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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q
(Mark One)

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021
OR

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .
Commission file number
0-15341
Donegal Group Inc.
(Exact name of registrant as specified in its charter)

Delaware |  | 23-2424711
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

1195 River Road, P.O. Box 302, Marietta, PA 17547
(Address of principal executive offices) (Zip code)
(717)
426-1931
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act. (Check one):

Large accelerated filer ☐ |  | Accelerated filer ☑ |  | Non-accelerated filer ☐ |  | Smaller reporting company ☑
Emerging growth company ☐ |  |  |  |  |  |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class |  | Trading Symbols |  | Name of Each Exchange on Which Registered
Class A Common Stock, $.01 par value |  | DGICA |  | The NASDAQ Global Select Market
Class B Common Stock, $.01 par value |  | DGICB |  | The NASDAQ Global Select Market

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 25,668,501 shares of Class A Common Stock, par value $0.01 per share, and 5,576,775 shares of Class B Common Stock, par value $0.01 per share, outstanding on July 31, 2021.

Table of Contents
DONEGAL GROUP INC.

|  |  |  | Page
PART I |  | FINANCIAL INFORMATION |  |
Item 1. |  | Financial Statements |  | 1
Item 2. |  | Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 22
Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk |  | 33
Item 4. |  | Controls and Procedures |  | 33
PART II |  | OTHER INFORMATION |  |
Item 1. |  | Legal Proceedings |  | 34
Item 1A. |  | Risk Factors |  | 34
Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 35
Item 3. |  | Defaults upon Senior Securities |  | 35
Item 4. |  | Removed and Reserved |  | 35
Item 5. |  | Other Information |  | 35
Item 6. |  | Exhibits |  | 36
Signatures |  | 37

Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Donegal Group Inc. and Subsidiaries
Consolidated Balance Sheets

|  | June 30, 2021 |  | December 31, 2020
|  |  | (Unaudited) |  |  |  |  |
Assets |  |  |  |  |  |  |  |
Investments |  |  |  |  |  |  |  |
Fixed maturities |  |  |  |  |  |  |  |
Held to maturity, at amortized cost |  | $ | 643,847,647 |  |  | $ | 586,609,439 |
Available for sale, at fair value |  |  | 522,580,264 |  |  |  | 555,136,017 |
Equity securities, at fair value |  |  | 72,757,031 |  |  |  | 58,556,173 |
Short-term investments, at cost, which approximates fair value |  |  | 22,767,372 |  |  |  | 20,900,155 |
Total investments |  |  | 1,261,952,314 |  |  |  | 1,221,201,784 |
Cash |  |  | 88,004,738 |  |  |  | 103,094,236 |
Accrued investment income |  |  | 8,175,750 |  |  |  | 7,936,879 |
Premiums receivable |  |  | 189,383,783 |  |  |  | 169,596,332 |
Reinsurance receivable |  |  | 422,198,101 |  |  |  | 408,908,850 |
Deferred policy acquisition costs |  |  | 69,687,624 |  |  |  | 59,156,958 |
Deferred tax asset, net |  |  | 5,134,455 |  |  |  | 5,683,113 |
Prepaid reinsurance premiums |  |  | 186,451,557 |  |  |  | 169,418,333 |
Property and equipment, net |  |  | 3,350,691 |  |  |  | 4,390,377 |
Accounts receivable - securities |  |  | 79,402 |  |  |  | 67,676 |
Federal income taxes recoverable |  |  | 4,018,210 |  |  |  | 3,089,369 |
Goodwill |  |  | 5,625,354 |  |  |  | 5,625,354 |
Other intangible assets |  |  | 958,010 |  |  |  | 958,010 |
Other |  |  | 1,380,569 |  |  |  | 1,393,053 |
Total assets |  | $ | 2,246,400,558 |  |  | $ | 2,160,520,324 |
Liabilities and Stockholders’ Equity |  |  |  |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |
Losses and loss expenses |  | $ | 998,658,015 |  |  | $ | 962,007,437 |
Unearned premiums |  |  | 599,949,617 |  |  |  | 537,189,598 |
Accrued expenses |  |  | 11,465,644 |  |  |  | 29,115,198 |
Reinsurance balances payable |  |  | 4,030,947 |  |  |  | 3,233,523 |
Borrowings under lines of credit |  |  | 35,000,000 |  |  |  | 85,000,000 |
Cash dividends declared to stockholders |  |  | — |  |  |  | 4,436,301 |
Subordinated debentures |  |  | 5,000,000 |  |  |  | 5,000,000 |
Accounts payable - securities |  |  | 11,295,765 |  |  |  | — |
Due to affiliate |  |  | 22,196,384 |  |  |  | 10,293,495 |
Other |  |  | 8,647,393 |  |  |  | 6,470,652 |
Total liabilities |  |  | 1,696,243,765 |  |  |  | 1,642,746,204 |
Stockholders’ Equity |  |  |  |  |  |  |  |
Preferred stock, $.01 par value, authorized 2,000,000 shares; none issued |  |  | — |  |  |  | — |
Class A common stock, $.01 par value, authorized 50,000,000 shares, issued 28,619,866 and 27,651,774 shares and outstanding 25,617,278 and 24,649,186 shares |  |  | 286,199 |  |  |  | 276,518 |
Class B common stock, $.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 |  |  | 302,510,624 |  |  |  | 289,149,567 |
Accumulated other comprehensive income |  |  | 8,473,471 |  |  |  | 11,130,612 |
Retained earnings |  |  | 280,056,364 |  |  |  | 258,387,288 |
Treasury stock, at cost |  |  | (41,226,357 | ) |  |  | (41,226,357 | )
Total stockholders’ equity |  |  | 550,156,793 |  |  |  | 517,774,120 |
Total liabilities and stockholders’ equity |  | $ | 2,246,400,558 |  |  | $ | 2,160,520,324 |

