DONEGAL GROUP INC 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Donegal Mutual Insurance Company (“Donegal Mutual”) organized us as an insurance holding company on August 26, 1986. See “Business - History and Organizational Structure” for more information. Our insurance subsidiaries are Atlantic States Insurance Company (“Atlantic States”), Michigan Insurance Company (“MICO”), The Peninsula Insurance Company and its wholly owned subsidiary, Peninsula Indemnity Company (collectively, “Peninsula”), 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, Midwest, Southern and Southwestern states. The commercial lines products of our insurance subsidiaries consist primarily of commercial automobile, commercial multi-peril and workers’ compensation policies. The personal lines products of our insurance subsidiaries consist primarily of homeowners and private passenger automobile policies. At December 31, 2024, 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 70% of the combined voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock. Donegal Mutual and Atlantic States have participated in a proportional reinsurance agreement, or pooling agreement, since 1986. Under the pooling agreement, Donegal Mutual and Atlantic States contribute substantially all of their respective premiums, losses and loss expenses to the underwriting pool, and the underwriting pool, acting through Donegal Mutual, then allocates 80% of the pooled business to Atlantic States. Thus, Donegal Mutual and Atlantic States share the underwriting results of the pooled business in proportion to their respective participation in the underwriting pool. The operations of our insurance subsidiaries and Donegal Mutual are interrelated due to the pooling agreement and other factors. While maintaining the separate corporate existence of each company, our insurance subsidiaries conduct business together with Donegal Mutual and its insurance subsidiaries as the Donegal Insurance Group. The Donegal Insurance Group is not a legal entity, is not an insurance company and does not issue or administer insurance policies. Rather, it is a trade name that refers to the group of insurance companies that are affiliated with Donegal Mutual. See “Business - Relationship with Donegal Mutual” for more information regarding the pooling agreement and other transactions with our affiliates. Donegal Mutual and our insurance subsidiaries operate together as the Donegal Insurance Group and share a combined business plan designed to achieve market penetration and underwriting profitability objectives. The products our insurance subsidiaries and Donegal Mutual offer are generally complementary, thereby allowing Donegal Insurance Group to offer a broader range of products to a given market and to expand Donegal Insurance Group’s ability to service an entire personal lines or commercial lines account. Distinctions within the products of Donegal Mutual and our insurance subsidiaries generally allow the individual companies to manage certain risk segments through variations in coverage, terms and pricing. Therefore, the underwriting profitability of the business the individual companies write directly will vary. However, because the pool homogenizes the risk characteristics of the predominant percentage of the business Donegal Mutual and Atlantic States write directly and each company shares the underwriting results according to each company’s participation percentage, each company realizes its percentage share of the underwriting results of the pool. In July 2013, our board of directors authorized a share repurchase program pursuant to which we have the authority to purchase up to 500,000 additional shares of our Class A common stock at prices prevailing from time to time in the open market subject to the provisions of the SEC Rule 10b-18 and in privately negotiated transactions. We did not purchase any shares of our Class A common stock under this program during 2024 or 2023. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through December 31, 2024. On April 29, 2022, Donegal Mutual disclosed that it will, at its discretion, purchase shares of our Class A common stock and our Class B common stock at market prices prevailing from time to time in the open market subject to the provisions of SEC Rule 10b-18 and in privately negotiated transactions. Such disclosure did not stipulate a maximum number of shares that may be purchased under this program. Donegal Mutual purchased 1,057,282 and 516,620 shares of our Class A common stock during 2024 and 2023, respectively. Donegal Mutual did not purchase any shares of our Class B common stock during 2024 or 2023. -44- Index Critical Accounting Policies and Estimates We combine our financial statements with those of our insurance subsidiaries and present them on a consolidated basis in accordance with GAAP. Our insurance subsidiaries make estimates and assumptions that can have a significant effect on amounts and disclosures we report in our financial statements. The most significant estimates relate to the reserves of our insurance subsidiaries for property and casualty insurance unpaid losses and loss expenses. While we believe our estimates and the estimates of our insurance subsidiaries are appropriate, the ultimate amounts may differ from the estimates we provided. We regularly review our methods for making these estimates, and we reflect any adjustment we consider necessary in our results of operations for the period in which we make an adjustment. Liability for Losses and Loss Expenses Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with respect to incurred policyholder claims based on facts and circumstances the insurer knows at that point in time. For example, legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries to pay losses for damages that their policies explicitly excluded or did not intend to cover. At the time of establishing its estimates, an insurer recognizes that its ultimate liability for losses and loss expenses will exceed or be less than such estimates. Our insurance subsidiaries base their estimates of liabilities for losses and loss expenses on assumptions as to future loss trends, expected claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, our insurance subsidiaries may learn additional facts regarding individual claims, and, consequently, it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates for these liabilities. We reflect any adjustments to the liabilities for losses and loss expenses of our insurance subsidiaries in our consolidated results of operations in the period in which our insurance subsidiaries make adjustments to their estimates. Our insurance subsidiaries maintain liabilities for the payment of losses and loss expenses with respect to both reported and unreported claims. Our insurance subsidiaries establish these liabilities for the purpose of covering the ultimate costs of settling all losses, including investigation and litigation costs. Our insurance subsidiaries base the amount of their liability for reported losses primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss the policyholder incurred. Our insurance subsidiaries determine the amount of their liability for unreported claims and loss expenses on the basis of historical information by line of insurance. Our insurance subsidiaries account for inflation in the reserving function through analysis of costs and trends and reviews of historical reserving results. Our insurance subsidiaries monitor their liabilities closely and recompute them periodically using new information on reported claims and a variety of statistical techniques. Our insurance subsidiaries do not discount their liabilities for losses and loss expenses. -45- Index Reserve estimates can change over time because of unexpected changes in assumptions related to our insurance subsidiaries’ external environment and, to a lesser extent, assumptions related to our insurance subsidiaries’ internal operations. For example, our insurance subsidiaries have experienced an increase in claims severity and a lengthening of the claim settlement periods on bodily injury claims during the past several years. In addition, the COVID-19 pandemic and related government mandates and restrictions resulted in various changes from historical claims reporting and settlement trends during 2020 and resulted in significant increases in loss costs in subsequent years due to a number of factors, including supply chain disruption, higher new and used automobile values, increases in the cost of replacement automobile parts and rising labor rates. These trend changes 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 and cost of skilled labor, the rate of specialized plaintiff attorney involvement in claims, plaintiff attorney utilization of litigation financing and the cost of medical technologies and procedures. Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at December 31, 2024. For every 1% change in our insurance subsidiaries’ loss and loss expense reserves, net of reinsurance recoverable, the effect on our pre-tax results of operations would be approximately $7.0 million. The establishment of appropriate liabilities is an inherently uncertain process and we can provide no assurance that our insurance subsidiaries’ ultimate liability will not exceed our insurance subsidiaries’ loss and loss expense reserves and have an adverse effect on our results of operations and financial condition. Furthermore, we cannot predict the timing, frequency and extent of adjustments to our insurance subsidiaries’ estimated future liabilities, because the historical conditions and events that serve as a basis for our insurance subsidiaries’ estimates of ultimate claim costs may change. As is the case for substantially all property and casualty insurance companies, our insurance subsidiaries have found it necessary in the past to increase their estimated future liabilities for losses and loss expenses in certain periods and, in other periods, their estimated future liabilities for losses and loss expenses have exceeded their actual liabilities for losses and loss expenses. Changes in our insurance subsidiaries’ estimates of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received subsequent to the prior reporting period. Our insurance subsidiaries recognized a decrease in their liability for losses and loss expenses of prior years of $15.0 million, $16.7 million and $44.8 million in 2024, 2023 and 2022, 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 2024 development represented 2.2% of the December 31, 2023 net carried reserves and resulted primarily from lower-than-expected loss emergence in the commercial multi-peril, personal automobile and homeowner lines of business, offset partially by higher-than-expected loss emergence in the workers’ compensation and commercial automobile lines of business, for accident years prior to 2024. The majority of the 2024 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO. 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. Excluding the impact of severe weather events and the COVID-19 pandemic, our insurance subsidiaries have noted stable amounts in the number of claims incurred and the number of claims outstanding at period ends relative to their premium base in recent years across most of their lines of business. However, the amount of the average claim outstanding has increased gradually over the past several years due to various factors such as increased property and automobile repair and replacement costs, rising medical loss costs and increased litigation trends and lengthening of repair completion times for property and automobile claims. We have also experienced a general slowing of settlement rates in litigated claims. Our insurance subsidiaries could have to make further adjustments to their estimates in the future. However, on the basis of our insurance subsidiaries’ internal procedures, which analyze, among other things, their prior assumptions, their experience with similar cases and historical trends such as reserving patterns, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes, we believe that our insurance subsidiaries have made adequate provision for their liability for losses and loss expenses. -46- Index Atlantic States’ participation in the underwriting pool with Donegal Mutual exposes Atlantic States to adverse loss development on the business that Donegal Mutual contributes to the underwriting pool. However, pooled business represents the predominant percentage of the net underwriting activity of both companies, and Donegal Mutual and Atlantic States share proportionately any adverse risk development relating to the pooled business. The business in the underwriting pool is homogeneous and each company has a pro-rata share of the entire underwriting pool. Since the predominant percentage of the business of Atlantic States and Donegal Mutual is pooled and the results shared by each company according to its participation level under the terms of the pooling agreement, the intent of the underwriting pool is to produce a more uniform and stable underwriting result from year to year for each company than either would experience individually and to spread the risk of loss between the companies. -47- Index Our insurance subsidiaries’ liability for losses and loss expenses by major line of business at December 31, 2024 and 2023 consisted of the following: 2024 2023 (in thousands) Commercial lines: Automobile $ 180,757 $ 168,749 Workers’ compensation 129,406 122,473 Commercial multi-peril 208,676 217,292 Other 39,336 27,167 Total commercial lines 558,175 535,681 Personal lines: Automobile 116,693 112,509 Homeowners 26,591 28,001 Other 2,905 12,952 Total personal lines 146,189 153,462 Total commercial and personal lines 704,364 689,143 Plus reinsurance recoverable 416,621 437,014 Total liability for losses and loss expenses $ 1,120,985 $ 1,126,157 We have evaluated the effect on our insurance subsidiaries’ loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables we consider in establishing loss and loss expense reserves. We established the range of reasonably likely changes based on a review of changes in accident year development by line of business and applied it to our insurance subsidiaries’ loss reserves as a whole. The selected range does not necessarily indicate what could be the potential best or worst case or the most-likely scenario. The following table sets forth the effect on our insurance subsidiaries’ loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables considered in establishing loss and loss expense reserves: Change in Loss and Loss Expense Reserves Net of Reinsurance Adjusted Loss and Loss Expense Reserves Net of Reinsurance at December 31, 2024 Percentage Change in Equity at December 31, 2024(1) Adjusted Loss and Loss Expense Reserves Net of Reinsurance at December 31, 2023 Percentage Change in Equity at December 31, 2023(1) (dollars in thousands) -10.0% $633,928 10.2% $620,229 11.3% -7.5 651,537 7.6 637,457 8.5 -5.0 669,146 5.1 654,686 5.7 -2.5 686,755 2.5 671,914 2.8 Base 704,364 — 689,143 — 2.5 721,973 -2.5 706,372 -2.8 5.0 739,582 -5.1 723,600 -5.7 7.5 757,191 -7.6 740,829 -8.5 10.0 774,800 -10.2 758,057 -11.3 (1) Net of income tax effect. -48- Index Our insurance subsidiaries base their reserves for unpaid losses and loss expenses on current trends in loss and loss expense development and reflect their best estimates for future amounts needed to pay losses and loss expenses with respect to incurred events currently known to them plus incurred but not reported (“IBNR”) claims. Our insurance subsidiaries develop their reserve estimates based on an assessment of known facts and circumstances, review of historical loss settlement patterns, estimates of trends in claims severity, frequency, legal and regulatory changes and other assumptions. Our insurance subsidiaries consistently