DONEGAL GROUP INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. We recommend that you read the following information in conjunction with the historical financial information and the footnotes to that financial information we include in this Quarterly Report on Form 10-Q. We also recommend you read Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2025. 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 United States generally accepted accounting principles (“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 liabilities of our insurance subsidiaries for property and casualty insurance 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. Liabilities for Losses and Loss Expenses Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with respect to incurred policyholder claims based on facts and circumstances the insurer knows at that point in time. For example, legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries to pay losses for damages that their policies explicitly excluded or did not intend to cover. At the time of establishing its estimates, an insurer recognizes that its ultimate liability for losses and loss expenses will exceed or be less than such estimates. Our insurance subsidiaries base their estimates of liabilities for losses and loss expenses on assumptions as to future loss trends, expected claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, our insurance subsidiaries may learn additional facts regarding individual claims, and, consequently, it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates for these liabilities. We reflect any adjustments to the liabilities for losses and loss expenses of our insurance subsidiaries in our consolidated results of operations in the period in which our insurance subsidiaries make adjustments to their estimates. Our insurance subsidiaries maintain liabilities for the payment of losses and loss expenses with respect to both reported and unreported claims. Our insurance subsidiaries establish these liabilities for the purpose of covering the ultimate costs of 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. 22 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 (including due to tariffs), availability and cost of skilled labor, the rate of litigation (including specialized plaintiff attorney involvement) in claims, increasing plaintiff attorney utilization of litigation financing and its impact on litigation strategies 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 March 31, 2026. At March 31, 2026, 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 $7.2 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. 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. 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 loss 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. 23 Index Our insurance subsidiaries’ liabilities for losses and loss expenses by major line of business at March 31, 2026 and December 31, 2025 consisted of the following: March 31, 2026 December 31, 2025 (in thousands) Commercial lines: Automobile $ 172,357 $ 175,277 Workers’ compensation 132,918 130,429 Commercial multi-peril 226,144 215,476 Other 55,625 53,249 Total commercial lines 587,044 574,431 Personal lines: Automobile 96,943 100,855 Homeowners 29,895 27,565 Other 2,221 2,345 Total personal lines 129,059 130,765 Total commercial and personal lines 716,103 705,196 Plus reinsurance recoverable 413,712 394,854 Total liabilities for losses and loss expenses $ 1,129,815 $ 1,100,050 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 the loss and loss expense reserves of our insurance subsidiaries. We established the range of reasonably likely changes based on a review of changes in accident-year development by line of business and applied those changes to our insurance subsidiaries’ loss and loss expense reserves as a whole. The range we selected does not necessarily indicate what could be the potential best or worst case or the most likely scenario. The following table sets forth the estimated 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 considered in establishing the loss and loss expense reserves of our insurance subsidiaries: 24 Index Percentage Change in Loss and Loss Expense Reserves Net of Reinsurance Adjusted Loss and Loss Expense Reserves Net of Reinsurance at March 31, 2026 Percentage Change in Stockholders’ Equity at March 31, 2026(1) Adjusted Loss and Loss Expense Reserves Net of Reinsurance at December 31, 2025 Percentage Change in Stockholders’ Equity at December 31, 2025(1) (dollars in thousands) (10.0)% $644,493 8.7% $634,676 8.7% (7.5) 662,395 6.5 652,306 6.5 (5.0) 680,298 4.4 669,936 4.3 (2.5) 698,200 2.2 687,566 2.2 Base 716,103 — 705,196 — 2.5 734,006 (2.2) 722,826 (2.2) 5.0 751,908 (4.4) 740,456 (4.3) 7.5 769,811 (6.5) 758,086 (6.5) 10.0 787,713 (8.7) 775,716 (8.7) (1) Net of income tax effect. Non-GAAP Information We prepare our consolidated financial statements on the basis of GAAP. Our insurance subsidiaries also prepare financial statements based on statutory accounting principles state insurance regulators prescribe or permit (“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, so investors should exercise caution when comparing our non-GAAP financial measures to the non-GAAP financial measures other companies use. Because our insurance subsidiaries do not prepare GAAP financial statements, we evaluate the performance of our personal lines and commercial lines segments utilizing SAP financial measures that reflect the growth trends and underwriting results of our insurance subsidiaries. 