See accompanying notes to consolidated financial statements.
1

Table of Contents
Donegal Group Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)

|  | Three Months Ended June 30,
|  | 2021 |  | 2020
Revenues: |  |  |  |  |  |  |  |
Net premiums earned |  | $ | 192,488,665 |  |  | $ | 184,373,768 |
Investment income, net of investment expenses |  |  | 7,652,180 |  |  |  | 7,172,144 |
Net investment gains (includes $479,211 and $14,493 accumulated other comprehensive income reclassifications) |  |  | 4,241,031 |  |  |  | 6,485,896 |
Lease income |  |  | 108,038 |  |  |  | 109,205 |
Installment payment fees |  |  | 656,029 |  |  |  | 758,759 |
Total revenues |  |  | 205,145,943 |  |  |  | 198,899,772 |
Expenses: |  |  |  |  |  |  |  |
Net losses and loss expenses |  |  | 113,956,652 |  |  |  | 105,349,019 |
Amortization of deferred policy acquisition costs |  |  | 33,103,000 |  |  |  | 29,634,000 |
Other underwriting expenses |  |  | 36,229,677 |  |  |  | 33,567,266 |
Policyholder dividends |  |  | 1,629,499 |  |  |  | 1,683,658 |
Interest |  |  | 217,290 |  |  |  | 428,092 |
Other expenses, net |  |  | 313,000 |  |  |  | 249,688 |
Total expenses |  |  | 185,449,118 |  |  |  | 170,911,723 |
Income before income tax expense |  |  | 19,696,825 |  |  |  | 27,988,049 |
Income tax expense (includes $100,634 and $3,044 income tax expense from reclassification items) |  |  | 3,532,789 |  |  |  | 5,309,271 |
Net income |  | $ | 16,164,036 |  |  | $ | 22,678,778 |
Earnings per common share: |  |  |  |  |  |  |  |
Class A common stock - basic |  | $ | 0.53 |  |  | $ | 0.80 |
Class A common stock - diluted |  | $ | 0.53 |  |  | $ | 0.79 |
Class B common stock - basic and diluted |  | $ | 0.48 |  |  | $ | 0.72 |

Donegal Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)

|  | Three Months Ended June 30,
|  | 2021 |  | 2020
Net income |  | $ | 16,164,036 |  |  | $ | 22,678,778 |
Other comprehensive income, net of tax |  |  |  |  |  |  |  |
Unrealized gain on securities: |  |  |  |  |  |  |  |
Unrealized holding gain during the period, net of income tax expense of $511,306 and $1,774,279 |  |  | 1,928,551 |  |  |  | 6,674,664 |
Reclassification adjustment for gains included in net income, net of income tax expense of $100,634 and $3,044 |  |  | (378,577 | ) |  |  | (11,449 | )
Other comprehensive income |  |  | 1,549,974 |  |  |  | 6,663,215 |
Comprehensive income |  | $ | 17,714,010 |  |  | $ | 29,341,993 |

See accompanying notes to consolidated financial statements.
2

Table of Contents
Donegal Group Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)

|  | Six Months Ended June 30,
|  | 2021 |  | 2020
Revenues: |  |  |  |  |  |  |  |
Net premiums earned |  | $ | 379,740,265 |  |  | $ | 371,626,546 |
Investment income, net of investment expenses |  |  | 15,162,758 |  |  |  | 14,548,428 |
Net investment gains (losses) (includes $450,025 and $436,328 accumulated other comprehensive income reclassifications) |  |  | 6,710,085 |  |  |  | (4,208,947 | )
Lease income |  |  | 215,805 |  |  |  | 218,472 |
Installment payment fees |  |  | 1,286,928 |  |  |  | 1,626,479 |
Total revenues |  |  | 403,115,841 |  |  |  | 383,810,978 |
Expenses: |  |  |  |  |  |  |  |
Net losses and loss expenses |  |  | 233,176,399 |  |  |  | 222,595,545 |
Amortization of deferred policy acquisition costs |  |  | 63,282,000 |  |  |  | 59,571,000 |
Other underwriting expenses |  |  | 70,011,727 |  |  |  | 66,164,895 |
Policyholder dividends |  |  | 2,923,520 |  |  |  | 3,525,658 |
Interest |  |  | 529,616 |  |  |  | 652,422 |
Other expenses, net |  |  | 745,069 |  |  |  | 810,238 |
Total expenses |  |  | 370,668,331 |  |  |  | 353,319,758 |
Income before income tax expense |  |  | 32,447,510 |  |  |  | 30,491,220 |
Income tax expense (includes $94,505 and $91,629 income tax expense from reclassification items) |  |  | 5,753,626 |  |  |  | 4,081,321 |
Net income |  | $ | 26,693,884 |  |  | $ | 26,409,899 |
Earnings per common share: |  |  |  |  |  |  |  |
Class A common stock - basic |  | $ | 0.89 |  |  | $ | 0.93 |
Class A common stock - diluted |  | $ | 0.88 |  |  | $ | 0.92 |
Class B common stock - basic and diluted |  | $ | 0.80 |  |  | $ | 0.84 |

Donegal Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)

|  | Six Months Ended June 30,
|  | 2021 |  | 2020
Net income |  | $ | 26,693,884 |  |  | $ | 26,409,899 |
Other comprehensive (loss) income, net of tax |  |  |  |  |  |  |  |
Unrealized (loss) gain on securities: |  |  |  |  |  |  |  |
Unrealized holding (loss) gain during the period, net of income tax (benefit) expense of ($614,319) and $2,713,454 |  |  | (2,301,621 | ) |  |  | 10,207,754 |
Reclassification adjustment for gains included in net income, net of income tax expense of $94,505 and $91,629 |  |  | (355,520 | ) |  |  | (344,699 | )
Other comprehensive (loss) income |  |  | (2,657,141 | ) |  |  | 9,863,055 |
Comprehensive income |  | $ | 24,036,743 |  |  | $ | 36,272,954 |