apply actuarial loss reserving techniques and assumptions, which rely on historical information as adjusted to reflect current conditions, including consideration of recent case reserve activity. Our insurance subsidiaries use the point estimate their actuaries select. For the year ended December 31, 2024, the actuaries developed a range from a low of $672.1 million to a high of $740.4 million and selected a point estimate of $704.4 million. The actuaries’ range of estimates for commercial lines in 2024 was $533.0 million to $587.5 million, and the actuaries selected a point estimate of $558.2 million. The actuaries’ range of estimates for personal lines in 2024 was $139.1 million to $153.0 million, and the actuaries selected a point estimate of $146.2 million. For the year ended December 31, 2023, the actuaries developed a range from a low of $651.1 million to a high of $728.7 million and selected a point estimate of $689.1 million. The actuaries’ range of estimates for commercial lines in 2023 was $507.2 million to $565.4 million, and the actuaries selected a point estimate of $535.7 million. The actuaries’ range of estimates for personal lines in 2023 was $144.0 million to $163.3 million, and the actuaries selected a point estimate of $153.5 million. Our insurance subsidiaries seek to enhance their underwriting results by carefully selecting the product lines they underwrite. For personal lines products, our insurance subsidiaries insure standard and preferred risks in private passenger automobile and homeowners lines. For commercial lines products, the commercial risks that our insurance subsidiaries primarily insure are business offices, wholesalers, service providers, contractors, artisans and light manufacturing operations. Our insurance subsidiaries have limited exposure to asbestos and other environmental liabilities. Through the consistent application of this disciplined underwriting philosophy, our insurance subsidiaries have avoided many of the “long-tail” issues other insurance companies have faced. We consider workers’ compensation to be a “long-tail” line of business, in that workers’ compensation claims tend to be settled over a longer time frame than those in the other lines of business of our insurance subsidiaries. The following table presents 2024 and 2023 claim count and payment amount information for workers’ compensation. Workers’ compensation losses primarily consist of indemnity and medical costs for injured workers. For the Year Ended December 31, (dollars in thousands) 2024 2023 Number of claims pending, beginning of period 3,144 3,366 Number of claims reported 5,066 5,928 Number of claims settled or dismissed 5,378 6,150 Number of claims pending, end of period 2,832 3,144 Losses paid $ 54,597 $ 54,336 Loss expenses paid $ 10,953 $ 12,292 Management Evaluation of Operating Results Despite challenging insurance market conditions and increasing property and casualty loss severity trends that affected our results in recent years, we believe that our focused business strategy, including our insurance subsidiaries’ ongoing implementation of premium rate increases and refinements to their underwriting practices, have positioned us well for 2025 and beyond. Because our insurance subsidiaries do not prepare GAAP financial statements, we evaluate the performance of our commercial lines and personal lines segments utilizing statutory accounting practices (“SAP”), which include financial measures that reflect the growth trends and underwriting results of our insurance subsidiaries. -49- Index We use the following financial data to monitor and evaluate our operating results: Year Ended December 31, (in thousands) 2024 2023 2022 Net premiums written: Commercial lines: Automobile $ 184,989 $ 174,741 $ 167,774 Workers’ compensation 103,533 107,598 111,892 Commercial multi-peril 213,959 195,632 200,045 Other 45,439 50,458 51,135 Total commercial lines 547,920 528,429 530,846 Personal lines: Automobile 243,036 215,957 181,129 Homeowners 140,613 139,688 120,087 Other 10,712 11,623 11,468 Total personal lines 394,361 367,268 312,684 Total net premiums written $ 942,281 $ 895,697 $ 843,530 Components of combined ratio: Loss ratio 64.5 % 69.1 % 68.6 % Expense ratio 33.7 34.7 34.1 Dividend ratio 0.4 0.6 0.6 Combined ratio 98.6 % 104.4 % 103.3 % Revenues: Net premiums earned: Commercial lines $ 539,683 $ 533,029 $ 521,227 Personal lines 396,968 349,042 301,263 Total net premiums earned 936,651 882,071 822,490 Net investment income 44,918 40,853 34,016 Investment gains (losses) 4,981 3,173 (10,185 ) Other 3,055 1,241 1,900 Total revenues $ 989,605 $ 927,338 $ 848,221 Year Ended December 31, (in thousands) 2024 2023 2022 Components of net income (loss): Underwriting income (loss): Commercial lines $ 5,826 $ (6,998 ) $ (22,665 ) Personal lines 5,739 (35,118 ) (13,506 ) SAP underwriting income (loss) 11,565 (42,116 ) (36,171 ) GAAP adjustments 1,331 3,735 8,667 GAAP underwriting income (loss) 12,896 (38,381 ) (27,504 ) Net investment income 44,918 40,853 34,016 Investment gains (losses) 4,981 3,173 (10,185 ) Other (456 ) (582 ) 35 Income (loss) before income tax expense (benefit) 62,339 5,063 (3,638 ) Income tax expense (benefit) 11,477 637 (1,679 ) Net income (loss) $ 50,862 $ 4,426 $ (1,959 ) -50- Index Non-GAAP Information We prepare our consolidated financial statements on the basis of GAAP. Our insurance subsidiaries prepare financial statements based on SAP. SAP financial measures are considered non-GAAP financial measures under applicable SEC rules because the SAP financial measures include or exclude certain items that the most comparable GAAP financial measures do not ordinarily include or exclude. Our calculation of non-GAAP financial measures may differ from similar measures other companies use. As a result, investors should exercise caution when comparing our non-GAAP financial measures to the non-GAAP financial measures other companies use. The SAP financial measures we utilize are net premiums written and statutory combined ratio. Net Premiums Written We define net premiums written as the amount of full-term premiums our insurance subsidiaries record for policies effective within a given period less premiums our insurance subsidiaries cede to reinsurers. Net premiums earned is the most comparable GAAP financial measure to net premiums written. Net premiums earned represent the sum of the amount of net premiums written and the change in net unearned premiums during a given period. Our insurance subsidiaries earn premiums and recognize them as revenue over the terms of their policies, which are one year or less in duration. Therefore, increases or decreases in net premiums earned generally reflect increases or decreases in net premiums written in the preceding 12-month period compared to the comparable period one year earlier. The following table provides a reconciliation of our net premiums earned to our net premiums written for 2024: (in thousands) Commercial Lines Personal Lines Total Net premiums earned $ 539,683 $ 396,968 $ 936,651 Change in net unearned premiums 8,237 (2,607 ) 5,630 Net premiums written $ 547,920 $ 394,361 $ 942,281 The following table provides a reconciliation of our net premiums earned to our net premiums written for 2023: (in thousands) Commercial Lines Personal Lines Total Net premiums earned $ 533,029 $ 349,042 $ 882,071 Change in net unearned premiums (4,600 ) 18,226 13,626 Net premiums written $ 528,429 $ 367,268 $ 895,697 The following table provides a reconciliation of our net premiums earned to our net premiums written for 2022: (in thousands) Commercial Lines Personal Lines Total Net premiums earned $ 521,227 $ 301,263 $ 822,490 Change in net unearned premiums 9,619 11,421 21,040 Net premiums written $ 530,846 $ 312,684 $ 843,530 Statutory Combined Ratio The combined ratio is a standard measurement of underwriting profitability for an insurance company. The combined ratio does not reflect investment income, net investment gains or losses, federal income taxes or other non-operating income or expense. A combined ratio of less than 100% generally indicates underwriting profitability. The statutory combined ratio is a non-GAAP financial measure that is based upon amounts determined under SAP. We calculate our statutory combined ratio as the sum of: -51- Index • the statutory loss ratio, which is the ratio of calendar-year net incurred losses and loss expenses to net premiums earned; • the statutory expense ratio, which is the ratio of expenses incurred for net commissions, premium taxes and underwriting expenses to net premiums written; and • the statutory dividend ratio, which is the ratio of dividends to holders of workers’ compensation policies to net premiums earned. The calculation of our statutory combined ratio differs from the calculation of our GAAP combined ratio. In calculating our GAAP combined ratio, we do not deduct installment payment fees from incurred expenses, and we base the expense ratio on net premiums earned instead of net premiums written. Differences between our GAAP loss ratio and our statutory loss ratio result from anticipating salvage and subrogation recoveries for our GAAP loss ratio but not for our statutory loss ratio. The following table presents comparative details with respect to our GAAP and statutory combined ratios for the years ended December 31, 2024, 2023 and 2022: Year Ended December 31, 2024 2023 2022 GAAP Combined Ratios (Total Lines) Loss ratio - core losses 54.0 % 57.5 % 59.8 % Loss ratio - weather-related losses 7.2 8.3 7.7 Loss ratio - large fire losses 4.9 5.2 6.5 Loss ratio - net prior-year reserve development -1.6 -1.9 -5.4 Loss ratio 64.5 69.1 68.6 Expense ratio 33.7 34.7 34.1 Dividend ratio 0.4 0.6 0.6 Combined ratio 98.6 % 104.4 % 103.3 % Statutory Combined Ratios Commercial lines: Automobile 102.6 % 97.3 % 98.0 % Workers’ compensation 104.4 96.6 97.3 Commercial multi-peril 95.0 112.3 116.9 Other 80.0 85.5 80.8 Total commercial lines 98.2 101.6 103.7 Personal lines: Automobile 97.4 109.7 103.8 Homeowners 99.6 108.6 111.0 Other 99.5 75.8 52.1 Total personal lines 98.3 108.2 102.8 Total commercial and personal lines 98.3 104.2 103.3 Results of Operations YEAR ENDED DECEMBER 31, 2024 COMPARED TO YEAR ENDED DECEMBER 31, 2023 Net Premiums Earned Our insurance subsidiaries’ net premiums earned increased to $936.7 million for 2024, an increase of $54.6 million, or 6.2%, compared to 2023, primarily reflecting solid premium retention and renewal premium increases. Our insurance subsidiaries earn premiums and recognize them as income over the terms of the policies they issue. Such terms are generally one year or less in duration. Therefore, increases or decreases in net premiums earned generally reflect increases or decreases in net premiums written in the preceding twelve-month period compared to the same period one year earlier. -52- Index Net Premiums Written Our insurance subsidiaries’ 2024 net premiums written increased 5.2% to $942.3 million, compared to $895.7 million for 2023. Commercial lines net premiums written increased $19.5 million, or 3.7%, for 2024 compared to 2023. We attribute the increase in commercial lines net premiums written primarily to strong premium retention and a continuation of renewal premium increases in lines other than workers’ compensation, offset partially by planned attrition in states we exited or classes of business we have targeted for profit improvement. Personal lines net premiums written increased $27.1 million, or 7.4%, for 2024 compared to 2023. We attribute the increase in personal lines net premiums written primarily to renewal premium rate increases and solid policy retention, offset partially by planned attrition due to non-renewal actions and lower new business writings. Investment Income For 2024, our net investment income increased 10.0% to $44.9 million, compared to $40.9 million for 2023, due primarily to higher average reinvestment yields and higher average invested assets for 2024 compared to 2023. Net Investment Gains Our net investment gains for 2024 were $5.0 million, compared to $3.2 million for 2023. The net investment gains for 2024 and 2023 were primarily related to increases in the market value of the equity securities held at the end of the respective periods. We did not recognize any impairment losses during 2024 or 2023. Losses and Loss Expenses Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 64.5% for 2024, compared to 69.1% for 2023. Our insurance subsidiaries’ commercial lines loss ratio decreased to 62.0% for 2024, compared to 64.8% for 2023. This decrease resulted primarily from the commercial multi-peril loss ratio decreasing to 57.5% for 2024, compared to 73.1% for 2023, primarily due to a decrease in severity of non-weather claims, offset partially by increases in the commercial automobile and workers’ compensation loss ratios due primarily to increases in loss emergence for prior accident years. The commercial automobile loss ratio increased to 68.5% for 2024, compared to 63.0% for 2023. The workers’ compensation loss ratio increased to 67.7% for 2024, compared to 59.0% for 2023. The personal lines loss ratio decreased to 68.0% for 2024, compared to 75.6% for 2023, due primarily to increases in net premiums earned related to premium rate increases. The personal automobile loss ratio decreased to 68.5% for 2024, compared to 78.5% for 2023. The homeowners loss ratio decreased to 66.7% for 2024, compared to 73.6% for 2023. Our insurance subsidiaries experienced favorable loss reserve development of approximately $15.0 million, or 1.6 percentage points of the loss ratio, during 2024 in their reserves for prior accident years, compared to approximately $16.7 million, or 1.9 percentage points of the loss ratio, during 2023. The favorable loss reserve development in 2024 resulted primarily from lower-than-expected loss emergence in the commercial multi-peril, personal automobile and homeowner lines of business, offset partially by higher-than-expected loss emergence in the workers’ compensation and commercial automobile lines of business, for accident years prior to 2024. Weather-related losses of $67.7 million, or 7.2 percentage points of the loss ratio, for 2024 increased from $72.9 million, or 8.3 percentage points of the loss ratio, for 2023, with the decrease primarily impacting the commercial multi-peril and homeowners lines of business. Large fire losses, which we define as individual fire losses in excess of $50,000, were $45.8 million, or 4.9 percentage points of the loss ratio, for 2024, compared to $45.4 million, or 5.2 percentage points of the loss ratio, for 2023. -53- Index Underwriting Expenses Our insurance subsidiaries’ expense ratio, which is the ratio of policy acquisition and other underwriting expenses to premiums earned, was 33.7% for 2024, compared to 34.7% for 2023. We attribute the decrease to the impacts of various expense reduction initiatives, including agency incentive program revisions, commission schedule adjustments, targeted staffing reductions, and hiring restrictions for open employment positions, among others. These impacts were offset partially by an increase in underwriting-based incentive costs as well as higher technology systems-related expenses that were primarily due to increased costs related to our ongoing systems modernization project, a portion of which Donegal Mutual Insurance Company allocates to our insurance subsidiaries. We expect the impact from allocated costs from Donegal Mutual Insurance Company to our insurance subsidiaries related to the ongoing systems modernization project peaked at approximately 1.3 percentage points of the expense ratio for 2024 and will subside gradually in 2025 and subsequent years. Policyholder Dividends Our insurance subsidiaries pay policyholder dividends primarily on workers’ compensation policies on a sliding scale based on the profitability of a given