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. 25 Index The following tables provide reconciliations of our net premiums earned to our net premiums written for the three months ended March 31, 2026 and 2025: Three Months Ended March 31, 2026 Commercial Lines Personal Lines Total (in thousands) Net premiums earned $ 138,963 $ 82,394 $ 221,357 Change in net unearned premiums 25,144 (7,211 ) 17,933 Net premiums written $ 164,107 $ 75,183 $ 239,290 Three Months Ended March 31, 2025 Commercial Lines Personal Lines Total (in thousands) Net premiums earned $ 136,216 $ 96,486 $ 232,702 Change in net unearned premiums 24,402 (10,012 ) 14,390 Net premiums written $ 160,618 $ 86,474 $ 247,092 Statutory Combined Ratio The combined ratio is a standard measurement of underwriting profitability for an insurance company. The combined ratio does not reflect investment income, net investment gains or losses, federal income taxes or other non-operating income or expense. A combined ratio of less than 100% generally indicates underwriting profitability. The statutory combined ratio is a non-GAAP financial measure that is based upon amounts determined under SAP. We calculate our statutory combined ratio as the sum of: • the statutory loss ratio, which is the ratio of calendar-year net incurred losses and loss expenses to net premiums earned; • the statutory expense ratio, which is the ratio of expenses incurred for net commissions, premium taxes and underwriting expenses to net premiums written; and • the statutory dividend ratio, which is the ratio of dividends to holders of workers’ compensation policies to net premiums earned. The calculation of our statutory combined ratio differs from the calculation of our GAAP combined ratio. In calculating our GAAP combined ratio, we do not deduct installment payment fees from incurred expenses, and we base the expense ratio on net premiums earned instead of net premiums written. Differences between our GAAP loss ratio and our statutory loss ratio result from anticipating salvage and subrogation recoveries for our GAAP loss ratio but not for our statutory loss ratio. 26 Index Combined Ratios The following table presents comparative details with respect to our GAAP and statutory combined ratios for the three months ended March 31, 2026 and 2025: Three Months Ended March 31, 2026 2025 GAAP Combined Ratios (Total Lines) Loss ratio - core losses 53.4 % 54.2 % Loss ratio - weather-related losses 7.8 3.7 Loss ratio - large fire losses 5.5 3.3 Loss ratio - net prior-year reserve development (2.6 ) (4.5 ) Loss ratio 64.1 56.7 Expense ratio 35.4 34.6 Dividend ratio 0.3 0.3 Combined ratio 99.8 % 91.6 % Statutory Combined Ratios Commercial lines: Automobile 92.0 % 91.4 % Workers’ compensation 112.9 117.6 Commercial multi-peril 113.9 90.3 Other 100.6 80.8 Total commercial lines 104.6 94.7 Personal lines: Automobile 80.5 85.0 Homeowners 94.6 83.8 Other 78.4 56.6 Total personal lines 85.7 83.6 Total commercial and personal lines 97.9 % 90.3 % 27 Index Results of Operations - Three Months Ended March 31, 2026 Compared to Three Months Ended March 31, 2025 Net Premiums Earned. Our insurance subsidiaries’ net premiums earned for the first quarter of 2026 were $221.4 million, a decrease of $11.3 million, or 4.9%, compared to $232.7 million for the first quarter of 2025, primarily reflecting lower new business writings, offset partially by solid premium retention and renewal premium increases in the preceding twelve-month period. Net Premiums Written. Our insurance subsidiaries’ net premiums written for the first quarter of 2026 were $239.3 million, a decrease of $7.8 million, or 3.2%, from the $247.1 million of net premiums written for the first quarter of 2025. Commercial lines net premiums written increased $3.5 million, or 2.2%, for the first quarter of 2026 compared to the first quarter of 2025. Personal lines net premiums written decreased $11.3 million, or 13.1%, for the first quarter of 2026 compared to the first quarter of 2025. We attribute the increase in commercial lines net premiums written primarily to new business writings, solid retention and a continuation of renewal premium increases in lines other than workers’ compensation. We attribute the decrease in personal lines net premiums written primarily to lower new business writings, offset partially by renewal premium rate increases and solid retention. We believe that the decrease in personal lines net premiums written will gradually taper over the course of 2026 as actions we have taken to slow the decline take effect. Investment