See accompanying notes to consolidated financial statements.
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Table of Contents
Donegal Group Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Unaudited)
Six Months Ended June 30, 2021

|  | Class A Shares |  | Class B Shares |  | Class A Amount |  | Class B Amount |  | Additional Paid-In Capital |  | Accumulated Other Comprehensive Income |  | Retained Earnings |  | Treasury Stock |  | Total Stockholders’ Equity
Balance, December 31, 2020 |  |  | 27,651,774 |  |  |  | 5,649,240 |  |  | $ | 276,518 |  |  | $ | 56,492 |  |  | $ | 289,149,567 |  |  | $ | 11,130,612 |  |  | $ | 258,387,288 |  |  | $ | (41,226,357 | ) |  | $ | 517,774,120 |
Issuance of common stock (stock compensation plans) |  |  | 33,336 |  |  |  | — |  |  |  | 334 |  |  |  | — |  |  |  | 419,454 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 419,788 |
Share-based compensation |  |  | 346,124 |  |  |  | — |  |  |  | 3,461 |  |  |  | — |  |  |  | 4,719,388 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 4,722,849 |
Net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 10,529,848 |  |  |  | — |  |  |  | 10,529,848 |
Cash dividends declared |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (5,000 | ) |  |  | — |  |  |  | (5,000 | )
Grant of stock options |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 109,184 |  |  |  | — |  |  |  | (109,184 | ) |  |  | — |  |  |  | — |
Other comprehensive loss |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (4,207,115 | ) |  |  | — |  |  |  | — |  |  |  | (4,207,115 | )
Balance, March 31, 2021 |  |  | 28,031,234 |  |  |  | 5,649,240 |  |  | $ | 280,313 |  |  | $ | 56,492 |  |  | $ | 294,397,593 |  |  | $ | 6,923,497 |  |  | $ | 268,802,952 |  |  | $ | (41,226,357 | ) |  | $ | 529,234,490 |
Issuance of common stock (stock compensation plans) |  |  | 49,613 |  |  |  | — |  |  |  | 496 |  |  |  | — |  |  |  | 730,005 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 730,501 |
Share-based compensation |  |  | 539,019 |  |  |  | — |  |  |  | 5,390 |  |  |  | — |  |  |  | 7,313,031 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 7,318,421 |
Net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 16,164,036 |  |  |  | — |  |  |  | 16,164,036 |
Cash dividends declared |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (4,840,629 | ) |  |  | — |  |  |  | (4,840,629 | )
Grant of stock options |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 69,995 |  |  |  | — |  |  |  | (69,995 | ) |  |  | — |  |  |  | — |
Other comprehensive income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,549,974 |  |  |  | — |  |  |  | — |  |  |  | 1,549,974 |
Balance, June 30, 2021 |  |  | 28,619,866 |  |  |  | 5,649,240 |  |  | $ | 286,199 |  |  | $ | 56,492 |  |  | $ | 302,510,624 |  |  | $ | 8,473,471 |  |  | $ | 280,056,364 |  |  | $ | (41,226,357 | ) |  | $ | 550,156,793 |

See accompanying notes to consolidated financial statements.
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Donegal Group Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Unaudited)
Six Months Ended June 30, 2020

|  | Class A Shares |  | Class B Shares |  | Class A Amount |  | Class B Amount |  | Additional Paid-In Capital |  | Accumulated Other Comprehensive Income |  | Retained Earnings |  | Treasury Stock |  | Total Stockholders’ Equity
Balance, December 31, 2019 |  |  | 26,203,935 |  |  |  | 5,649,240 |  |  | $ | 262,040 |  |  | $ | 56,492 |  |  | $ | 268,151,601 |  |  | $ | 504,170 |  |  | $ | 223,267,573 |  |  | $ | (41,226,357 | ) |  | $ | 451,015,519 |
Issuance of common stock (stock compensation plans) |  |  | 28,924 |  |  |  | — |  |  |  | 289 |  |  |  | — |  |  |  | 376,539 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 376,828 |
Share-based compensation |  |  | 67,087 |  |  |  | — |  |  |  | 671 |  |  |  | — |  |  |  | 1,242,315 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,242,986 |
Net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,731,121 |  |  |  | — |  |  |  | 3,731,121 |
Cash dividends declared |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (5,363 | ) |  |  | — |  |  |  | (5,363 | )
Grant of stock options |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 118,525 |  |  |  | — |  |  |  | (118,525 | ) |  |  | — |  |  |  | — |
Other comprehensive income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,199,840 |  |  |  | — |  |  |  | — |  |  |  | 3,199,840 |
Balance, March 31, 2020 |  |  | 26,299,946 |  |  |  | 5,649,240 |  |  | $ | 263,000 |  |  | $ | 56,492 |  |  | $ | 269,888,980 |  |  | $ | 3,704,010 |  |  | $ | 226,874,806 |  |  | $ | (41,226,357 | ) |  | $ | 459,560,931 |
Issuance of common stock (stock compensation plans) |  |  | 52,964 |  |  |  | — |  |  |  | 530 |  |  |  | — |  |  |  | 720,018 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 720,548 |
Share-based compensation |  |  | 160,869 |  |  |  | — |  |  |  | 1,608 |  |  |  | — |  |  |  | 2,490,136 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,491,744 |
Net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 22,678,778 |  |  |  | — |  |  |  | 22,678,778 |
Cash dividends declared |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (4,255,882 | ) |  |  | — |  |  |  | (4,255,882 | )
Grant of stock options |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 76,354 |  |  |  | — |  |  |  | (76,354 | ) |  |  | — |  |  |  | — |
Other comprehensive income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 6,663,215 |  |  |  | — |  |  |  | — |  |  |  | 6,663,215 |
Balance, June 30, 2020 |  |  | 26,513,779 |  |  |  | 5,649,240 |  |  | $ | 265,138 |  |  | $ | 56,492 |  |  | $ | 273,175,488 |  |  | $ | 10,367,225 |  |  | $ | 245,221,348 |  |  | $ | (41,226,357 | ) |  | $ | 487,859,334 |