policy. Combined Ratio Our insurance subsidiaries’ combined ratio was 98.6% and 104.4% for 2024 and 2023, respectively. The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of workers’ compensation policy dividends incurred to premiums earned. We attribute the decrease in our combined ratio primarily to the decreases in the loss and expense ratios. Interest Expense Our interest expense for 2024 increased to $946,020, compared to $619,813 for 2023. We attribute the increase to higher interest rates on borrowings under our lines of credit during 2024 compared to 2023. Income Taxes Our income tax expense was $11.5 million for 2024, compared to $637,972 for 2023. Our effective tax rate for 2024 and 2023 was 18.4% and 12.6%, respectively. Net Income and Earnings Per Share Our net income for 2024 was $50.9 million, or $1.53 per share of Class A common stock on a diluted basis and $1.38 per share of Class B common stock, compared to $4.4 million, or $0.14 per share of Class A common stock on a diluted basis and $0.11 per share of Class B common stock, for 2023. We had 30.0 million and 27.8 million Class A shares outstanding at December 31, 2024 and 2023, respectively. We had 5.6 million Class B shares outstanding for both periods. There are no outstanding securities that dilute our shares of Class B common stock. Book Value Per Share Our stockholders’ equity increased by $66.0 million during 2024, primarily due to our net income, stock issuances under our stock compensation plans and other increases exceeding the cash dividends we declared during the year and resulting in an increase in our book value per share to $15.36 at December 31, 2024, compared to $14.39 a year earlier. YEAR ENDED DECEMBER 31, 2023 COMPARED TO YEAR ENDED DECEMBER 31, 2022 Net Premiums Earned Our insurance subsidiaries’ net premiums earned increased to $882.1 million for 2023, an increase of $59.6 million, or 7.2%, compared to 2022, primarily reflecting solid premium retention and renewal premium increases. Our insurance subsidiaries earn premiums and recognize them as income over the terms of the policies they issue. Such terms are generally one year or less in duration. Therefore, increases or decreases in net premiums earned generally reflect increases or decreases in net premiums written in the preceding twelve-month period compared to the same period one year earlier. -54- Index Net Premiums Written Our insurance subsidiaries’ 2023 net premiums written increased 6.2% to $895.7 million, compared to $843.5 million for 2022. Commercial lines net premiums written decreased $2.4 million, or 0.5%, for 2023 compared to 2022. We attribute the decrease in commercial lines net premiums written primarily to planned attrition in states we are exiting or have targeted for profit improvement, lower new business writings and reinsurance reinstatement premiums on our property excess of loss reinsurance program, offset partially by strong premium retention and a continuation of renewal premium increases in lines other than workers’ compensation. Personal lines net premiums written increased $54.6 million, or 17.5%, for 2023 compared to 2022. We attribute the increase in personal lines net premiums written primarily to renewal premium increases and strong policy retention. Investment Income For 2023, our net investment income increased 20.1% to $40.9 million, compared to $34.0 million for 2022, due primarily to higher average reinvestment yields and higher average invested assets for 2023 compared to 2022. Net Investment Gains (Losses) Our net investment gains for 2023 were $3.2 million. Our net investment losses for 2022 were $10.2 million. The net investment gains (losses) for 2023 and 2022 were primarily related to increases (decreases) in the market value of the equity securities held at the end of the respective periods. We did not recognize any impairment losses during 2023 or 2022. Losses and Loss Expenses Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 69.1% for 2023, compared to 68.6% for 2022. Our insurance subsidiaries’ commercial lines loss ratio decreased to 64.8% for 2023, compared to 67.1% for 2022. This decrease resulted primarily from the commercial multi-peril loss ratio decreasing to 73.1% for 2023, compared to 79.2% for 2022, primarily due to a decrease in severity of non-weather claims. The personal lines loss ratio increased to 75.6% for 2023, compared to 71.0% for 2022. The personal automobile loss ratio increased to 78.5% for 2023, compared to 72.1% for 2022, primarily due to an increase in automobile claim severity due to the ongoing impact of supply chain disruption and labor shortages on the costs of repair and replacement vehicles. Our insurance subsidiaries experienced favorable loss reserve development of approximately $16.7 million, or 1.9 percentage points of the loss ratio, during 2023 in their reserves for prior accident years, compared to approximately $44.8 million, or 5.4 percentage points of the loss ratio, during 2022. The favorable loss reserve development in 2023 resulted primarily from lower-than-expected loss emergence in the personal automobile and commercial automobile lines of business for accident years prior to 2023. Weather-related losses of $72.9 million, or 8.3 percentage points of the loss ratio, for 2023 increased from $63.5 million, or 7.7 percentage points of the loss ratio, for 2022, with the increase primarily impacting the homeowners line of business. Large fire losses, which we define as individual fire losses in excess of $50,000, were $45.4 million, or 5.2 percentage points of the loss ratio, for 2023, compared to $53.5 million, or 6.5 percentage points of the loss ratio, for 2022. The decrease was related to lower average claim severity of both commercial property and home fires in 2023 compared to 2022. Underwriting Expenses Our insurance subsidiaries’ expense ratio, which is the ratio of policy acquisition and other underwriting expenses to premiums earned, was 34.7% for 2023, compared to 34.1% for 2022. We attribute the modest increase to higher technology system-related expenses for 2023 compared to 2022, offset somewhat by decreased underwriting-based incentive costs for our employees for 2023 compared to 2022. The increase in technology systems-related expenses for 2023 was primarily due to an increased allocation of costs from Donegal Mutual to our insurance subsidiaries following the successful implementation of two additional major releases of new systems as part of our ongoing systems modernization project in 2023. We expect the impact from allocated costs from Donegal Mutual to our insurance subsidiaries related to the ongoing systems modernization project will peak at approximately 1.25 percentage points of the expense ratio in 2024 before beginning to subside gradually in subsequent years. -55- Index Policyholder Dividends Our insurance subsidiaries pay policyholder dividends primarily on workers’ compensation policies on a sliding scale based on the profitability of a given policy. Combined Ratio Our insurance subsidiaries’ combined ratio was 104.4% and 103.3% for 2023 and 2022, respectively. The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of workers’ compensation policy dividends incurred to premiums earned. We attribute the increase in our combined ratio primarily to the increases in the loss and expense ratios. Interest Expense Our interest expense for 2023 decreased slightly to $619,813, compared to $620,558 for 2022. Income Taxes Our income tax expense was $637,972 for 2023, compared to an income tax benefit of $1.7 million for 2022. Our effective tax rate for 2023 was 12.6%. Net Income (Loss) and Earnings (Loss) Per Share Our net income for 2023 was $4.4 million, or $0.14 per share of Class A common stock on a diluted basis and $0.11 per share of Class B common stock, compared to a net loss for 2022 of $2.0 million, or $0.06 per share of Class A common stock and $0.07 per share of Class B common stock. We had 27.8 million and 27.1 million Class A shares outstanding at December 31, 2023 and 2022, respectively. We had 5.6 million Class B shares outstanding for both periods. There are no outstanding securities that dilute our shares of Class B common stock. Book Value Per Share Our stockholders’ equity decreased by $3.8 million during 2023, primarily due to the cash dividends we declared exceeding our net income and other increases during the year, resulting in a decrease in our book value per share to $14.39 at December 31, 2023, compared to $14.79 a year earlier. Financial Condition Liquidity and Capital Resources Liquidity is a measure of an entity’s ability to secure enough cash to meet its contractual obligations and operating needs as they arise. Our major sources of funds from operations are the net cash flows generated from our insurance subsidiaries’ underwriting results, investment income and maturing investments. -56- Index We have historically generated sufficient net positive cash flow from our operations to fund our commitments and build our investment portfolio, thereby increasing future investment returns. The pooling agreement with Donegal Mutual historically has been cash flow positive because of the profitability of the underwriting pool. Because we settle the pool monthly, our cash flows are substantially similar to the cash flows that would result from the underwriting of direct business. We maintain a high degree of liquidity in our investment portfolio in the form of marketable fixed maturities, equity securities and short-term investments. We structure our fixed-maturity investment portfolio following a “laddering” approach so that projected cash flows from investment income and principal maturities are evenly distributed from a timing perspective. This laddering approach provides an additional measure of liquidity to meet our obligations and the obligations of our insurance subsidiaries should an unexpected variation occur in the future. Net cash flows provided by operating activities in 2024, 2023 and 2022 were $67.4 million, $28.6 million and $67.1 million, respectively. At December 31, 2024, we had no outstanding borrowings under our line of credit with M&T and had the ability to borrow up to $20.0 million at interest rates equal to the then-current Term SOFR rate plus 2.11%. At December 31, 2024, Atlantic States had a $35.0 million outstanding advance with the FHLB of Pittsburgh that carries a fixed interest rate of 3.806% and is due in September 2026. We discuss in Note 9 – Borrowings our estimate of the timing of the amounts payable for the borrowings under our lines of credit based on their contractual maturities. We estimate the timing of claim payments associated with the liabilities for losses and loss expenses of our insurance subsidiaries based on historical experience and expectations of future payment patterns. Amounts Atlantic States assumes pursuant to the pooling agreement with Donegal Mutual represent a substantial portion of our insurance subsidiaries’ gross liabilities for losses and loss expenses, and amounts Atlantic States cedes pursuant to the pooling agreement represent a substantial portion of our insurance subsidiaries’ reinsurance recoverable on unpaid losses and loss expenses. We include cash settlement of Atlantic States’ assumed liabilities from the pool in monthly settlements of pooled activity, as we net amounts ceded to and assumed from the pool. Although Donegal Mutual and we do not anticipate any changes in the pool participation levels in the foreseeable future, any such change would be prospective in nature and therefore would not impact the timing of expected payments by Atlantic States for its percentage share of pooled losses occurring in periods prior to the effective date of such change. The cash dividends we declared to our stockholders totaled $23.2 million, $22.2 million and $20.9 million in 2024, 2023 and 2022, respectively. There are no regulatory restrictions on our payment of dividends to our stockholders, although there are restrictions under applicable state laws on the payment of dividends from our insurance subsidiaries to us, which is a significant source of cash for payment of stockholder dividends by us. Our insurance subsidiaries are required by law to maintain certain minimum surplus on a statutory basis and are subject to regulations under which their payment of dividends from statutory surplus is restricted and may require prior approval of their domiciliary insurance regulatory authorities. Our insurance subsidiaries are also subject to risk-based capital (“RBC”) requirements. The amount of statutory capital and surplus necessary for our insurance subsidiaries to satisfy regulatory requirements, including the RBC requirements, was not significant in relation to our insurance subsidiaries’ statutory capital and surplus at December 31, 2024. Amounts available for distribution to us as dividends from our insurance subsidiaries without prior approval of insurance regulatory authorities in 2025 are approximately $40.7 million from Atlantic States, $7.8 million from MICO and $4.7 million from Peninsula, or a total of approximately $53.3 million. -57- Index Investments At December 31, 2024 and 2023, our investment portfolio of primarily investment-grade bonds, common stock, short-term investments and cash totaled $1.4 billion and $1.3 billion, respectively, representing 61.6% and 58.6%, respectively, of our total assets. See “Business - Investments” for more information. December 31, 2024 2023 Percent of Percent of (dollars in thousands) Amount Total Amount Total Fixed maturities: Total held to maturity $ 705,714 51.0 % $ 679,497 51.2 % Total available for sale 617,892 44.6 589,348 44.4 Total fixed maturities 1,323,606 95.6 1,268,845 95.6 Equity securities 36,808 2.6 25,903 2.0 Short-term investments 24,558 1.8 32,306 2.4 Total investments $ 1,384,972 100.0 % $ 1,327,054 100.0 % The carrying value of our fixed maturity investments represented 95.6% of our total invested assets at December 31, 2024 and 2023. Our fixed maturity investments consisted of high-quality marketable bonds, of which 95.6% and 95.2% were rated at investment-grade levels at December 31, 2024 and 2023, respectively. At December 31, 2024, the net unrealized loss on our available-for-sale fixed maturity investments, net of deferred taxes, amounted to $27.4 million, compared to $31.9 million at December 31, 2023. Impact of Inflation Our insurance subsidiaries establish their property and casualty insurance premium rates before they know the amount of losses and loss settlement expenses or the extent to which inflation may impact such expenses. Consequently, our insurance subsidiaries attempt, in establishing rates, to anticipate the potential future impact of inflation. Our insurance subsidiaries account for inflation in the reserving function through analysis of costs and trends and reviews of historical reserving results. Impact of Changing Climate Conditions Insured losses from severe weather events could significantly impact the underwriting results of our insurance subsidiaries. Losses from catastrophic events are a function of both the extent of our insurance subsidiaries’ exposures, the frequency and severity of the events themselves and the level of reinsurance coverage our insurance subsidiaries purchase. The increased frequency and severity of weather-related catastrophes and other losses, such as from wildfires and flooding, incurred by the industry in recent years may be indicative of changing weather patterns due to climate change. Should those patterns continue to emerge, increased weather-related catastrophes in the states in which our insurance subsidiaries operate would lead to higher overall losses that they may be unable to offset through pricing actions. Our insurance subsidiaries seek to reduce their exposure to catastrophe losses through their underwriting strategies and their purchase of catastrophe