 521,737 $ 525,301 Liabilities and Stockholders’ Equity Liabilities Cash dividends declared to stockholders $ 5,570 $ 5,297 Notes payable to subsidiary 35,000 35,000 Other 1,422 1,411 Total liabilities 41,992 41,708 Stockholders’ equity 479,745 483,593 Total liabilities and stockholders’ equity $ 521,737 $ 525,301 Condensed Statements of Income (Loss) and Comprehensive Income (Loss) (in thousands) Year Ended December 31, 2023 2022 2021 Statements of Income (Loss) Revenues Dividends from subsidiaries $ 13,000 $ — $ 5,000 Other 638 526 481 Total revenues 13,638 526 5,481 Expenses Operating expenses 1,202 1,245 1,223 Interest 787 787 787 Total expenses 1,989 2,032 2,010 Income (loss) before income tax benefit and equity in undistributed net (loss) income of subsidiaries 11,649 ( 1,506 ) 3,471 Income tax benefit ( 375 ) ( 618 ) ( 714 ) Income (loss) before equity in undistributed net (loss) income of subsidiaries 12,024 ( 888 ) 4,185 Equity in undistributed net (loss) income of subsidiaries ( 7,598 ) ( 1,071 ) 21,069 Net income (loss) $ 4,426 $ ( 1,959 ) $ 25,254 Statements of Comprehensive Income (Loss) Net income (loss) $ 4,426 $ ( 1,959 ) $ 25,254 Other comprehensive income (loss), net of tax Unrealized gain (loss) - subsidiaries 6,018 ( 44,988 ) ( 7,847 ) Other comprehensive income (loss), net of tax 6,018 ( 44,988 ) ( 7,847 ) Comprehensive income (loss) $ 10,444 $ ( 46,947 ) $ 17,407 -102- Index Condensed Statements of Cash Flows (in thousands) Year Ended December 31, 2023 2022 2021 Cash flows from operating activities: Net income (loss) $ 4,426 $ ( 1,959 ) $ 25,254 Adjustments: Equity in undistributed net loss (income) of subsidiaries 7,598 1,071 ( 21,069 ) Other ( 168 ) ( 1,972 ) ( 536 ) Net adjustments 7,430 ( 901 ) ( 21,605 ) Net cash provided (used) 11,856 ( 2,860 ) 3,649 Cash flows from investing activities: Net sale (purchases) of short-term investments 5,856 ( 7,316 ) — Net purchase of property and equipment ( 45 ) — ( 13 ) Investment in subsidiaries ( 819 ) ( 768 ) ( 916 ) Other 30 ( 28 ) — Net cash received (used) 5,022 ( 8,112 ) ( 929 ) Cash flows from financing activities: Cash dividends paid ( 21,894 ) ( 20,503 ) ( 19,099 ) Issuance of common stock 9,771 20,388 15,433 Net cash used ( 12,123 ) ( 115 ) ( 3,666 ) Net change in cash 4,755 ( 11,087 ) ( 946 ) Cash at beginning of year 3,288 14,375 15,321 Cash at end of year $ 8,043 $ 3,288 $ 14,375 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. -103- Index Financial data by segment is as follows: 2023 2022 2021 (in thousands) Revenues: Premiums earned: Commercial lines $ 533,029 $ 521,227 $ 478,966 Personal lines 349,042 301,263 297,049 GAAP premiums earned 882,071 822,490 776,015 Net investment income 40,853 34,016 31,126 Investment gains (losses) 3,173 ( 10,185 ) 6,477 Other 1,241 1,900 2,848 Total revenues $ 927,338 $ 848,221 $ 816,466 2023 2022 2021 (in thousands) Income (loss) before income taxes: Underwriting (loss) income: Commercial lines $ ( 6,998 ) $ ( 22,665 ) $ ( 35,174 ) Personal lines ( 35,118 ) ( 13,506 ) 17,235 SAP underwriting loss ( 42,116 ) ( 36,171 ) ( 17,939 ) GAAP adjustments 3,735 8,667 9,945 GAAP underwriting loss ( 38,381 ) ( 27,504 ) ( 7,994 ) Net investment income 40,853 34,016 31,126 Investment gains (losses) 3,173 ( 10,185 ) 6,477 Other ( 582 ) 35 730 Income (loss) before income taxes $ 5,063 $ ( 3,638 ) $ 30,339 20 - Guaranty Fund and Other Insurance-Related Assessments Our insurance subsidiaries’ liabilities for guaranty fund and other insurance-related assessments were $ 1.9 million at December 31, 2023 and 2022. These liabilities included $ 702,261 and $ 663,883 related to surcharges collected by our insurance subsidiaries on behalf of regulatory authorities for 2023 and 2022, respectively. 21 - Allowance for Expected Credit Losses Pursuant to new accounting guidance we adopted on January 1, 2023, we make estimates with respect to the potential impairment of financial instruments and recognize expected credit losses as an allowance rather than impairments as credit losses are incurred. We refer to Note 2 - Impact of New Accounting Standards for more information regarding the new accounting guidance. We have established allowances for expected credit losses with respect to held-to-maturity debt securities and reinsurance recoverable. Held-to-Maturity Debt Securities For held-to-maturity debt securities, we make estimates concerning expected credit losses at an aggregated level rather that monitoring individual debt securities for credit losses. We establish an allowance for expected credit losses based on an ongoing review of securities held, historical loss data, changes in issuer credit standing and other relevant factors. We utilize a probability-of-default methodology, which reflects current and forecasted economic conditions, to estimate the allowance for expected credit losses and recognize changes to the allowance in our results of operations. -104- Index The following table presents