See accompanying notes to consolidated financial statements.
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Donegal Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

|  |  | Six Months Ended June 30, |
|  |  | 2021 |  |  |  | 2020 |
Cash Flows from Operating Activities: |  |  |  |  |  |  |  |
Net income |  | $ | 26,693,884 |  |  | $ | 26,409,899 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |  |  |
Depreciation, amortization and other non-cash items |  |  | 3,083,025 |  |  |  | 3,502,046 |
Net investment (gains) losses |  |  | (6,710,085 | ) |  |  | 4,208,947 |
Changes in assets and liabilities: |  |  |  |  |  |  |  |
Losses and loss expenses |  |  | 36,650,578 |  |  |  | 32,149,773 |
Unearned premiums |  |  | 62,760,019 |  |  |  | 52,796,454 |
Premiums receivable |  |  | (19,787,451 | ) |  |  | (21,717,231 | )
Deferred acquisition costs |  |  | (10,530,666 | ) |  |  | (2,865,674 | )
Deferred income taxes |  |  | 1,266,870 |  |  |  | (837,202 | )
Reinsurance receivable |  |  | (13,289,251 | ) |  |  | (12,319,334 | )
Prepaid reinsurance premiums |  |  | (17,033,224 | ) |  |  | (32,483,228 | )
Accrued investment income |  |  | (238,871 | ) |  |  | (597,823 | )
Due to affiliate |  |  | 11,902,889 |  |  |  | (2,053,312 | )
Reinsurance balances payable |  |  | 797,424 |  |  |  | 144,398 |
Current income taxes |  |  | (928,841 | ) |  |  | 4,893,520 |
Accrued expenses |  |  | (17,649,554 | ) |  |  | (5,005,473 | )
Other, net |  |  | 2,189,225 |  |  |  | 1,809,764 |
Net adjustments |  |  | 32,482,087 |  |  |  | 21,625,625 |
Net cash provided by operating activities |  |  | 59,175,971 |  |  |  | 48,035,524 |
Cash Flows from Investing Activities: |  |  |  |  |  |  |  |
Purchases of fixed maturities, held to maturity |  |  | (80,315,578 | ) |  |  | (55,313,641 | )
Purchases of fixed maturities, available for sale |  |  | (73,023,551 | ) |  |  | (81,210,780 | )
Purchases of equity securities, available for sale |  |  | (25,332,194 | ) |  |  | (5,071,801 | )
Maturity of fixed maturities: |  |  |  |  |  |  |  |
Held to maturity |  |  | 23,650,172 |  |  |  | 18,812,367 |
Available for sale |  |  | 111,197,663 |  |  |  | 70,379,590 |
Sales of fixed maturities, available for sale |  |  | — |  |  |  | 15,251,996 |
Sales of equity securities, available for sale |  |  | 17,391,396 |  |  |  | 3,202,672 |
Net sales of property and equipment |  |  | 935,029 |  |  |  | 32,107 |
Net purchases of short-term investments |  |  | (1,867,217 | ) |  |  | (37,311,903 | )
Net cash used in investing activities |  |  | (27,364,280 | ) |  |  | (71,229,393 | )
Cash Flows from Financing Activities: |  |  |  |  |  |  |  |
Cash dividends paid |  |  | (9,281,930 | ) |  |  | (8,336,479 | )
Issuance of common stock |  |  | 12,380,741 |  |  |  | 3,988,784 |
Borrowing under lines of credit |  |  | — |  |  |  | 50,000,000 |
Payments on lines of credit |  |  | (50,000,000 | ) |  |  | — |
Net cash (used in) provided by financing activities |  |  | (46,901,189 | ) |  |  | 45,652,305 |
Net (decrease) increase in cash |  |  | (15,089,498 | ) |  |  | 22,458,436 |
Cash at beginning of period |  |  | 103,094,236 |  |  |  | 49,318,930 |
Cash at end of period |  | $ | 88,004,738 |  |  | $ | 71,777,366 |
Cash paid during period - Interest |  | $ | 659,222 |  |  | $ | 664,342 |
Net cash paid during period - Taxes |  | $ | 5,400,000 |  |  | $ | — |

See accompanying notes to consolidated financial statements.
6

Table of Contents
DONEGAL GROUP INC. AND SUBSIDIARIES
(Unaudited)
Notes to Consolidated Financial Statements

1 - | Organization

Donegal Mutual Insurance Company (“Donegal Mutual”) organized us as an insurance holding company on August 26, 1986. Our insurance subsidiaries, Atlantic States Insurance Company (“Atlantic States”), Southern Insurance Company of Virginia (“Southern”), the Peninsula Insurance Group (“Peninsula”), which consists of Peninsula Indemnity Company and The Peninsula Insurance Company, and Michigan Insurance Company (“MICO”), and our affiliates write personal and commercial lines of property and casualty coverages exclusively through independent insurance agents in certain
Mid-Atlantic,
Midwestern, New England, Southern and Southwestern states.
We have 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 June 30, 2021, Donegal Mutual held approximately 41% 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, or pooling agreement, with Donegal Mutual. Under the pooling agreement, Donegal Mutual and Atlantic States contribute substantially all of their respective premiums, losses and loss expenses to the underwriting pool, and the underwriting pool, acting through Donegal Mutual, then allocates 80% of the pooled business to Atlantic States. Thus, Donegal Mutual and Atlantic States share the underwriting results of the pooled business in proportion to their respective participation in the underwriting pool.
In addition, Donegal Mutual has a 100% quota-share reinsurance agreement with Southern Mutual Insurance Company, or Southern Mutual. Donegal Mutual places its assumed business from Southern Mutual into the underwriting pool.
Donegal Mutual completed the merger of Mountain States Mutual Casualty Company, or Mountain States, with and into Donegal Mutual effective May 25, 2017. Donegal Mutual was the surviving company in the merger, and Mountain States’ insurance subsidiaries, Mountain States Indemnity Company and Mountain States Commercial Insurance Company (collectively, the “Mountain States insurance subsidiaries”), became insurance subsidiaries of Donegal Mutual upon completion of the merger. Upon completion of the merger, Donegal Mutual assumed all of the policy obligations of Mountain States and began to market its products together with the Mountain States insurance subsidiaries as the Mountain States Insurance Group in four Southwestern states. Donegal Mutual also entered into a 100% quota-share reinsurance agreement with the Mountain States insurance subsidiaries on the merger date. Beginning with policies effective in 2021, Donegal Mutual began to place the business of the Mountain States Insurance Group into the underwriting pool. As a result, our consolidated financial results through December 31, 2020 excluded the results of the Mountain States Insurance Group operations in those Southwestern states.
The same executive management and underwriting personnel administer products, classes of business underwritten, pricing practices and underwriting standards of Donegal Mutual and our insurance subsidiaries. In addition, as the Donegal Insurance Group, Donegal Mutual and our insurance subsidiaries share a combined business plan to achieve market penetration and underwriting profitability objectives. 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
7