reinsurance. While the emerging science regarding climate change and its connection to extreme weather events continues to be studied, climate change, to the extent it produces rising temperatures and changes in weather patterns, could affect the frequency and severity of weather events and other losses and thus impact the affordability and availability of catastrophe reinsurance coverage for our insurance subsidiaries. Our insurance subsidiaries’ ability to appropriately manage catastrophe risk depends partially on catastrophe models, which rely on historical data that might not be representative of the frequency and severity of future events. Such models might also be unable to anticipate the uncertain impact of changing climate conditions that tend to occur gradually over time. Because the policies of our insurance subsidiaries renew not less frequently than annually, our insurance subsidiaries have the ability to respond to the impact of changing climate conditions through adjustments to their underwriting standards, pricing, and policy terms and conditions, subject to applicable regulatory approvals. -58- Index Changing climate conditions could lead to new or revised regulations with which our insurance subsidiaries would have to comply. Such regulations could impact the ability of our insurance subsidiaries to manage their exposures in areas impacted by increased weather activity, require our insurance companies to alter the terms and conditions of their policies or impact the ability of our insurance subsidiaries to obtain sufficient pricing increases to offset higher loss activity. Impact of New Accounting Standards In September 2016, the Financial Accounting Standards Board (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. In November 2023, the FASB issued guidance that amended previous guidance on the disclosure of reportable segments. The guidance requires disclosure of incremental segment information including the title and position of the individual identified as the chief operating decision maker, a narrative explanation of how the chief operating decision maker uses each reported measure of a segment’s profit or loss in assessing performance and determining how to allocate resources, as well as quantification of significant segment expenses and other items. We refer to Note 19 - Segment Information for further information and disclosure of items required within the amended and enhanced guidance. The adoption of this guidance did not have an impact on our financial position, results of operations or cash flows. In December 2023, the FASB issued guidance to enhance the transparency and usefulness of income tax disclosures. The guidance requires disclosure of specific categories in the rate reconciliation table and additional information for reconciling items that meet a quantitative threshold of equal to or greater than 5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate. The guidance also requires disaggregated disclosure of the amount of income taxes paid for federal, state and foreign taxes. The guidance is effective for annual periods beginning after December 15, 2024. The adoption of this guidance will not have an impact on our financial position, results of operations or cash flows. In November 2024, the FASB issued guidance requiring disaggregated disclosure of income statement expenses in the notes to financial statements. The guidance requires disclosure of certain expenses, including employee compensation, depreciation and selling expenses. The guidance will not impact current income statement expense captions that industry-specific guidance requires. The guidance is effective for annual reporting periods beginning after December 15, 2026. The adoption of this guidance will not have an impact on our financial position, results of operations or cash flows. Off-Balance Sheet Arrangements As of December 31, 2024 and 2023, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. -59- Index Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to the impact of interest rate changes, to changes in fair values of investments and to credit risk. In the normal course of business, we employ established policies and procedures to manage our exposure to changes in interest rates, fluctuations in the fair market value of our debt and equity securities and credit risk. We seek to mitigate these risks by various actions we describe below. Interest Rate Risk Our exposure to market risk for a change in interest rates is concentrated in our investment portfolio. We monitor this exposure through periodic reviews of our asset and liability positions. We regularly monitor estimates of cash flows and the impact of interest rate fluctuations relating to our investment portfolio. Generally, we do not hedge our exposure to interest rate risk because we have the capacity to, and do, hold fixed-maturity investments to maturity. -60- Index Principal cash flows and related weighted-average interest rates by stated maturity dates for the financial instruments we held at December 31, 2024 that are sensitive to interest rates are as follows: (in thousands) Principal Cash Flows Weighted- Average Interest Rate Fixed-maturity and short-term investments: 2025 $ 82,064 4.18 % 2026 65,538 3.93 2027 73,054 3.92 2028 84,203 4.27 2029 88,485 3.78 Thereafter 998,456 3.52 Total $ 1,391,800 Fair value $ 1,274,020 Debt: 2026 $ 35,000 3.81 % Total $ 35,000 Fair value $ 35,000 Actual cash flows from investments may differ from those depicted above as a result of calls and prepayments. Equity Price Risk Our portfolio of equity securities, which we carry on our consolidated balance sheets at estimated fair value, has exposure to price risk, which is the risk of potential loss in estimated fair value resulting from an adverse change in prices. Our objective is to mitigate this risk and to earn competitive relative returns by investing in a diverse portfolio of high-quality, liquid securities. Credit Risk Our objective is to earn competitive returns by investing in a diversified portfolio of securities. Our portfolio of fixed maturity securities and, to a lesser extent, short-term investments is subject to credit risk. We define this risk as the potential loss in fair value resulting from adverse changes in the borrower’s ability to repay the debt. We manage this risk by performing an analysis of prospective investments and through regular reviews of our portfolio by our investment personnel. We also limit the amount of our total investment portfolio that we invest in any one security. Our insurance subsidiaries provide property and liability insurance coverages through independent insurance agencies located throughout their operating areas. Our insurance subsidiaries bill the majority of this business directly to the insured, although our insurance subsidiaries bill a portion of their commercial business through their agents, to whom they extend credit in the normal course of business. Because the pooling agreement does not relieve Atlantic States of primary liability as the originating insurer, Atlantic States is subject to a concentration of credit risk arising from the business Atlantic States cedes to Donegal Mutual. Our insurance subsidiaries maintain reinsurance agreements with Donegal Mutual and with a number of other major unaffiliated authorized reinsurers. 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. -61- Index Item 8. Financial Statements and Supplementary Data. Index to Consolidated Financial Statements and Schedule Consolidated Balance Sheets 63 Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) 64 Consolidated Statements of Stockholders’ Equity 65 Consolidated Statements of Cash Flows 66 Notes to Consolidated Financial Statements 67 Report of Independent Registered Public Accounting Firm ( KPMG LLP , PCAOB ID 185 ) 105 Schedule: Schedule III — Supplementary Insurance Information 113 -62- Index Donegal Group Inc. Consolidated Balance Sheets December 31, 2024 2023 Assets Investments Fixed maturities Held to maturity, at amortized cost (fair value $ 631,568,929 and $ 611,526,338 ; net of allowance for expected credit losses of $ 1,388,240 and $ 1,325,847 ) $ 705,713,916 $ 679,497,038 Available for sale, at fair value (amortized cost $ 652,564,965 and $ 629,727,513 ) 617,891,862 589,348,243 Equity securities, at fair value 36,807,810 25,902,956 Short-term investments, at cost, which approximates fair value 24,558,744 32,305,408 Total investments 1,384,972,332 1,327,053,645 Cash 52,925,931 23,792,273 Accrued investment income 10,361,959 9,945,714 Premiums receivable 181,106,519 179,591,821 Reinsurance receivable (net of allowance for expected credit losses of $ 391,432 and $ 1,394,074 ) 420,741,855 441,431,334 Deferred policy acquisition costs 73,346,967 75,043,404 Deferred tax asset, net 18,769,861 19,532,525 Prepaid reinsurance premiums 176,161,872 168,724,465 Property and equipment, net 2,479,183 2,633,405 Accounts receivable - securities 24,924 1,501,079 Federal income taxes recoverable — 8,102,321 Due from affiliate 8,410,090 1,907,527 Goodwill 5,625,354 5,625,354 Other intangible assets 958,010 958,010 Other 147,126 451,011 Total assets $ 2,336,031,983 $ 2,266,293,888 Liabilities and Stockholders’ Equity Liabilities Losses and loss expenses $ 1,120,985,050 $ 1,126,156,838 Unearned premiums 612,476,068 599,411,468 Accrued expenses 2,916,705 3,946,974 Reinsurance balances payable 4,345,426 8,758,976 Borrowings under lines of credit 35,000,000 35,000,000 Cash dividends declared to stockholders 6,031,078 5,569,992 Federal income taxes payable 356,103 — Other 8,145,422 7,704,286 Total liabilities 1,790,255,852 1,786,548,534 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 32,954,347 and 30,764,555 shares and outstanding 29,951,759 and 27,761,967 shares 329,544 307,646 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 369,679,946 335,694,478 Accumulated other comprehensive loss ( 28,200,481 ) ( 32,881,822 ) Retained earnings 245,136,987 217,794,917 Treasury stock, at cost ( 41,226,357 ) ( 41,226,357 ) Total stockholders’ equity 545,776,131 479,745,354 Total liabilities and stockholders’ equity $ 2,336,031,983 $ 2,266,293,888 See accompanying notes to consolidated financial statements. -63- Index Donegal Group Inc. Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Years Ended December 31, 2024 2023 2022 Statements of Income (Loss) Revenues Net premiums earned (includes affiliated reinsurance of $ 239,521,005 , $ 237,903,029 and $ 232,105,306 - see note 3) $ 936,651,480 $ 882,071,386 $ 822,489,450 Investment income, net of investment expenses 44,918,162 40,853,215 34,016,112 Installment payment fees 2,740,505 894,137 1,516,330 Lease income 313,831 346,439 383,451 Net investment gains (losses) (includes ($ 174,302 ), ($ 2,242,190 ) and ($ 979,972 ) accumulated other comprehensive income reclassification) 4,981,072 3,172,807 ( 10,184,797 ) Total revenues 989,605,050 927,337,984 848,220,546 Expenses Net losses and loss expenses (includes affiliated reinsurance of $ 136,662,558 , $ 150,198,479 and $ 177,849,040 - see note 3) 604,117,716 609,177,699 564,078,993 Amortization of deferred policy acquisition costs 160,311,000 154,214,000 142,430,000 Other underwriting expenses 155,253,685 151,747,579 137,923,739 Policyholder dividends 4,073,481 5,313,430 5,560,407 Interest 946,020 619,813 620,558 Other, net 2,564,216 1,201,987 1,244,948 Total expenses 927,266,118 922,274,508 851,858,645 Income (loss) before income tax expense (benefit) 62,338,932 5,063,476 ( 3,638,099 ) Income tax expense (benefit) (includes $ 36,603 , $ 470,860 and $ 205,794 income tax benefit from reclassification items) 11,476,680 637,972 ( 1,678,694 ) Net income (loss) $ 50,862,252 $ 4,425,504 $ ( 1,959,405 ) Basic earnings (loss) per common share: Class A common stock $ 1.53 $ 0.14 $ ( 0.06 ) Class B common stock $ 1.38 $ 0.11 $ ( 0.07 ) Diluted earnings (loss) per common share: Class A common stock $ 1.53 $ 0.14 $ ( 0.06 ) Class B common stock $ 1.38 $ 0.11 $ ( 0.07 ) Statements of Comprehensive Income (Loss) Net income (loss) $ 50,862,252 $ 4,425,504 $ ( 1,959,405 ) 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 $ 1,207,804 , $ 1,285,390 and ($ 12,164,443 ) 4,543,642 4,246,693 ( 45,761,476 ) Reclassification adjustment for losses included in net income (loss), net of income tax benefit of $ 36,603 , $ 470,860 and $ 205,794 137,699 1,771,330 774,178 Other comprehensive income (loss) 4,681,341 6,018,023 ( 44,987,298 ) Comprehensive income (loss) $ 55,543,593 $ 10,443,527 $ ( 46,946,703 ) See accompanying notes to consolidated financial statements. -64- 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, 2022 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 Issuance of common stock (stock compensation plans) 153,366 1,534 2,006,136 2,007,670 Stock-based compensation 2,036,426 20,364 31,621,452 31,641,816 Net income 50,862,252 50,862,252 Cash dividends ( 23,162,302 ) ( 23,162,302 ) Grant of stock options 357,880 ( 357,880 ) — Other comprehensive income 4,681,341 4,681,341 Balance, December 31, 2024 32,954,347 5,649,240 $ 329,544 $ 56,492 $ 369,679,946 $ ( 28,200,481 ) $ 245,136,987 $ ( 41,226,357 ) $ 545,776,131 See accompanying notes to consolidated financial statements. -65- Index Donegal Group Inc. Consolidated Statements of Cash Flows Years Ended December 31, 2024 2023 2022 Cash Flows from Operating Activities: Net income (loss) $ 50,862,252 $ 4,425,504 $ ( 1,959,405 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, amortization and other non-cash items 3,873,161 4,326,446 4,841,559 Net investment (gains) losses ( 4,981,072 ) ( 3,172,807 ) 10,184,797 Changes in Assets and Liabilities: Losses and loss expenses ( 5,171,788 ) 5,111,080 43,425,457 Unearned premiums 13,064,600 21,758,338 4,694,708 Accrued expenses ( 1,030,269 ) ( 279,416 ) 197,731 Premiums receivable ( 1,514,698 ) ( 5,745,527 ) ( 4,983,714 ) Deferred policy acquisition costs 1,696,437 ( 1,873,174 ) ( 5,141,857 ) Deferred income taxes ( 481,743 ) 229,397 ( 2,958,735 ) Reinsurance receivable 20,689,479 13,959,053 ( 1,111,214 ) Accrued investment income ( 416,245 ) ( 1,084,422 ) ( 646,321 ) Amounts due from affiliate ( 6,502,563 ) ( 7,080,816 ) 7,096,006 Reinsurance balances payable ( 4,413,550 ) 5,263,152 ( 450,281 ) Prepaid reinsurance premiums ( 7,437,407 ) ( 8,133,066 ) 16,344,443 Current income taxes 8,458,424 408,576 ( 3,219,959 ) Other, net 745,019 511,426 796,805 Net adjustments 16,577,785 24,198,240 69,069,425 Net cash provided by operating activities 67,440,037 28,623,744 67,110,020 Cash Flows from Investing Activities: Purchases of fixed maturities: Held to maturity ( 56,707,019 ) ( 25,226,609 ) ( 74,902,605 ) Available for sale ( 147,736,805 ) ( 150,423,864 ) ( 151,994,462 ) Purchases of equity securities ( 8,697,500 ) ( 5,128,994 ) ( 15,862,888 ) Sales of fixed maturities: Available for sale 7,184,635 28,154,556 24,381,244 Maturity of fixed maturities: Held to maturity 30,548,257 32,923,991 53,747,886 Available for sale 116,612,046 58,277,402 75,759,806 Sales of equity securities 3,010,413 19,745,875 34,973,196 Net sales (purchases) of property and equipment 743 ( 44,701 ) 28,290 Net sales (purchases) of short-term investments 7,746,664 25,015,703 ( 44,628,770 ) Net cash used in investing activities ( 48,038,566 ) ( 16,706,641 ) ( 98,498,303 ) Cash Flows from Financing Activities: Issuance of common stock 32,433,403 8,645,530 19,304,956 Cash dividends paid ( 22,701,216 ) ( 21,893,692 ) ( 20,502,716 ) Net cash provided by (used in) financing activities 9,732,187 ( 13,248,162 ) ( 1,197,760 ) Net increase (decrease) in cash 29,133,658 ( 1,331,059 ) ( 32,586,043 ) Cash at beginning of year 23,792,273 25,123,332 57,709,375 Cash at end of year $ 52,925,931 $ 23,792,273 $ 25,123,332 See accompanying notes to consolidated financial statements. -66- 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, Southern and Southwestern states. At December 31, 2024, 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, 2024, 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 70 % 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 also has a 100 % quota-share reinsurance agreement with Mountain States Indemnity Company and Mountain States Commercial Insurance Company (collectively, the “Mountain States insurance subsidiaries”). Donegal Mutual places its assumed business from the Mountain States insurance subsidiaries into the underwriting pool. 