the balances for fixed maturities classified as held-to-maturity, net of the allowance for expected credit losses, at December 31, 2023, the cumulative effect of our adoption of the updated accounting guidance for credit losses on January 1, 2023 and changes in the allowance for expected credit losses for 2023. At and For the Year Ended December 31, 2023 Held-to-Maturity, Net of Allowance for Expected Credit Losses Allowance for Expected Credit Losses (in thousands) Balance at beginning of period $ 688,439 $ — Cumulative effect of adoption of updated accounting guidance for credit losses 1,268 Current period change for expected credit losses 58 Balance at end of period $ 679,497 $ 1,326 Reinsurance Receivable For reinsurance receivable, we establish an allowance for expected credit losses based upon our ongoing review of amounts outstanding, historical loss data, changes in reinsurer credit standing and other relevant factors. We utilize a probability-of-default methodology, which reflects current and forecasted economic conditions, to estimate the allowance for expected credit losses and recognize changes to the allowance in our results of operations. The following table presents the balances for reinsurance receivable, net of the allowance for expected credit losses, at December 31, 2023, the cumulative effect of our adoption of the updated accounting guidance for credit losses on January 1, 2023 and the changes in the allowance for expected credit losses for 2023. At and For the Year Ended December 31, 2023 Reinsurance Receivable, Net of Allowance for Expected Credit Losses Allowance for Expected Credit Losses (in thousands) Balance at beginning of period $ 456,522 $ — Cumulative effect of adoption of updated accounting guidance for credit losses 1,132 Current period change for expected credit losses 262 Balance at end of period $ 441,431 $ 1,394 -105- Index Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of Donegal Group Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Donegal Group Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, 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, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Estimate of Liabilities for Losses and Loss Expenses As discussed in Notes 1 and 8 to the consolidated financial statements, the Company estimates the liabilities for losses and loss expenses (reserves) through an internal reserve analysis that relies upon generally accepted actuarial practices. The Company develops reserve estimates by line of business and, as experience emerges and other information develops, the reserve estimates are assessed in aggregate and adjusted as necessary. As of December 31, 2023, the Company recorded a liability of $1.126 billion for reserves. -106- Index We identified the evaluation of the estimate of reserves as a critical audit matter. The evaluation of the Company’s estimate of reserves involved a high degree of auditor judgment due to the inherent uncertainties in the use of actuarial methods and assumptions, which considered internal and external factors. Assumptions included the selection of loss development factors, a priori ratios, and the weighting of actuarial methods when more than one was used. Evaluating the actuarial methods and assumptions required specialized skills and auditor judgment. The following are the primary procedures we performed to address this critical audit matter. We evaluated, with the involvement of actuarial professionals, when appropriate, the design and tested the operating effectiveness of certain internal controls related to the Company’s reserving process. These included controls related to the Company’s actuarial analyses and determination of the Company’s estimate of recorded reserves. We involved actuarial professionals with specialized skills and knowledge, who assisted in: • evaluating the Company’s actuarial methods by comparing them to generally accepted actuarial practices • developing an independent estimate of reserves for certain lines of business using methods consistent with generally accepted actuarial practices by independently forming assumptions of loss development factors, a priori ratios, and the weighting of actuarial methods when more than one was used, considering internal and external factors • assessing the Company’s internal actuarial analysis for certain lines of business by reviewing the assumptions and actuarial methods used, which included the selection of loss development factors, a priori ratios, and the weighting of actuarial methods when more than one was used, considering internal and external factors • developing a range of reserves and comparing to the Company’s recorded reserves and assessing movement of the Company’s recorded reserves within that range. We or our predecessor firms have served as the Company’s auditor since 1986. Philadelphia, Pennsylvania March 6, 2024 -107- Index Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.