Table of Contents
expand the Donegal Insurance Group’s ability to service an entire personal lines or commercial lines account. Distinctions within the products of Donegal Mutual and our insurance subsidiaries generally relate to specific risk profiles targeted within similar classes of business, such as preferred tier versus standard tier products, but we do not allocate all of the standard risk gradients to one company. Therefore, the underwriting profitability of the business the individual companies write directly will vary. However, the underwriting pool homogenizes the risk characteristics of all business that Donegal Mutual and Atlantic States write directly. The business Atlantic States derives from the underwriting pool represents a significant percentage of our total consolidated revenues.​​​​​​​

2 - | Basis of Presentation

Our financial information for the interim periods included in this Form
10-Q
Report is unaudited; however, our financial information we include in this Form
10-Q
Report reflects all adjustments, consisting only of normal recurring adjustments that, in the opinion of our management, are necessary for a fair presentation of our financial position, results of operations and cash flows for those interim periods. Our results of operations for the six months ended June 30, 2021 are not necessarily indicative of the results of operations we expect for the year ending December 31, 2021.
We recommend you read the interim financial statements we include in this Form
10-Q
Report in conjunction with the financial statements and the notes to our financial statements contained in our Annual Report on Form
10-K
for the year ended December 31, 2020.

3 - | Earnings Per Share

We have two classes of common stock, which we refer to as our Class A common stock and our Class B common stock. Our certificate of incorporation provides that whenever our board of directors declares a dividend on our Class B common stock, our board of directors shall simultaneously declare a dividend on our Class A common stock that is payable to the holders of our Class A common stock at the same time and as of the same record date at a rate that is at least 10% greater than the rate at which our board of directors declared a dividend on our Class B common stock. Accordingly, we use the
two-class
method to compute our 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 we have declared and an allocation of our remaining undistributed earnings using a participation percentage that reflects the dividend rights of each class. The table below presents for the periods indicated a reconciliation of the numerators and denominators we used to compute basic and diluted net income per share for our Class A common stock and our Class B common stock:​​​​​​​
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Table of Contents

|  | Three Months Ended June 30,
|  | 2021 |  | 2020
|  | Class A |  | Class B |  | Class A |  | Class B
|  | (in thousands, except per share data)
Basic earnings per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Numerator: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allocation of net income |  | $ | 13,482 |  |  | $ | 2,682 |  |  | $ | 18,665 |  |  | $ | 4,014 |
Denominator: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Weighted-average shares outstanding |  |  | 25,342 |  |  |  | 5,577 |  |  |  | 23,451 |  |  |  | 5,577 |
Basic earnings per share |  | $ | 0.53 |  |  | $ | 0.48 |  |  | $ | 0.80 |  |  | $ | 0.72 |
Diluted earnings per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Numerator: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allocation of net income |  | $ | 13,482 |  |  | $ | 2,682 |  |  | $ | 18,665 |  |  | $ | 4,014 |
Denominator: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Number of shares used in basic computation |  |  | 25,342 |  |  |  | 5,577 |  |  |  | 23,451 |  |  |  | 5,577 |
Weighted-average shares effect of dilutive securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Director and employee stock options |  |  | 252 |  |  |  | — |  |  |  | 199 |  |  |  | — |
Number of shares used in diluted computation |  |  | 25,594 |  |  |  | 5,577 |  |  |  | 23,650 |  |  |  | 5,577 |
Diluted earnings per share |  | $ | 0.53 |  |  | $ | 0.48 |  |  | $ | 0.79 |  |  | $ | 0.72 |

|  | Six Months Ended June 30,
|  | 2021 |  | 2020
|  | Class A |  | Class B |  | Class A |  | Class B
|  | (in thousands, except per share data)
Basic earnings per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Numerator: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allocation of net income |  | $ | 22,223 |  |  | $ | 4,471 |  |  | $ | 21,721 |  |  | $ | 4,689 |
Denominator: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Weighted-average shares outstanding |  |  | 25,057 |  |  |  | 5,577 |  |  |  | 23,356 |  |  |  | 5,577 |
Basic earnings per share |  | $ | 0.89 |  |  | $ | 0.80 |  |  | $ | 0.93 |  |  | $ | 0.84 |
Diluted earnings per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Numerator: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allocation of net income |  | $ | 22,223 |  |  | $ | 4,471 |  |  | $ | 21,721 |  |  | $ | 4,689 |
Denominator: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Number of shares used in basic computation |  |  | 25,057 |  |  |  | 5,577 |  |  |  | 23,356 |  |  |  | 5,577 |
Weighted-average shares effect of dilutive securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Director and employee stock options |  |  | 190 |  |  |  | — |  |  |  | 193 |  |  |  | — |
Number of shares used in diluted computation |  |  | 25,247 |  |  |  | 5,577 |  |  |  | 23,549 |  |  |  | 5,577 |
Diluted earnings per share |  | $ | 0.88 |  |  | $ | 0.80 |  |  | $ | 0.92 |  |  | $ | 0.84 |

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We did not include outstanding options to purchase the following number of shares of Class A common stock in our computation of diluted earnings per share because the exercise price of the options exceeded the average market price of our Class A common stock during the applicable periods.

|  | Three Months Ended June 30, |  | Six Months Ended June 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
Number of options to purchase Class A shares excluded |  |  | 4,952,276 |  |  |  | 6,183,992 |  |  |  | 4,952,276 |  |  |  | 6,183,992 |

4 - | Reinsurance

Atlantic States and Donegal Mutual have participated in a pooling agreement since 1986 under which they pool their direct premiums written, and Atlantic States and Donegal Mutual then share the underwriting results of the pool in accordance with the terms of the pooling agreement. 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. Donegal Mutual began placing the business of the Mountain States Insurance Group into the pool beginning with policies effective in 2021.
Our insurance subsidiaries and Donegal Mutual have a combined third-party reinsurance program. The coverage and parameters of the program are common to all of our insurance subsidiaries and Donegal Mutual. Our insurance subsidiaries and Donegal Mutual use several different reinsurers. They require their reinsurers to maintain 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 our insurance subsidiaries have in place for 2021:

| • |  | excess of loss reinsurance, under which the losses of Donegal Mutual and our insurance subsidiaries are automatically reinsured, through a series of contracts, over a set retention of $2.0 million; and

| • |  | catastrophe reinsurance, under which Donegal Mutual and our insurance subsidiaries recover, through a series of reinsurance agreements, 100% of an accumulation of many losses resulting from a single event, including natural disasters, over a set retention of $15.0 million up to aggregate losses of $185.0 million per occurrence.