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 allow the individual companies to manage certain risk segments through variations in coverage, terms and pricing. 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. -67- Index Basis of Consolidation Our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), include our accounts and those of our wholly owned subsidiaries. We have eliminated all significant inter-company accounts and transactions in consolidation. The terms “we,” “us,” “our” or the “Company” as we use them in the notes to our consolidated financial statements refer to the consolidated entity. Use of Estimates In preparing our consolidated financial statements, our management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet and revenues and expenses for the period then ended. Actual results could differ significantly from those estimates. We make estimates and assumptions that could have a significant effect on amounts and disclosures we report in our consolidated financial statements. The most significant estimates relate to our insurance subsidiaries’ reserves for property and casualty insurance unpaid losses and loss expenses. While we believe our estimates and the estimates of our insurance subsidiaries are appropriate, the ultimate amounts may differ from the estimates provided. We regularly review our methods for making these estimates as well as the continuing appropriateness of the estimated amounts, and we reflect any adjustment we consider necessary in our current results of operations. Reclassification We have made certain reclassifications in our prior period financial statements to conform to the current year presentation. Investments We classify our debt securities into the following categories: Held to Maturity - Debt securities that we have the positive intent and ability to hold to maturity; reported at amortized cost. Available for Sale - Debt securities not classified as held to maturity; reported at fair value, with unrealized gains and losses excluded from income and reported as a separate component of stockholders’ equity (net of tax effects). Short-term investments are carried at amortized cost, which approximates fair value. We make estimates concerning the valuation of our investments and, 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 than 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. -68- Index We amortize premiums and discounts on debt securities over the life of the security as an adjustment to yield using the effective interest method. We compute investment gains and losses using the specific identification method. We amortize premiums and discounts for mortgage-backed debt securities using anticipated prepayments. Fair Values of Financial Instruments We use the following methods and assumptions in estimating our fair value disclosures: Investments - We present our investments in available-for-sale fixed maturity and equity securities at estimated fair value. The estimated fair value of a security may differ from the amount that we could realize if we sold the security in a forced transaction. In addition, the valuation of fixed maturity investments is more subjective when markets are less liquid, increasing the potential that the estimated fair value does not reflect the price at which an actual transaction would occur. We utilize nationally recognized independent pricing services to estimate fair values for our fixed maturity and equity investments. We generally obtain two prices per security. The pricing services utilize market quotations for fixed maturity and equity securities that have quoted prices in active markets. For fixed maturity securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements based predominantly on observable market inputs. The pricing services do not use broker quotes in determining the fair values of our investments. Our investment personnel review the estimates of fair value the pricing services provide to determine if the estimates we obtain are representative of fair values based upon the general knowledge of our investment personnel of the market, their research findings related to unusual fluctuations in value and their comparison of such values to execution prices for similar securities. Our investment personnel monitor the market and are familiar with current trading ranges for similar securities and the pricing of specific investments. Our investment personnel review all pricing estimates that we receive from the pricing services against their expectations with respect to pricing based on fair market curves, security ratings, coupon rates, security type and recent trading activity. Our investment personnel review documentation with respect to the pricing services’ pricing methodology that they obtain periodically to determine if the primary pricing sources, market inputs and pricing frequency for various security types are reasonable. We refer to Note 5 - Fair Value Measurements for more information regarding our methods and assumptions in estimating fair values. Cash and Short-Term Investments - The carrying amounts we report in the balance sheet for these instruments approximate their fair values. Premiums and Reinsurance Receivables and Payables - The carrying amounts we report in the balance sheet for these instruments related to premiums and paid losses and loss expenses approximate their fair values. Revenue Recognition Our insurance subsidiaries recognize insurance premiums as income over the terms of the policies they issue. Our insurance subsidiaries calculate unearned premiums on a daily pro-rata basis. -69- Index Policy Acquisition Costs We defer our insurance subsidiaries’ policy acquisition costs, consisting primarily of commissions, premium taxes and certain other underwriting costs, reduced by ceding commissions, related directly to the successful acquisition of new or renewal insurance contracts. We amortize these deferred policy acquisition costs over the period in which our insurance subsidiaries earn the premiums. The method we follow in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss expenses and certain other costs we expect to incur as our insurance subsidiaries earn the premium. Estimates in the calculation of policy acquisition costs have not shown material variability because of uncertainties in applying accounting principles or as a result of sensitivities to changes in key assumptions. Property and Equipment We report property and equipment at depreciated cost that we compute using the straight-line method based upon estimated useful lives of the assets. Losses and Loss Expenses Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with respect to incurred policyholder claims based on facts and circumstances the insurer knows at that point in time. For example, legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries to pay losses for damages that their policies explicitly excluded or did not intend to cover. At the time of establishing its estimates, an insurer recognizes that its ultimate liability for losses and loss expenses will exceed or be less than such estimates. Our insurance subsidiaries base their estimates of liabilities for losses and loss expenses on assumptions as to future loss trends, expected claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, our insurance subsidiaries may learn additional facts regarding individual claims, and, consequently, it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates for these liabilities. We reflect any adjustments to the liabilities for losses and loss expenses of our insurance subsidiaries in our consolidated results of operations in the period in which our insurance subsidiaries make adjustments to their estimates. O ur insurance subsidiaries maintain liabilities for the payment of losses and loss expenses with respect to both reported and unreported claims. Our insurance subsidiaries establish these liabilities for the purpose of covering the ultimate costs of settling all losses, including investigation and litigation costs. Our insurance subsidiaries base the amount of their liability for reported losses primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss the policyholder incurred. Our insurance subsidiaries determine the amount of their liability for unreported claims and loss expenses on the basis of historical information by line of insurance. Our insurance subsidiaries account for inflation in the reserving function through analysis of costs and trends and reviews of historical reserving results. Our insurance subsidiaries monitor their liabilities closely and recompute them periodically using new information on reported claims and a variety of statistical techniques. Our insurance subsidiaries do not discount their liabilities for losses and loss expenses . -70- Index Reserve estimates can change over time because of unexpected changes in assumptions related to our insurance subsidiaries’ external environment and, to a lesser extent, assumptions related to our insurance subsidiaries’ internal operations. For example, our insurance subsidiaries have experienced an increase in claims severity and a lengthening of the claim settlement periods on bodily injury claims during the past several years. In addition, the COVID-19 pandemic and related government mandates and restrictions resulted in various changes from historical claims reporting and settlement trends during 2020 and resulted in significant increases in loss costs in subsequent years due to a number of factors, including supply chain disruption, higher new and used automobile values, increases in the cost of replacement automobile parts and rising labor rates. These continuing trend changes 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 and cost of skilled labor, the rate of specialized plaintiff attorney involvement in claims, plaintiff attorney utilization of litigation financing and the cost of medical technologies and procedures. Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at December 31, 2024. Our insurance subsidiaries seek to enhance their underwriting results by carefully selecting the product lines they underwrite. Our insurance subsidiaries’ personal lines products primarily include standard and preferred risks in private passenger automobile and homeowners lines. Our insurance subsidiaries’ commercial lines products primarily include business offices, wholesalers, service providers, contractors, artisans and light manufacturing operations. Our insurance subsidiaries have limited exposure to asbestos and other environmental liabilities. Income Taxes We currently file a consolidated federal income tax return that includes us and our insurance subsidiaries. We account for income taxes using the asset and liability method. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at enacted tax rates we expect to be in effect when we realize or settle such amounts. Credit Risk Our objective is to earn competitive returns by investing in a diversified portfolio of securities. Our portfolio of fixed maturity securities and, to a lesser extent, short-term investments is subject to credit risk. We define this risk as the potential loss in fair value resulting from adverse changes in the borrower’s ability to repay its debt to us. We manage this risk by performing an analysis of prospective investments and through regular reviews of our portfolio by our investment personnel. We also limit the amount of our total investment portfolio that we invest in any one security. Our insurance subsidiaries provide property and liability insurance coverages through independent insurance agencies located throughout their operating areas. Our insurance subsidiaries bill the majority of this business directly to their policyholders, although our insurance subsidiaries bill a portion of their commercial business through their agents, to whom they extend credit in the normal course of business. Our insurance subsidiaries have reinsurance agreements with Donegal Mutual and with a number of major unaffiliated reinsurers. Reinsurance Accounting and Reporting Our insurance subsidiaries rely upon reinsurance agreements to limit their maximum net loss from large single risks or risks in concentrated areas and to increase their capacity to write insurance. Reinsurance does not relieve our insurance subsidiaries from liability to their respective policyholders. To the extent that a reinsurer cannot pay losses for which it is liable under the terms of a reinsurance agreement with one or more of our insurance subsidiaries, our insurance subsidiaries retain continued liability for such losses. However, in an effort to reduce the risk of non-payment, our insurance subsidiaries require all of their reinsurers to have an A.M. Best rating of A- or better or, with respect to foreign reinsurers, to have a financial condition that, in the opinion of our management, is equivalent to a company with an A.M. Best rating of A- or better. We refer to Note 10 - Reinsurance for more information regarding the reinsurance agreements of our insurance subsidiaries. -71- Index 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 2024, 2023 and 2022, we realized $ 370,644 , $ 139,135 and $ 360,452 , respectively, in tax benefits upon the exercise of stock options. Earnings Per Share We calculate basic earnings per share by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. We have two classes of common stock, which we refer to as Class A common stock and Class B common stock. Our Class A common stock is entitled to the declaration and payment of cash dividends that are at least 10 % higher than those we declare and pay on our Class B common stock. Accordingly, we use the two-class method for the computation of earnings per common share. The two-class method is an earnings allocation formula that determines earnings per share separately for each class of common stock based on dividends declared and an allocation of remaining undistributed earnings using a participation percentage that reflects the dividend rights of each class. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the underlying fair value of acquired entities. When completing acquisitions, we seek also to identify separately identifiable intangible assets that we have acquired. We assess goodwill and intangible assets with an indefinite useful life for impairment annually. We also assess goodwill and other intangible assets for impairment upon the occurrence of certain events. In making our assessment, we consider a number of factors including operating results, business plans, economic projections, anticipated future cash flows and current market data. Inherent uncertainties exist with respect to these factors and to our judgment in applying them when we make our assessment. Impairment of goodwill and other intangible assets could result from changes in economic and operating conditions in future periods. 