Income. Our net investment income was $14.3 million for the first quarter of 2026, an increase of $2.3 million, or 19.2%, compared to $12.0 million for the first quarter of 2025. We attribute the increase primarily to an increase in the average investment yield and higher average invested assets relative to the first quarter of 2025. Net Investment Losses. Net investment losses for the first quarter of 2026 and 2025 were $479,224 and $470,861, respectively. The net investment losses for the first quarter of 2026 and 2025 were primarily related to decreases in the market value of the equity securities we held at the end of the respective periods. We did not recognize any impairment losses for individual securities in our investment portfolio during the first quarter of 2026 or 2025. Losses and Loss Expenses. Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 64.1% for the first quarter of 2026, an increase from our insurance subsidiaries’ loss ratio of 56.7% for the first quarter of 2025. The core loss ratio, which excludes weather-related losses, large fire losses and net development of reserves for losses incurred in prior accident years, was 53.4% for the first quarter of 2026, a decrease from the core loss ratio of 54.2% for the first quarter of 2025. For the commercial lines segment, the core loss ratio of 57.6% for the first quarter of 2026 decreased from 58.3% for the first quarter of 2025. For the personal lines segment, the core loss ratio of 46.5% for the first quarter of 2026 decreased from 48.7% for the first quarter of 2025. We attribute the decrease in the commercial lines core loss ratio primarily as a result of ongoing premium rate increases in all lines except workers’ compensation. We attribute the decrease in the personal lines core loss ratio primarily to the favorable impact of premium rate increases on net premiums earned for the personal lines segment. Weather-related losses were $17.2 million, or 7.8 percentage points of the loss ratio, for the first quarter of 2026, compared to $8.6 million, or 3.7 percentage points of the loss ratio, for the first quarter of 2025. The impact of weather-related loss activity to the loss ratio for the first quarter of 2026 was higher than our previous five-year average of first quarter weather-related losses. Large fire losses, which we define as individual fire losses in excess of $50,000, for the first quarter of 2026 were $12.2 million, or 5.5 percentage points of the loss ratio, compared to $7.7 million, or 3.3 percentage points of the loss ratio, for the first quarter of 2025. We attribute the increase to higher loss frequency and severity compared to the prior-year quarter. Our insurance subsidiaries’ commercial lines loss ratio was 68.8% for the first quarter of 2026, compared to 59.7% for the first quarter of 2025, primarily due to increases in the commercial multi-peril and other commercial lines of business loss ratios, offset partially by a decrease in the workers’ compensation line of business loss ratio. The personal lines loss ratio of our insurance subsidiaries increased to 56.4% for the first quarter of 2026, compared to 52.5% for the first quarter of 2025. We attribute this increase primarily to an increase in the homeowners and other personal lines of business loss ratios, offset partially by a decrease in the personal automobile line of business loss ratio. Our insurance subsidiaries experienced net favorable loss reserve development for the first quarter of 2026 of $5.7 million that decreased the loss ratio by 2.6 percentage points, compared to $10.5 million of net favorable loss reserve development that decreased the loss ratio for the first quarter of 2025 by 4.5 percentage points. Our insurance subsidiaries experienced favorable development primarily in the commercial automobile and personal automobile lines of business, offset partially by unfavorable development in the commercial multi-peril and commercial other liability lines of business for the first quarter of 2026. 28 Index Underwriting Expenses. The expense ratio for an insurance company is the ratio of policy acquisition costs and other underwriting expenses to premiums earned. The expense ratio of our insurance subsidiaries was 35.4% for the first quarter of 2026, compared to 34.6% for the first quarter of 2025. The increase in the expense ratio primarily reflected the impact of lower net premiums earned upon which the ratio is based. The impact from allocated costs from Donegal Mutual to our insurance subsidiaries related to the ongoing systems modernization project represented approximately 1.6 percentage points of the expense ratio for the first quarter of 2026. We expect that the expense ratio impact of allocated costs related to the project will be 1.4 percentage points for the full year of 2026, subsiding gradually over the next several years. Combined Ratio. The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of policyholder dividends incurred to premiums earned. Our insurance subsidiaries’ combined ratios were 99.8% and 91.6% for the first quarter of 2026 and 