In addition to the pooling agreement and third-party reinsurance, our insurance subsidiaries have a catastrophe reinsurance agreement with Donegal Mutual, under which each of our insurance subsidiaries recovers 100% of an accumulation of multiple losses resulting from a single event, including natural disasters, over a set retention of $2.0 million up to aggregate losses of $13.0 million per occurrence. The agreement also provides additional coverage for an accumulation of losses from a single event including a combination of our insurance subsidiaries over a combined retention of $5.0 million.
Our insurance subsidiaries and Donegal Mutual also purchase facultative reinsurance to cover certain exposures, including property exposures that exceeded the limits provided by their respective treaty reinsurance.

5 - | Investments

The amortized cost and estimated fair values of our fixed maturities at June 30, 2021 were as follows:
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|  | 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 |  | $ | 89,716 |  |  | $ | 2,839 |  |  | $ | 649 |  |  | $ | 91,906 |
Obligations of states and political subdivisions |  |  | 346,517 |  |  |  | 20,073 |  |  |  | 788 |  |  |  | 365,802 |
Corporate securities |  |  | 188,162 |  |  |  | 15,061 |  |  |  | 267 |  |  |  | 202,956 |
Mortgage-backed securities |  |  | 19,453 |  |  |  | 1,005 |  |  |  | — |  |  |  | 20,458 |
Totals |  | $ | 643,848 |  |  | $ | 38,978 |  |  | $ | 1,704 |  |  | $ | 681,122 |

|  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Estimated Fair Value
|  | (in thousands)
Available for Sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 22,508 |  |  | $ | 257 |  |  | $ | 439 |  |  | $ | 22,326 |
Obligations of states and political subdivisions |  |  | 59,378 |  |  |  | 2,366 |  |  |  | 31 |  |  |  | 61,713 |
Corporate securities |  |  | 201,634 |  |  |  | 9,644 |  |  |  | 202 |  |  |  | 211,076 |
Mortgage-backed securities |  |  | 222,814 |  |  |  | 5,068 |  |  |  | 417 |  |  |  | 227,465 |
Totals |  | $ | 506,334 |  |  | $ | 17,335 |  |  | $ | 1,089 |  |  | $ | 522,580 |

At June 30, 2021, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $267.8 million and an amortized cost of $254.2 million. Our holdings at June 30, 2021 also included special revenue bonds with an aggregate fair value of $159.7 million and an amortized cost of $151.7 million. With respect to both categories of those bonds at June 30, 2021, we held no securities of any issuer that comprised more than 10% of our holdings of either bond category. Education bonds and water and sewer utility bonds represented 46% and 35%, respectively, of our total investments in special revenue bonds based on the carrying values of these investments at June 30, 2021. Many of the issuers of the special revenue bonds we held at June 30, 2021 have the authority to impose ad valorem taxes. In that respect, many of the special revenue bonds we held at June 30, 2021 are similar to general obligation bonds.
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The amortized cost and estimated fair values of our fixed maturities at December 31, 2020 were as follows:

|  | 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 |  | $ | 77,435 |  |  | $ | 3,984 |  |  | $ | 223 |  |  | $ | 81,196 |
Obligations of states and political subdivisions |  |  | 312,319 |  |  |  | 23,212 |  |  |  | 143 |  |  |  | 335,388 |
Corporate securities |  |  | 173,270 |  |  |  | 18,172 |  |  |  | 206 |  |  |  | 191,236 |
Mortgage-backed securities |  |  | 23,585 |  |  |  | 1,236 |  |  |  | — |  |  |  | 24,821 |
Totals |  | $ | 586,609 |  |  | $ | 46,604 |  |  | $ | 572 |  |  | $ | 632,641 |

|  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Estimated Fair Value
|  | (in thousands)
Available for Sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 47,512 |  |  | $ | 424 |  |  | $ | 121 |  |  | $ | 47,815 |
Obligations of states and political subdivisions |  |  | 66,287 |  |  |  | 2,690 |  |  |  | 12 |  |  |  | 68,965 |
Corporate securities |  |  | 202,396 |  |  |  | 10,496 |  |  |  | 184 |  |  |  | 212,708 |
Mortgage-backed securities |  |  | 218,763 |  |  |  | 6,902 |  |  |  | 17 |  |  |  | 225,648 |
Totals |  | $ | 534,958 |  |  | $ | 20,512 |  |  | $ | 334 |  |  | $ | 555,136 |

​​​​​​​
At December 31, 2020, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $263.6 million and an amortized cost of $247.5 million. Our holdings also included special revenue bonds with an aggregate fair value of $140.8 million and an amortized cost of $131.1 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, 2020. Education bonds and water and sewer utility bonds represented 44% and 39%, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, 2020. Many of the issuers of the special revenue bonds we held at December 31, 2020 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 made reclassifications from available for sale to held to maturity of certain fixed maturities at fair value on November 30, 2013. We segregated within accumulated other comprehensive income the net unrealized losses of $15.1 million arising prior to the November 30, 2013 reclassifications. We are amortizing this balance over the remaining life of the related securities as an adjustment to yield in a manner consistent with the accretion of discount on the same fixed maturities. We recorded amortization of $556,553 and $833,690 in other comprehensive (loss) income during the six months ended June 30, 2021 and 2020, respectively. At June 30, 2021 and December 31, 2020, net unrealized losses of $5.5 million and $6.1 million, respectively, remained within accumulated other comprehensive income.
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We show below the amortized cost and estimated fair value of our fixed maturities at June 30, 2021 by contractual maturity. Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