2 - Impact of New Accounting Standards In September 2016, the Financial Accounting Standards Board (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. -72- Index In November 2023, the FASB issued guidance that amended previous guidance on the disclosure of reportable segments. The guidance requires disclosure of incremental segment information including the title and position of the individual identified as the chief operating decision maker, a narrative explanation of how the chief operating decision maker uses each reported measure of a segment’s profit or loss in assessing performance and determining how to allocate resources, as well as quantification of significant segment expenses and other items. We refer to Note 19 - Segment Information for further information and disclosure of items required within the amended and enhanced guidance. The adoption of this guidance did not have an impact on our financial position, results of operations or cash flows. In December 2023, the FASB issued guidance to enhance the transparency and usefulness of income tax disclosures. The guidance requires disclosure of specific categories in the rate reconciliation table and additional information for reconciling items that meet a quantitative threshold of equal to or greater than 5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate. The guidance also requires disaggregated disclosure of the amount of income taxes paid for federal, state and foreign taxes. The guidance is effective for annual periods beginning after December 15, 2024. The adoption of this guidance will not have an impact on our financial position, results of operations or cash flows. In November 2024, the FASB issued guidance requiring disaggregated disclosure of income statement expenses in the notes to financial statements. The guidance requires disclosure of certain expenses, including employee compensation, depreciation and selling expenses. The guidance will not impact current income statement expense captions that industry-specific guidance requires. The guidance is effective for annual reporting periods beginning after December 15, 2026. The adoption of this guidance will not have an impact on our financial position, results of operations or cash flows. 3 - Transactions with Affiliates Our insurance subsidiaries conduct business and have various agreements with Donegal Mutual that we describe in the following subparagraphs: 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. In addition, Donegal Mutual has 100 % quota-share reinsurance agreements with Southern Mutual and the Mountain States insurance subsidiaries, and Donegal Mutual places the business of Southern Mutual and the Mountain States insurance subsidiaries 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 2024, 2023 and 2022: 2024 2023 2022 Premiums earned $ 358,062,827 $ 332,272,662 $ 314,321,443 Losses and loss expenses 201,030,943 238,055,099 202,228,589 Prepaid reinsurance premiums 169,621,545 161,991,511 154,472,615 Liability for losses and loss expenses 297,955,741 299,947,390 277,641,902 -73- Index The following amounts represent reinsurance Atlantic States assumed from the pool during 2024, 2023 and 2022: 2024 2023 2022 Premiums earned $ 611,864,614 $ 583,559,746 $ 578,216,706 Losses and loss expenses 354,052,955 409,051,306 395,794,813 Unearned premiums 297,493,977 286,147,727 280,031,908 Liability for losses and loss expenses 517,975,350 507,527,839 496,849,769 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 2024, 2023 and 2022: 2024 2023 2022 Premiums earned $ 19,517 $ 168,243 $ 17,989,939 Losses and loss expenses ( 3,095,130 ) 2,902,422 5,194,974 Liability for losses and loss expenses 10,450,447 17,852,153 22,642,908 In 2024 and 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. In 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 2024, 2023 and 2022: 2024 2023 2022 Premiums earned $ 14,261,265 $ 13,215,814 $ 13,800,018 Losses and loss expenses 19,454,584 17,895,306 10,517,709 Liability for losses and loss expenses 6,876,255 2,497,244 1,271,006 The following amounts represent the effect of affiliated reinsurance transactions on net premiums our insurance subsidiaries earned during 2024, 2023 and 2022: 2024 2023 2022 Assumed $ 611,864,614 $ 583,559,746 $ 578,216,706 Ceded ( 372,343,609 ) ( 345,656,717 ) ( 346,111,400 ) Net $ 239,521,005 $ 237,903,029 $ 232,105,306 -74- Index The following amounts represent the effect of affiliated reinsurance transactions on net losses and loss expenses our insurance subsidiaries incurred during 2024, 2023 and 2022: 2024 2023 2022 Assumed $ 354,052,955 $ 409,051,306 $ 395,790,312 Ceded ( 217,390,397 ) ( 258,852,827 ) ( 217,941,272 ) Net $ 136,662,558 $ 150,198,479 $ 177,849,040 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 $ 224,565,390 , $ 218,974,132 and $ 199,177,393 for 2024, 2023 and 2022, 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 several releases of new systems into service beginning in 2020. Donegal Mutual allocated $ 12.3 million, $ 10.5 million and $ 7.6 million of related costs to our insurance subsidiaries in 2024, 2023 and 2022, respectively. Donegal Mutual will allocate to our insurance subsidiaries their proportionate share of the remaining $ 29.4 million of related costs over the next five years. Donegal Mutual incurred an additional $ 14.4 million of deferred costs related to releases under development that were not yet ready for their intended use at December 31, 2024. 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 effective January 1, 2020. -75- Index 4 - Investments The amortized cost and estimated fair values of our fixed maturities at December 31, 2024 and 2023 are as follows: 2024 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 $ 86,579,024 $ 51,632 $ 86,630,656 $ — $ 8,484,505 $ 78,146,151 Obligations of states and political subdivisions 371,895,483 259,896 372,155,379 649,770 54,062,089 318,743,060 Corporate securities 236,550,262 1,070,337 237,620,599 272,817 13,607,632 224,285,784 Mortgage-backed securities 10,689,147 6,375 10,695,522 — 301,588 10,393,934 Totals $ 705,713,916 $ 1,388,240 $ 707,102,156 $ 922,587 $ 76,455,814 $ 631,568,929 2024 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 $ 87,514,016 $ 50,451 $ 3,771,832 $ 83,792,635 Obligations of states and political subdivisions 41,693,772 9,435 4,298,787 37,404,420 Corporate securities 211,059,119 141,685 8,269,108 202,931,696 Mortgage-backed securities 312,298,058 216,549 18,751,496 293,763,111 Totals $ 652,564,965 $ 418,120 $ 35,091,223 $ 617,891,862 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 -76- Index At December 31, 2024, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $ 233.1 million and an amortized cost of $ 272.5 million. Our holdings also included special revenue bonds with an aggregate fair value of $ 123.0 million and an amortized cost of $ 141.3 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, 2024. Education bonds and water and sewer utility bonds represented 44 % and 37 %, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, 2024. Many of the issuers of the special revenue bonds we held at December 31, 2024 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, 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. 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 $ 219,583 , $ 284,095 and $ 510,819 in other comprehensive income in 2024, 2023 and 2022, respectively. At December 31, 2024 and 2023, net unrealized losses of $ 1.0 million and $ 1.3 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, 2024 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 $ 26,242,529 $ 26,079,023 Due after one year through five years 188,104,030 176,623,906 Due after five years through ten years 234,909,164 215,122,262 Due after ten years 247,150,911 203,349,804 Mortgage-backed securities 10,695,522 10,393,934 Total held to maturity $ 707,102,156 $ 631,568,929 Available for sale Due in one year or less $ 30,880,061 $ 30,671,938 Due after one year through five years 205,273,058 197,656,304 Due after five years through ten years 90,287,938 84,003,172 Due after ten years 13,825,850 11,797,337 Mortgage-backed securities 312,298,058 293,763,111 Total available for sale $ 652,564,965 $ 617,891,862 The cost and estimated fair values of our equity securities at December 31, 2024 were as follows: Cost Gross Gains Gross Losses Estimated Fair Value Equity securities $ 24,725,576 $ 12,087,227 $ 4,993 $ 36,807,810 -77- 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 amortized cost of fixed maturities on deposit with various regulatory authorities at December 31, 2024 and 2023 amounted to $ 10,323,629 and $ 10,499,430 , respectively. We derived net investment income, consisting primarily of interest and dividends, from the following sources: 2024 2023 2022 Fixed maturities $ 44,450,895 $ 40,445,697 $ 34,945,437 Equity securities 710,333 765,881 897,429 Short-term investments 3,621,766 2,471,998 817,428 Other 29,250 29,250 29,250 Investment income 48,812,244 43,712,826 36,689,544 Investment expenses ( 3,894,082 ) ( 2,859,611 ) ( 2,673,432 ) Net investment income $ 44,918,162 $ 40,853,215 $ 34,016,112 We present below gross gains and losses from investments and the change in the difference between fair value and cost of investments: 2024 2023 2022 Gross realized gains: Fixed maturities $ 113,699 $ 1,059,244 $ 1,149,761 Equity securities 289,840 2,662,661 1,765,923 Real estate — — 477,287 403,539 3,721,905 3,392,971 Gross realized losses: Fixed maturities 288,008 3,300,351 2,129,736 Equity securities 95,290 732,940 4,113,526 383,298 4,033,291 6,243,262 Net realized gains (losses) 20,241 ( 311,386 ) ( 2,850,291 ) Gross unrealized gains on equity securities 5,028,206 3,651,125 258,532 Gross unrealized losses on equity securities ( 4,982 ) ( 109,125 ) ( 7,593,038 ) Increase in allowance for credit losses ( 62,393 ) ( 57,807 ) — Net investment gains (losses) $ 4,981,072 $ 3,172,807 $ ( 10,184,797 ) Change in difference between fair value and cost of investments: Fixed maturities $ ( 530,513 ) $ 28,839,658 $ ( 177,147,840 ) Equity securities 5,023,207 2,724,820 15,823,189 Totals $ 4,492,694 $ 31,564,478 $ ( 161,324,651 ) -78- Index We held fixed maturities with unrealized losses representing declines that we considered temporary at December 31, 2024 as follows: Less than 12 months 12 months or longer Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 37,528,341 $ 349,573 $ 112,322,114 $ 11,906,764 Obligations of states and political subdivisions 37,674,513 824,487 292,851,970 57,536,389 Corporate securities 83,342,468 1,505,512 311,435,364 20,371,228 Mortgage-backed securities 112,950,244 1,261,878 153,960,179 17,791,206 Totals $ 271,495,566 $ 3,941,450 $ 870,569,627 $ 107,605,587 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 902 debt securities that were in an unrealized loss position at December 31, 2024. 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 2024, 2023 or 2022. We had no sales or transfers from our held to maturity portfolio in 2024, 2023 or 2022. We had no derivative instruments or hedging activities during 2024, 2023 or 2022. 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. -79- Index At December 31, 2024, 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, 2024, 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, 2024 and 2023. The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at December 31, 2024: 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 $ 83,792,635 $ — $ 83,792,635 $ — Obligations of states and political subdivisions 37,404,420 — 37,404,420 — Corporate securities 202,931,696 — 202,931,696 — Mortgage-backed securities 293,763,111 — 293,763,111 — Equity securities 36,807,810 34,707,981 2,099,829 — Total investments in the fair value hierarchy $ 654,699,672 $ 34,707,981 $ 619,991,691 $ — 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 $ — -80- Index 6 - Deferred Policy Acquisition Costs Changes in our insurance subsidiaries’ deferred policy acquisition costs are as follows: 2024 2023 2022 Balance, January 1 $ 75,043,404 $ 73,170,230 $ 68,028,373 Acquisition costs deferred 158,614,563 156,087,174 147,571,857 Amortization charged to earnings ( 160,311,000 ) ( 154,214,000 ) ( 142,430,000 ) Balance, December 31 $ 73,346,967 $ 75,043,404 $ 73,170,230 7 - Property and Equipment Property and equipment at December 31, 2024 and 2023 consisted of the following: 2024 2023 Estimated Useful Life Office equipment $ 8,288,988 $ 8,289,730 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 12,293,925 12,294,667 Accumulated depreciation ( 9,814,742 ) ( 9,661,262 ) $ 2,479,183 $ 2,633,405 Depreciation expense for 2024, 2023 and 2022 amounted to $ 153,480 , $ 166,400 and $ 173,535 , respectively. 8 - Liability for Losses and Loss Expenses The establishment of an appropriate liability for losses and loss expenses is an inherently uncertain process, and we can provide no assurance that our insurance subsidiaries’ ultimate liability will not exceed their loss and loss expense reserves and have an adverse effect on our results of operations and financial condition. For example, legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries to pay losses for damages that their policies explicitly excluded or did not intend to cover. Furthermore, we cannot predict the timing, frequency and extent of adjustments to our insurance subsidiaries’ estimated future liabilities, because the historical conditions and events that serve as a basis for our insurance subsidiaries’ estimates of ultimate claim costs may change. As is the case for substantially all property and casualty insurance companies, our insurance subsidiaries have found it necessary in the past to increase their estimated future liabilities for losses and loss expenses in certain periods, and, in other periods, their estimates have exceeded their actual liabilities. Changes in our insurance subsidiaries’ estimate of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received since the prior reporting date. -81- Index We summarize activity in our insurance subsidiaries’ liability for losses and loss expenses as follows: 2024 2023 2022 Balance at January 1 $ 1,126,156,838 $ 1,121,045,758 $ 1,077,620,301 Less reinsurance recoverable ( 437,013,974 ) ( 451,184,222 ) ( 451,261,306 ) Cumulative effect of adoption of updated accounting guidance for credit losses at January 1 — 1,131,836 — Net balance at January 1 689,142,864 670,993,372 626,358,995 Incurred related to: Current year 619,089,646 625,831,043 608,900,206 Prior years ( 14,971,930 ) ( 16,653,344 ) ( 44,821,213 ) Total incurred 604,117,716 609,177,699 564,078,993 Paid related to: Current year 319,195,507 330,290,039 302,272,322 Prior years 269,701,400 260,738,168 218,304,130 Total paid 588,896,907 591,028,207 520,576,452 Net balance at December 31 704,363,673 689,142,864 669,861,536 Plus reinsurance recoverable 416,621,377 437,013,974 451,184,222 Balance at December 31 $ 1,120,985,050 $ 1,126,156,838 $ 1,121,045,758 Our insurance subsidiaries recognized a decrease in their liability for losses and loss expenses of prior years of $ 15.0 million, $ 16.7 million and $ 44.8 million in 2024, 2023 and 2022, 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 2024 development represented 2.2 % of the December 31, 2023 net carried reserves and resulted primarily from lower-than-expected loss emergence in the commercial multi-peril, personal automobile and homeowner lines of business, offset partially by higher-than-expected loss emergence in the workers’ compensation and commercial automobile lines of business, for accident years prior to 2024. The majority of the 2024 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO. 