2025, respectively. We attribute the increase in the combined ratio primarily to increases in the loss and expense ratios for the first quarter of 2026 compared to the first quarter of 2025. Income Tax Expense. We recorded income tax expense of $2.6 million for the first quarter of 2026, representing an effective tax rate of 18.5%. We recorded income tax expense of $6.0 million for the first quarter of 2025, representing an effective tax rate of 19.1%. The income tax expense for the first quarter of 2026 and 2025 represented estimates based on our projected annual taxable income and effective tax rates. Net Income and Net Income Per Share. Our net income for the first quarter of 2026 was $11.5 million, or $.31 per share of Class A common stock on a diluted basis and $.29 per share of Class B common stock, compared to $25.2 million, or $.71 per share of Class A common stock on a diluted basis and $.65 per share of Class B common stock, for the first quarter of 2025. We had 31.4 million and 30.4 million Class A shares outstanding at March 31, 2026 and 2025, respectively. We had 5.6 million Class B shares outstanding at the end of both periods. 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 such obligations and needs arise. Our major sources of funds from operations are the net cash flows we generate from our insurance subsidiaries’ underwriting results, investment income and maturing investments. We have historically generated sufficient net positive cash flow to fund our commitments and add to our investment portfolio, thereby increasing future investment returns. The impact of the pooling agreement between Donegal Mutual and Atlantic States has historically been cash-flow positive because of the consistent underwriting 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 the first three months of 2026 and 2025 were $20.2 million and $25.7 million, respectively. At March 31, 2026, 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 an interest rate equal to the then-current Term SOFR rate plus 2.11%. At March 31, 2026, 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 7 – Borrowings our estimate of the timing of the amounts payable for the borrowings under our lines of credit based on their contractual maturities. 29 Index 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. 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 shares of our Class A common stock at prices prevailing from time to time in the open market subject to the provisions of applicable rules 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 the three months ended March 31, 2026 or 2025. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through March 31, 2026. On April 16, 2026, our board of directors declared quarterly cash dividends of $0.1925 per share of our Class A common stock and $0.175 per share of our Class B common stock, payable on May 15, 2026 to our stockholders of record as of the close of business on May 1, 2026. There are no 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 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, 2025. Our insurance subsidiaries did not pay any dividends to us during the first three months of 2026. Amounts remaining available for distribution to us as dividends from our insurance subsidiaries without prior approval of their domiciliary insurance regulatory authorities in 2026 are approximately $50.8 million from Atlantic States, $10.2 million from MICO and $5.4 million from Peninsula, or a total of approximately $66.4 million. At March 31, 2026, we had no material commitments for capital expenditures. Equity Price Risk Our portfolio of marketable equity securities, which we carry on our consolidated balance sheets at estimated fair value, has exposure to the risk of loss resulting from an adverse change in prices. We manage this risk by having our investment personnel perform an analysis of prospective investments and regular reviews of our portfolio of equity securities. Credit Risk Our portfolio of fixed-maturity securities and, to a lesser extent, our portfolio of short-term investments is subject to credit risk, which we define as the potential loss in market value resulting from adverse changes in the borrower’s ability to repay its debt. We manage this risk by having our investment personnel perform an analysis of prospective investments and regular reviews of our portfolio of fixed-maturity securities. We also limit the percentage and amount of our total investment portfolio that we invest in the securities of any one issuer. Our insurance subsidiaries provide property and casualty insurance coverages through independent insurance agencies. We bill the majority of this business directly to the insured, although we bill a portion of our commercial business through licensed insurance agents to whom our insurance subsidiaries 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 it cedes to Donegal Mutual. Our insurance subsidiaries maintain reinsurance agreements with Donegal Mutual and with a number of other major unaffiliated authorized reinsurers. 30 Index