|  | Amortized Cost |  | Estimated Fair Value
|  | (in thousands)
Held to maturity |  |  |  |  |  |  |  |
Due in one year or less |  | $ | 38,641 |  |  | $ | 39,762 |
Due after one year through five years |  |  | 83,282 |  |  |  | 88,929 |
Due after five years through ten years |  |  | 224,135 |  |  |  | 237,348 |
Due after ten years |  |  | 278,337 |  |  |  | 294,625 |
Mortgage-backed securities |  |  | 19,453 |  |  |  | 20,458 |
Total held to maturity |  | $ | 643,848 |  |  | $ | 681,122 |
Available for sale |  |  |  |  |  |  |  |
Due in one year or less |  | $ | 26,146 |  |  | $ | 26,621 |
Due after one year through five years |  |  | 131,837 |  |  |  | 138,624 |
Due after five years through ten years |  |  | 96,413 |  |  |  | 99,711 |
Due after ten years |  |  | 29,124 |  |  |  | 30,159 |
Mortgage-backed securities |  |  | 222,814 |  |  |  | 227,465 |
Total available for sale |  | $ | 506,334 |  |  | $ | 522,580 |

The cost and estimated fair values of our equity securities at June 30, 2021 were as follows:

|  | Cost |  | Gross Gains |  | Gross Losses |  | Estimated Fair Value
|  | (in thousands)
Equity securities |  | $ | 50,864 |  |  | $ | 22,007 |  |  | $ | 114 |  |  | $ | 72,757 |

The cost and estimated fair values of our equity securities at December 31, 2020 were as follows:

|  | Cost |  | Gross Gains |  | Gross Losses |  | Estimated Fair Value
|  | (in thousands)
Equity securities |  | $ | 42,410 |  |  | $ | 17,103 |  |  | $ | 957 |  |  | $ | 58,556 |

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Gross investment gains and losses before applicable income taxes for the three months and six months ended June 30, 2021 and 2020 were as follows:

|  | Three Months Ended June 30, |  | Six Months Ended June 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
|  | (in thousands) |  | (in thousands)
Gross investment gains: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturities |  | $ | 479 |  |  | $ | 229 |  |  | $ | 524 |  |  | $ | 652 |
Equity securities |  |  | 3,762 |  |  |  | 6,474 |  |  |  | 6,728 |  |  |  | 3,355 |
|  |  | 4,241 |  |  |  | 6,703 |  |  |  | 7,252 |  |  |  | 4,007 |
Gross investment losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturities |  |  | — |  |  |  | 217 |  |  |  | 74 |  |  |  | 218 |
Equity securities |  |  | — |  |  |  | — |  |  |  | 468 |  |  |  | 7,998 |
|  |  | — |  |  |  | 217 |  |  |  | 542 |  |  |  | 8,216 |
Net investment gains (losses) |  | $ | 4,241 |  |  | $ | 6,486 |  |  | $ | 6,710 |  |  | $ | (4,209 | )

We recognized $6.1 million of gains and $114,339 of losses on equity securities we held at June 30, 2021 in net investment gains for the six months ended June 30, 2021. We recognized $3.4 million of gains and $4.9 million of losses on equity securities we held at June 30, 2020 in net investment losses for the six months ended June 30, 2020.
We held fixed maturities with unrealized losses representing declines that we considered temporary at June 30, 2021 as follows:

|  | Less Than 12 Months |  | More Than 12 Months
|  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
|  | (in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 38,202 |  |  | $ | 1,088 |  |  | $ | — |  |  | $ | — |
Obligations of states and political subdivisions |  |  | 45,446 |  |  |  | 819 |  |  |  | — |  |  |  | — |
Corporate securities |  |  | 38,846 |  |  |  | 344 |  |  |  | 3,375 |  |  |  | 125 |
Mortgage-backed securities |  |  | 55,930 |  |  |  | 415 |  |  |  | 487 |  |  |  | 2 |
Totals |  | $ | 178,424 |  |  | $ | 2,666 |  |  | $ | 3,862 |  |  | $ | 127 |

We held fixed maturities with unrealized losses representing declines that we considered temporary at December 31, 2020 as follows:

|  | Less Than 12 Months |  | More Than 12 Months
|  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
|  | (in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 29,144 |  |  | $ | 345 |  |  | $ | — |  |  | $ | — |
Obligations of states and political subdivisions |  |  | 9,362 |  |  |  | 154 |  |  |  | — |  |  |  | — |
Corporate securities |  |  | 26,143 |  |  |  | 115 |  |  |  | 8,230 |  |  |  | 276 |
Mortgage-backed securities |  |  | 3,091 |  |  |  | 15 |  |  |  | 236 |  |  |  | 1 |
Totals |  | $ | 67,740 |  |  | $ | 629 |  |  | $ | 8,466 |  |  | $ | 277 |

We make estimates concerning the valuation of our investments and the recognition of other-than-temporary declines in the value of our investments. For equity securities, we measure investments at fair value, and we recognize changes in fair value in
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our results of operations. With respect to a debt security that is in an unrealized loss position, we first assess if we intend to sell the debt security. If we determine we intend to sell the debt security, we recognize the impairment loss in our results of operations. If we do not intend to sell the debt security, we determine whether it is more likely than not that we will be required to sell the debt security prior to recovery. If we determine it is more likely than not that we will be required to sell the debt security prior to recovery, we recognize 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 consider the impairment to be other than temporary. We then recognize the amount of the impairment loss related to the credit loss in our results of operations, and we recognize the remaining portion of the impairment loss in our other comprehensive income, net of applicable taxes. In addition, we may write down securities in an unrealized loss position based on a number of other factors, including when the fair value of an investment is significantly below its cost, when the financial condition of the issuer of a security has deteriorated, the occurrence of industry, issuer or geographic events that have negatively impacted the value of a security and rating agency downgrades. We held 89
debt securities that were in an unrealized loss position at June 30, 2021. 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 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 realized investment gains and losses using the specific identification method.
We amortize premiums and discounts on mortgage-backed debt securities using anticipated prepayments.