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. Short-duration contracts are contracts for which our insurance subsidiaries receive premiums that they recognize as revenue over the period of the contract in proportion to the amount of insurance protection our insurance subsidiaries provide. Our insurance subsidiaries consider the policies they issue to be short-duration contracts. We consider our insurance subsidiaries’ material lines of business to be personal automobile, homeowners, commercial automobile, commercial multi-peril and workers’ compensation. Our insurance subsidiaries determine incurred but not reported (“IBNR”) reserves by subtracting the cumulative loss and loss expense amounts our insurance subsidiaries have paid and the case reserves our insurance subsidiaries have established at the balance sheet date from their actuaries’ estimate of the ultimate cost of losses and loss expenses. Accordingly, our insurance subsidiaries’ IBNR reserves include their actuaries’ projections of the cost of unreported claims as well as their actuaries’ projected development of case reserves on known claims and reopened claims. Our insurance subsidiaries’ methodology for estimating IBNR reserves has been in place for many years, and their actuaries made no significant changes to that methodology during 2024. -82- Index 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, 2024, 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, 2015 through 2023, which we present as supplementary information. -83- Index Personal Automobile At December 31, 2024 Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2015 137,569 139,333 139,181 142,493 142,408 142,073 142,010 141,965 141,894 $ 141,973 $ 49 70 2016 150,216 153,937 157,516 157,943 156,935 156,436 156,227 155,834 155,822 114 73 2017 166,690 176,728 175,939 174,784 173,730 173,032 172,712 172,376 220 79 2018 186,580 183,358 181,558 180,787 179,732 178,990 178,799 345 81 2019 161,056 157,689 156,300 154,805 153,883 153,253 652 68 2020 111,483 103,585 100,339 99,253 98,506 772 43 2021 119,364 118,752 114,707 114,874 1,352 47 2022 126,203 134,834 136,073 3,173 50 2023 152,740 155,260 6,193 52 2024 153,403 29,466 45 Total $ 1,460,339 Personal Automobile Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Unaudited (in thousands) 2015 93,611 116,303 128,395 135,027 139,121 140,028 140,892 141,172 141,298 $ 141,392 2016 102,433 129,507 143,321 151,159 153,521 154,769 155,521 155,505 155,602 2017 111,964 142,372 159,879 166,099 169,190 170,895 171,513 171,863 2018 115,585 150,175 163,036 169,651 173,922 176,233 177,367 2019 103,101 127,187 141,004 146,667 150,017 150,842 2020 66,084 81,783 89,736 94,094 96,277 2021 76,477 93,998 103,427 109,052 2022 83,616 109,845 125,624 2023 99,574 127,752 2024 101,227 Total 1,356,998 All outstanding liabilities before 2015, net of reinsurance 907 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 104,248 -84- Index Homeowners At December 31, 2024 Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2015 63,359 63,925 63,053 63,071 63,099 62,993 63,043 63,036 63,042 $ 63,041 $ — 14 2016 62,443 64,064 63,735 63,355 63,279 63,409 63,472 63,478 63,462 — 12 2017 79,283 79,911 79,305 79,247 79,065 78,815 78,819 78,687 — 17 2018 81,965 83,385 82,905 82,566 82,058 81,977 81,930 36 19 2019 73,294 73,554 73,234 72,168 72,176 71,785 90 16 2020 61,633 62,718 61,595 61,495 61,285 94 14 2021 67,677 66,996 65,451 64,425 269 11 2022 82,433 82,045 81,838 1,066 10 2023 86,693 87,047 1,657 11 2024 85,975 8,875 10 Total $ 739,475 Homeowners Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Unaudited (in thousands) 2015 51,885 61,542 62,204 62,590 62,844 62,943 62,936 62,938 63,042 $ 63,041 2016 50,125 61,145 62,760 63,144 63,162 63,217 63,266 63,296 63,302 2017 67,077 77,663 78,006 78,127 78,454 78,528 78,556 78,662 2018 70,385 79,892 80,905 81,464 81,568 81,826 81,833 2019 58,074 69,145 70,416 70,884 71,209 71,446 2020 51,226 60,348 60,809 61,189 61,181 2021 52,161 63,920 64,124 64,258 2022 63,107 79,187 80,132 2023 67,636 84,194 2024 67,702 Total 715,751 All outstanding liabilities before 2015, net of reinsurance 98 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 23,822 -85- Index Commercial Automobile At December 31, 2024 Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2015 46,526 48,323 51,412 54,259 54,517 54,619 53,793 53,477 53,431 $ 53,339 $ 6 12 2016 54,302 57,353 65,905 67,127 66,894 66,085 65,922 65,602 65,537 23 13 2017 61,484 67,927 67,697 67,249 65,310 64,631 65,022 64,821 43 14 2018 79,307 81,396 82,313 83,043 82,226 82,368 82,234 102 16 2019 88,864 91,245 90,290 86,140 84,566 83,709 129 16 2020 90,367 87,766 85,016 83,590 83,590 998 14 2021 109,824 99,231 96,947 97,903 2,546 15 2022 115,287 108,690 109,314 7,758 15 2023 112,135 110,821 16,917 14 2024 115,327 38,125 11 Total $ 866,595 Commercial Automobile Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Unaudited (in thousands) 2015 23,875 35,342 41,678 48,261 51,605 51,992 52,728 53,052 53,047 $ 53,333 2016 27,033 38,237 48,837 57,237 60,485 64,421 65,076 65,273 65,315 2017 28,707 40,213 49,703 57,128 59,889 62,187 64,074 64,219 2018 33,862 47,941 57,451 69,487 74,421 79,308 80,375 2019 36,948 53,026 63,575 72,139 80,617 81,647 2020 31,884 46,459 60,665 70,669 78,974 2021 39,851 56,101 69,908 80,595 2022 46,242 67,367 81,554 2023 45,387 65,131 2024 43,206 Total 694,349 All outstanding liabilities before 2015, net of reinsurance 62 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 172,308 -86- Index Commercial Multi-Peril At December 31, 2024 Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2015 42,070 43,874 44,728 45,104 45,873 45,366 45,420 45,595 46,181 $ 45,941 $ — 6 2016 43,005 46,988 48,267 48,871 48,732 48,823 48,802 48,374 48,213 18 6 2017 56,185 56,043 56,517 54,812 55,076 54,244 55,002 54,475 39 7 2018 66,265 66,470 67,749 67,810 65,911 65,900 65,727 178 7 2019 71,865 73,836 76,326 75,821 76,015 74,995 559 7 2020 83,195 79,910 76,490 74,796 72,624 1,722 8 2021 116,827 117,574 119,321 116,202 8,459 7 2022 142,395 141,935 139,486 16,187 7 2023 129,069 125,596 23,997 6 2024 119,376 43,797 5 Total $ 862,635 Commercial Multi-Peril Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Unaudited (in thousands) 2015 21,837 29,419 34,323 39,162 42,849 44,090 44,439 44,764 45,572 $ 45,678 2016 19,660 29,402 34,612 41,193 43,435 44,944 47,432 48,048 48,169 2017 27,399 36,926 42,691 46,361 49,488 51,494 52,422 53,886 2018 30,597 42,296 48,050 54,913 59,118 62,253 63,040 2019 28,210 41,266 47,522 55,951 63,156 69,762 2020 34,729 46,193 52,646 58,754 66,669 2021 46,768 69,735 82,580 94,484 2022 57,641 86,664 100,931 2023 56,238 82,006 2024 45,663 Total 670,288 All outstanding liabilities before 2015, net of reinsurance 814 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 193,161 -87- Index Workers’ Compensation At December 31, 2024 Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total IBNR Plus Expected Development on Reported Claims Cumulative Number of Reported Claims Unaudited (dollars and reported claims in thousands) 2015 53,332 49,615 45,991 44,986 43,006 42,597 42,225 42,043 41,875 $ 41,705 $ 92 6 2016 58,814 49,802 47,883 44,969 44,098 43,559 43,484 43,447 43,610 189 6 2017 60,450 56,351 52,687 51,464 49,557 48,802 48,668 48,504 622 6 2018 62,197 55,291 52,514 47,912 47,007 46,742 46,552 694 6 2019 60,998 59,624 57,728 56,480 55,893 56,121 631 7 2020 57,172 57,850 57,384 56,714 56,605 1,050 6 2021 67,035 65,530 64,225 64,445 2,346 7 2022 67,046 67,331 69,467 3,418 7 2023 62,401 65,137 7,311 6 2024 60,522 21,305 5 Total $ 552,668 Workers’ Compensation Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Accident Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Unaudited (in thousands) 2015 13,071 27,531 34,192 36,929 37,936 38,596 39,096 39,478 39,762 $ 39,898 2016 14,709 30,344 37,178 40,570 41,208 41,543 41,809 42,195 42,486 2017 15,581 31,990 39,684 42,954 44,242 45,174 45,935 46,339 2018 17,644 31,928 37,072 41,611 43,279 44,359 44,624 2019 16,939 33,009 41,740 47,121 50,079 51,944 2020 14,591 32,817 44,089 48,259 50,928 2021 20,931 42,633 51,781 56,162 2022 18,643 41,225 51,916 2023 17,546 39,922 2024 15,800 Total 440,019 All outstanding liabilities before 2015, net of reinsurance 6,493 Liabilities for claims and claims adjustment expenses, net of reinsurance $ 119,142 -88- 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) 2024 Net outstanding liabilities: Personal automobile $ 104,248 Homeowners 23,822 Commercial automobile 172,308 Commercial multi-peril 193,161 Workers ’ compensation 119,142 Other 36,626 649,307 Reinsurance recoverable: Personal automobile $ 89,839 Homeowners 15,647 Commercial automobile 98,041 Commercial multi-peril 100,308 Workers ’ compensation 82,666 Other 12,058 398,559 Unallocated loss adjustment expenses $ 73,119 Gross liability for unpaid losses and loss expenses $ 1,120,985 The following table presents supplementary information about average historical claims duration as of December 31, 2024: Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance Years 1 2 3 4 5 6 7 8 9 10 Personal automobile 65.4 % 17.2 % 9.0 % 4.3 % 2.2 % 0.9 % 0.5 % 0.1 % 0.1 % 0.1 % Homeowners 81.1 16.1 1.2 0.5 0.2 0.2 — 0.1 0.1 — Commercial automobile 41.5 18.2 13.9 12.1 6.9 3.5 1.6 0.4 — 0.5 Commercial multi-peril 43.5 18.5 9.9 10.2 7.6 4.6 2.2 1.6 1.0 0.2 Workers’ compensation 30.3 32.9 15.5 7.8 3.4 2.0 1.0 0.9 0.7 0.3 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, 2024, 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 %. 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, 2024. The cash advance carries a fixed interest rate of 3.806 % and is due in September 2026 . -89- Index 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, 2024. FHLB stock purchased and owned as part of the agreement $ 1,605,000 Collateral pledged, at par (carrying value $ 40,655,374 ) 44,054,754 Borrowing capacity currently available 3,322,670 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 2024: • excess of loss reinsurance, under which Donegal Mutual and our insurance subsidiaries recovered losses over a set retention of $ 3.0 million for all liability and workers’ compensation losses and a set retention of $ 4.0 million for property 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. For property insurance, our insurance subsidiaries had excess of loss reinsurance that provided for coverage of $ 36.0 million per loss over a set retention of $ 4.0 million. For liability insurance, our insurance subsidiaries had excess of loss reinsurance that provided for coverage of $ 72.0 million per occurrence over a set retention of $ 3.0 million. For workers’ compensation insurance, our insurance subsidiaries had excess of loss reinsurance that provided for coverage of $ 17.0 million on any one life over a set retention of $ 3.0 million. As many as 29 reinsurers provided coverage for 2024 on any one treaty with no reinsurer taking more than 20 % 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, Atlantic States, MICO and Peninsula are required to be members of the Michigan Catastrophic Claims Association (“MCCA”). The MCCA provides reinsurance to Atlantic States, MICO and Peninsula 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. -90- Index The following amounts represent ceded reinsurance transactions with unaffiliated reinsurers during 2024, 2023 and 2022: 2024 2023 2022 Premiums written $ 38,495,838 $ 43,030,879 $ 37,002,702 Premiums earned 38,688,465 42,416,710 36,947,675 Losses and loss expenses ( 2,537,221 ) 16,318,760 31,096,016 Prepaid reinsurance premiums 6,540,327 6,732,955 6,118,784 Liability for losses and loss expenses 101,730,415 116,717,187 149,628,406 Total Reinsurance The following amounts represent total ceded reinsurance transactions with both affiliated and unaffiliated reinsurers during 2024, 2023 and 2022: 2024 2023 2022 Premiums earned $ 411,032,074 $ 388,073,427 $ 383,059,075 Losses and loss expenses 214,853,176 275,171,587 249,037,288 Prepaid reinsurance premiums 176,161,872 168,724,466 160,591,399 Liability for losses and loss expenses 417,012,858 437,013,974 451,184,222 The following amounts represent the effect of reinsurance on premiums written for 2024, 2023 and 2022: 2024 2023 2022 Direct $ 737,539,403 $ 702,227,408 $ 641,971,207 Assumed 623,210,848 589,675,724 568,272,026 Ceded ( 418,469,480 ) ( 396,206,492 ) ( 366,714,634 ) Net premiums written $ 942,280,771 $ 895,696,640 $ 843,528,599 The following amounts represent the effect of reinsurance on premiums earned for 2024, 2023 and 2022: 2024 2023 2022 Direct $ 735,818,955 $ 686,584,907 $ 627,331,528 Assumed 611,864,599 583,559,906 578,216,997 Ceded ( 411,032,074 ) ( 388,073,427 ) ( 383,059,075 ) Net premiums earned $ 936,651,480 $ 882,071,386 $ 822,489,450 Percentage of assumed premiums earned to net premiums earned 65.3 % 66.2 % 70.3 % 11 - Income Taxes Our provision for income tax expense (benefit) for 2024, 2023 and 2022 consisted of the following: 2024 2023 2022 Current federal income tax $ 11,958,424 $ 408,575 $ 1,280,041 Deferred federal income tax ( 481,744 ) 229,397 ( 2,958,735 ) Income tax expense (benefit) $ 11,476,680 $ 637,972 $ ( 1,678,694 ) -91- 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: 2024 2023 2022 Income (loss) before income tax expense (benefit) $ 62,338,932 $ 5,063,476 $ ( 3,638,099 ) Tax at federal statutory rate 13,091,176 1,063,330 ( 764,001 ) Tax-exempt interest ( 1,260,114 ) ( 1,328,312 ) ( 1,446,102 ) Proration 329,468 351,415 384,944 Dividends received deduction ( 57,759 ) ( 77,348 ) ( 93,675 ) Stock options 101,600 595,602 216,893 Additional tax paid for prior year ( 5,157 ) 159,261 ( 6,071 ) Fixed-maturity dispositions ( 585,845 ) — — Other, net ( 136,689 ) ( 125,976 ) 29,318 Income tax expense (benefit) $ 11,476,680 $ 637,972 $ ( 1,678,694 ) The tax effects of temporary differences that give rise to significant portions of our deferred tax assets and deferred tax liabilities at December 31, 2024 and 2023 are as follows: 2024 2023 Deferred tax assets: Unearned premium $ 18,377,475 $ 18,130,477 Loss reserves 10,579,697 10,067,846 Net unrealized losses 7,498,822 8,743,238 Net state operating loss carryforward - DGI Parent 7,581,066 8,072,420 Other 1,035,322 1,492,635 Total gross deferred tax assets 45,072,382 46,506,616 Less valuation allowance ( 7,581,066 ) ( 8,072,420 ) Net deferred tax assets 37,491,316 38,434,196 Deferred tax liabilities: Deferred policy acquisition costs 15,402,863 15,759,115 Loss reserve transition adjustment 271,738 564,002 Other 3,046,854 2,578,554 Total gross deferred tax liabilities 18,721,455 18,901,671 Net deferred tax asset $ 18,769,861 $ 19,532,525 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, 2024 and 2023, we established a valuation allowance of $ 7.6 million and $ 8.1 million, respectively, for our net state operating loss carryforward. We determined that we were not required to establish a valuation allowance for the other net deferred tax assets of $ 37.5 million and $ 38.4 million at December 31, 2024 and 2023, 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. -92- 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 2024, 2023 or 2022. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through December 31, 2024. At December 31, 2024 and 2023, 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 2024, 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 ten 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 2024, we adopted a new 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 2, 2024 under our prior director plan. We issued 8,500 shares of restricted stock on January 3, 2023 under our prior director plan. We issued 8,500 shares of restricted stock on January 4, 2022 under our prior director plan. No further shares are available for future option grants for plans in effect prior to 2024. We measure all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and record such expense in our results of operations. In determining the expense we record for stock options granted to directors and employees of our subsidiaries and affiliates, we estimate the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The significant assumptions we utilize in applying the Black-Scholes option pricing model are the risk-free interest rate, expected term, dividend yield and expected volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected term used as the assumption in the model. We base the expected term of an option award on our historical experience for similar awards. We determine the dividend yield by dividing the per share dividend by the grant date stock price. We base the expected volatility on the volatility of our stock price over a historical period comparable to the expected term. The weighted-average grant date fair value of options we granted during 2024 was $ 1.41 . We calculated this fair value based upon a risk-free interest rate of 4.35 %, an expected life of three years , an expected volatility of 16 % and an expected dividend yield of 4.4 %. -93- 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 %. We charged compensation expense for our stock compensation plans against income before income taxes of $ 980,911 , $ 876,569 and $ 818,853 for the years ended December 31, 2024, 2023 and 2022, respectively, with a corresponding income tax benefit of $ 205,991 , $ 184,079 and $ 171,959 . At December 31, 2024 and 2023, our total unrecognized compensation cost related to non-vested share-based compensation granted under our stock compensation plans was $ 1.8 million and $ 1.9 million, respectively. We expect to recognize this cost over a weighted average period of 1.9 years. During 2024, we received cash from option exercises under all stock compensation plans of $ 30.7 million. We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of $ 370,644 for 2024. 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. Information regarding activity in our stock option plans follows: Number of Options Weighted- Average Exercise Price Per Share 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 Granted - 2024 910,100 15.76 Exercised - 2024 ( 2,035,226 ) 15.06 Forfeited - 2024 ( 211,400 ) 14.19 Expired - 2024 ( 229,309 ) 15.63 Outstanding at December 31, 2024 3,486,493 $ 14.57 Exercisable at: December 31, 2022 4,627,630 $ 15.21 December 31, 2023 3,234,327 $ 14.90 December 31, 2024 1,792,942 $ 14.24 Shares available for future option grants at December 31, 2024 totaled 4,089,900 shares under all plans. -94- Index The following table summarizes information about stock options outstanding at December 31, 2024: Grant Date Exercise Price Number of Options Outstanding Weighted-Average Remaining Contractual Life Number of Options Exercisable December 17, 2020 14.43 469,550 1.0 years 469,550 January 4, 2021 14.07 10,000 1.0 years 10,000 December 16, 2021 14.39 557,793 2.0 years 557,793 December 15, 2022 14.09 727,750 3.0 years 485,166 December 21, 2023 13.87 811,300 4.0 years 270,433 December 19, 2024 15.76 910,100 5.0 years — Total 3,486,493 1,792,942 Employee Stock Purchase Plan Since 1996, we have maintained an Employee Stock Purchase Plan. During 2021, we adopted a plan that made 500,000 shares of our Class A common stock available for issuance and extends over a 10 -year period. The plan provides for shares to be offered to all eligible employees at a purchase price equal to the lesser of 85 % of the fair market value of our Class A common stock on the last day before the first day of each enrollment period (June 1 and December 1 of each year) under the plan or 85 % of the fair market value of our Class A common stock on the last day of each subscription period (June 30 and December 31 of each year). A summary of plan activity follows: Shares Issued Price Shares 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 January 1, 2024 11.89 29,787 July 1, 2024 10.95 33,899 On January 1, 2025, we issued 28,500 shares at a price of $ 11.25 per share under this plan. Agency Stock Purchase Plan Since 1996, we have maintained an Agency Stock Purchase Plan. During 2021, we adopted a plan that made 500,000 shares of our Class A common stock available for issuance to agents of our insurance subsidiaries and Donegal Mutual. During 2024, 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 2024, 2023 and 2022, we issued 81,180 , 86,469 and 104,393 shares, respectively, under the 2021 plan. The expense we recognized under this plan was not material. -95- Index 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: 2024 2023 2022 Atlantic States: Statutory capital and surplus $ 316,926,609 $ 273,626,140 $ 263,579,356 Statutory unassigned surplus 209,677,754 167,301,333 158,056,862 Statutory net income (loss) 40,741,454 7,193,716 ( 3,124,687 ) MICO: Statutory capital and surplus 74,616,370 71,608,571 75,441,871 Statutory unassigned surplus 52,590,070 49,582,271 53,422,483 Statutory net income (loss) 7,822,780 3,298,940 ( 233,391 ) Peninsula: Statutory capital and surplus 47,342,601 50,398,403 52,234,684 Statutory unassigned surplus 29,033,401 32,089,203 33,925,484 Statutory net income 2,140,162 4,121,754 4,192,697 Southern: Statutory capital and surplus 70,050,664 68,041,175 64,463,124 Statutory unassigned surplus ( 16,898,113 ) ( 8,907,602 ) 7,523,951 Statutory net loss ( 7,147,676 ) ( 16,927,267 ) ( 410,561 ) We rely on dividends from our insurance subsidiaries as a significant source of cash for payment of dividends to our stockholders. 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, 2024 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 2025 are approximately $ 40.7 million from Atlantic States, $ 7.8 million from MICO and $ 4.7 million from Peninsula, or a total of approximately $ 53.3 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. -96- Index Reconciliations of statutory net income (loss) 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, 2024 2023 2022 Statutory net income (loss) of insurance subsidiaries $ 43,556,720 $ ( 2,312,857 ) $ 424,058 Increases (decreases): Deferred policy acquisition costs ( 1,696,437 ) 1,873,174 5,141,857 Deferred federal income taxes 481,744 ( 229,397 ) 2,958,735 Salvage and subrogation recoverable 3,674,600 3,644,800 5,195,800 Consolidating eliminations and adjustments ( 9,024,921 ) ( 10,574,579 ) ( 14,791,466 ) Parent-only net income (loss) 13,870,546 12,024,363 ( 888,389 ) Net income (loss) $ 50,862,252 $ 4,425,504 $ ( 1,959,405 ) December 31, 2024 2023 2022 Statutory capital and surplus of insurance subsidiaries $ 508,936,244 $ 463,674,289 $ 455,719,035 Increases (decreases): Deferred policy acquisition costs 73,346,967 75,043,404 73,170,230 Deferred federal income taxes ( 13,302,370 ) ( 13,072,768 ) ( 23,794,084 ) Salvage and subrogation recoverable 36,025,600 32,351,000 28,706,200 Non-admitted assets and other adjustments, net 1,722,807 1,328,142 712,623 Fixed maturities ( 33,993,851 ) ( 41,036,366 ) ( 49,367,986 ) Parent-only equity and other adjustments ( 26,959,266 ) ( 38,542,347 ) ( 1,553,006 ) Stockholders’ equity $ 545,776,131 $ 479,745,354 $ 483,593,012 16 - Supplementary Cash Flow Information The following table reflects net income taxes and interest we paid during 2024, 2023 and 2022: 2024 2023 2022 Income taxes $ 3,500,000 $ — $ 4,500,000 Interest 969,089 618,519 623,947 -97- 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) 2024 2023 2022 Basic earnings (loss) per share: Numerator: Allocation of net income (loss) $ 43,178 $ 3,788 $ ( 1,571 ) Denominator: Weighted-average shares outstanding 28,155 27,469 26,409 Basic earnings (loss) per share $ 1.53 $ 0.14 $ ( 0.06 ) Diluted earnings (loss) per share: Numerator: Allocation of net income (loss) $ 43,178 $ 3,788 $ ( 1,571 ) Denominator: Number of shares used in basic computation 28,155 27,469 26,409 Weighted-average effect of dilutive securities Add: Director and employee stock options 91 94 — Number of shares used in per share computations 28,246 27,563 26,409 Diluted earnings (loss) per share $ 1.53 $ 0.14 $ ( 0.06 ) 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) 2024 2023 2022 Basic and diluted earnings (loss) per share: Numerator: Allocation of net income (loss) $ 7,684 $ 638 $ ( 388 ) Denominator: Weighted-average shares outstanding 5,577 5,577 5,577 Basic and diluted earnings (loss) per share $ 1.38 $ 0.11 $ ( 0.07 ) 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. -98- Index 18 - Condensed Financial Information of Parent Company Condensed Balance Sheets (in thousands) December 31, 2024 2023 Assets Investment in subsidiaries/affiliates (equity method) $ 559,452 $ 506,855 Short-term investments 6,551 1,469 Cash 20,014 8,043 Property and equipment 385 504 Other 2,013 4,866 Total assets $ 588,415 $ 521,737 Liabilities and Stockholders’ Equity Liabilities Cash dividends declared to stockholders $ 6,031 $ 5,570 Notes payable to subsidiary 35,000 35,000 Other 1,608 1,422 Total liabilities 42,639 41,992 Stockholders’ equity 545,776 479,745 Total liabilities and stockholders’ equity $ 588,415 $ 521,737 Condensed Statements of Income (Loss) and Comprehensive Income (Loss) (in thousands) Year Ended December 31, 2024 2023 2022 Statements of Income (Loss) Revenues Dividends from subsidiaries $ 15,000 $ 13,000 $ — Other 669 638 526 Total revenues 15,669 13,638 526 Expenses Operating expenses 1,314 1,202 1,245 Interest 1,120 787 787 Total expenses 2,434 1,989 2,032 Income (loss) before income tax benefit and equity in undistributed net income (loss) of subsidiaries 13,235 11,649 ( 1,506 ) Income tax benefit ( 635 ) ( 375 ) ( 618 ) Income (loss) before equity in undistributed net income (loss) of subsidiaries 13,870 12,024 ( 888 ) Equity in undistributed net income (loss) of subsidiaries 36,992 ( 7,598 ) ( 1,071 ) Net income (loss) $ 50,862 $ 4,426 $ ( 1,959 ) Statements of Comprehensive Income (Loss) Net income (loss) $ 50,862 $ 4,426 $ ( 1,959 ) Other comprehensive income (loss), net of tax Unrealized gain (loss) - subsidiaries 4,681 6,018 ( 44,988 ) Other comprehensive income (loss), net of tax 4,681 6,018 ( 44,988 ) Comprehensive income (loss) $ 55,543 $ 10,444 $ ( 46,947 ) -99- Index Condensed Statements of Cash Flows (in thousands) Year Ended December 31, 2024 2023 2022 Cash flows from operating activities: Net income (loss) $ 50,862 $ 4,426 $ ( 1,959 ) Adjustments: Equity in undistributed net (income) loss of subsidiaries ( 36,992 ) 7,598 1,071 Other 3,159 ( 168 ) ( 1,972 ) Net adjustments ( 33,833 ) 7,430 ( 901 ) Net cash provided (used) 17,029 11,856 ( 2,860 ) Cash flows from investing activities: Net (purchase) sale of short-term investments ( 5,082 ) 5,856 ( 7,316 ) Net purchase of property and equipment — ( 45 ) — Investment in subsidiaries ( 10,924 ) ( 819 ) ( 768 ) Other — 30 ( 28 ) Net cash (used) received ( 16,006 ) 5,022 ( 8,112 ) Cash flows from financing activities: Cash dividends paid ( 22,701 ) ( 21,894 ) ( 20,503 ) Issuance of common stock 33,649 9,771 20,388 Net cash received (used) 10,948 ( 12,123 ) ( 115 ) Net change in cash 11,971 4,755 ( 11,087 ) Cash at beginning of year 8,043 3,288 14,375 Cash at end of year $ 20,014 $ 8,043 $ 3,288 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. Our chief operating decision maker, which is our Chief Executive Officer, evaluates the performance of the commercial lines and personal lines primarily based upon our insurance subsidiaries’ underwriting results as determined under SAP. This segmentation is consistent with the segmentation we utilize to manage our business. We make resource allocation decisions based upon historical underwriting results as well as perceived opportunities for future profitable growth within each segment. We operate only in the United States, and no single customer or agent provides 10 percent or more of our revenues. -100- Index Financial data by segment is as follows: 2024 Investments Commercial Lines Personal Lines Total (in thousands) Revenues: Net premiums earned $ — $ 539,683 $ 396,968 $ 936,651 Net investment income 44,918 — — 44,918 Investment gains 4,981 — — 4,981 Total segment revenues 49,899 539,683 396,968 986,550 Other 3,055 Total revenues $ 989,605 Segment expenses: Net losses and loss expenses — 336,353 271,918 608,271 Other underwriting expenses — 193,431 119,311 312,742 Policyholder dividends — 4,073 — 4,073 Total segment expenses — 533,857 391,229 925,086 SAP underwriting income — 5,826 5,739 11,565 GAAP adjustments 1,331 GAAP underwriting income 12,896 Net investment income 44,918 Investment gains 4,981 Other ( 456 ) Income before income tax expense $ 62,339 -101- Index 2023 Investments Commercial Lines Personal Lines Total (in thousands) Revenues: Net premiums earned $ — $ 533,029 $ 349,042 $ 882,071 Net investment income 40,853 — — 40,853 Investment gains 3,173 — — 3,173 Total segment revenues 44,026 533,029 349,042 926,097 Other 1,241 Total revenues $ 927,338 Segment expenses: Net losses and loss expenses — 346,177 265,894 612,071 Other underwriting expenses — 188,537 118,266 306,803 Policyholder dividends — 5,313 — 5,313 Total segment expenses — 540,027 384,160 924,187 SAP underwriting loss — ( 6,998 ) ( 35,118 ) ( 42,116 ) GAAP adjustments 3,735 GAAP underwriting loss ( 38,381 ) Net investment income 40,853 Investment gains 3,173 Other ( 582 ) Income before income tax expense $ 5,063 2022 Investments Commercial Lines Personal Lines Total (in thousands) Revenues: Net premiums earned $ — $ 521,227 $ 301,263 $ 822,490 Net investment income 34,016 — — 34,016 Investment losses ( 10,185 ) — — ( 10,185 ) Total segment revenues 23,831 521,227 301,263 846,321 Other 1,900 Total revenues $ 848,221 Segment expenses: Net losses and loss expenses — 350,719 217,581 568,300 Other underwriting expenses — 187,613 97,188 284,801 Policyholder dividends — 5,560 — 5,560 Total segment expenses — 543,892 314,769 858,661 SAP underwriting loss — ( 22,665 ) ( 13,506 ) ( 36,171 ) GAAP adjustments 8,667 GAAP underwriting loss ( 27,504 ) Net investment income 34,016 Investment losses ( 10,185 ) Other 35 Loss before income tax benefit $ ( 3,638 ) -102- Index 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, 2024 and 2023. These liabilities included $ 668,722 and $ 702,261 related to surcharges collected by our insurance subsidiaries on behalf of regulatory authorities for 2024 and 2023, 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 receivable. 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. 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, 2024 and 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 2024 and 2023. At and For the Year Ended December 31, 2024 At and For the Year Ended December 31, 2023 Held-to- Maturity, Net of Allowance for Expected Credit Losses Allowance for Expected Credit Losses Held-to- Maturity, Net of Allowance for Expected Credit Losses Allowance for Expected Credit Losses (in thousands) Balance at beginning of period $ 679,497 $ 1,326 $ 688,439 $ — Cumulative effect of adoption of updated accounting guidance for credit losses — 1,268 Current period change for expected credit losses 62 58 Balance at end of period $ 705,714 $ 1,388 $ 679,497 $ 1,326 -103- Index 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, 2024 and 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 2024 and 2023. At and For the Year Ended December 31, 2024 At and For the Year Ended December 31, 2023 Reinsurance Receivable, Net of Allowance for Expected Credit Losses Allowance for Expected Credit Losses Reinsurance Receivable, Net of Allowance for Expected Credit Losses Allowance for Expected Credit Losses (in thousands) Balance at beginning of period $ 441,431 $ 1,394 $ 456,522 $ — Cumulative effect of adoption of updated accounting guidance for credit losses — 1,132 Current period change for expected credit losses ( 1,003 ) 262 Balance at end of period $ 420,742 $ 391 $ 441,431 $ 1,394 -104- 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, 2024 and 2023, the related consolidated statements of income (loss) and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2024, 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, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2024, 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, 2024, 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 10, 2025 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, 2024, the Company recorded a liability of $1.121 billion for reserves. -105- 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 have served as the Company’s auditor since 1986. Philadelphia, Pennsylvania March 10, 2025 -106- Index Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.