6 - | Segment Information

We evaluate the performance of our personal lines and commercial lines segments based upon the underwriting results of our insurance subsidiaries using statutory accounting principles (“SAP”) that various state insurance departments prescribe or permit. Our management uses SAP to measure the performance of our insurance subsidiaries instead of United States generally accepted accounting principles (“GAAP”). SAP financial measures are considered
non-GAAP
financial measures under applicable SEC rules because they include or exclude certain items that the most comparable GAAP financial measures do not ordinarily include or exclude.
Financial data by segment for the three and six months ended June 30, 2021 and 2020 is as follows:​​​​​​​​​​​​​​
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|  | Three Months Ended June 30,
|  | 2021 |  | 2020
|  | (in thousands)
Revenues: |  |  |  |  |  |  |  |
Premiums earned: |  |  |  |  |  |  |  |
Commercial lines |  | $ | 115,300 |  |  | $ | 101,870 |
Personal lines |  |  | 77,189 |  |  |  | 82,504 |
GAAP premiums earned |  |  | 192,489 |  |  |  | 184,374 |
Net investment income |  |  | 7,652 |  |  |  | 7,172 |
Investment gains |  |  | 4,241 |  |  |  | 6,486 |
Other |  |  | 764 |  |  |  | 868 |
Total revenues |  | $ | 205,146 |  |  | $ | 198,900 |
Income before income tax expense: |  |  |  |  |  |  |  |
Underwriting income: |  |  |  |  |  |  |  |
Commercial lines |  | $ | 1,767 |  |  | $ | 4,472 |
Personal lines |  |  | 547 |  |  |  | 8,290 |
SAP underwriting income |  |  | 2,314 |  |  |  | 12,762 |
GAAP adjustments |  |  | 5,256 |  |  |  | 1,378 |
GAAP underwriting income |  |  | 7,570 |  |  |  | 14,140 |
Net investment income |  |  | 7,652 |  |  |  | 7,172 |
Investment gains |  |  | 4,241 |  |  |  | 6,486 |
Other |  |  | 234 |  |  |  | 190 |
Income before income tax expense |  | $ | 19,697 |  |  | $ | 27,988 |

|  | Six Months Ended June 30,
|  | 2021 |  | 2020
|  | (in thousands)
Revenues: |  |  |  |  |  |  |  |
Premiums earned: |  |  |  |  |  |  |  |
Commercial lines |  | $ | 224,525 |  |  | $ | 203,645 |
Personal lines |  |  | 155,215 |  |  |  | 167,982 |
GAAP premiums earned |  |  | 379,740 |  |  |  | 371,627 |
Net investment income |  |  | 15,163 |  |  |  | 14,548 |
Investment gains (losses) |  |  | 6,710 |  |  |  | (4,209 | )
Other |  |  | 1,503 |  |  |  | 1,845 |
Total revenues |  | $ | 403,116 |  |  | $ | 383,811 |
Income before income tax expense: |  |  |  |  |  |  |  |
Underwriting (loss) income: |  |  |  |  |  |  |  |
Commercial lines |  | $ | (6,475 | ) |  | $ | 3,906 |
Personal lines |  |  | 5,584 |  |  |  | 13,101 |
SAP underwriting (loss) income |  |  | (891 | ) |  |  | 17,007 |
GAAP adjustments |  |  | 11,238 |  |  |  | 2,762 |
GAAP underwriting income |  |  | 10,347 |  |  |  | 19,769 |
Net investment income |  |  | 15,163 |  |  |  | 14,548 |
Investment gains (losses) |  |  | 6,710 |  |  |  | (4,209 | )
Other |  |  | 228 |  |  |  | 383 |
Income before income tax expense |  | $ | 32,448 |  |  | $ | 30,491 |

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7 - | 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 June 30, 2021, we had no outstanding borrowings from M&T and had the ability to borrow up to $20.0 million at interest rates equal to the then-current LIBOR rate plus 2.00%.
Atlantic States is a member of the FHLB of Pittsburgh. Through its membership, Atlantic States has the ability to issue debt to the FHLB of Pittsburgh in exchange for cash advances. Atlantic States has a fixed-rate cash advance of $35.0 million that was outstanding at June 30, 2021. The cash advance carries a fixed interest rate of 1.74% and is due in August 2024. In March 2020, Atlantic States issued $50.0 million of debt to the FHLB of Pittsburgh in exchange for a cash advance in the same amount that carried a fixed interest rate of 0.83%. Atlantic States obtained this contingent liquidity funding in light of uncertainty surrounding the economic impact of the
COVID-19
pandemic. Atlantic States repaid this advance when it became due in March 2021. The table below presents the amount of FHLB of Pittsburgh stock Atlantic States purchased, collateral pledged and assets related to Atlantic States’ membership in the FHLB of Pittsburgh at June 30, 2021.

FHLB of Pittsburgh stock purchased and owned |  | $ | 1,575,600 |
Collateral pledged, at par (carrying value $45,226,104) |  |  | 44,343,661 |
Borrowing capacity currently available |  |  | 8,847,792 |

Subordinated Debentures
Donegal Mutual holds a $5.0 million surplus note that MICO issued to increase MICO’s statutory surplus. The surplus note carries an interest rate of 5.00%, and any repayment of principal or payment of interest on the surplus note requires prior approval of the Michigan Department of Insurance and Financial Services.

8 - | Share–Based Compensation

We measure all share-based payments to employees, including grants of stock options, and use a fair-value-based method for the recording of related compensation 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, the expected term, the dividend yield and the expected volatility.
We charged compensation expense related to our stock compensation plans against income before income taxes of $
304,373
and $
314,237
for the three months ended June 30, 2021 and 2020, respectively, with a corresponding income tax benefit of $
63,918
and $
65,990
, respectively. We charged compensation expense related to our stock compensation plans against income before income taxes of $
597,168
and $
644,541
for the six months ended June 30, 2021 and 2020, respectively, with a corresponding income tax benefit of $
125,405
and $
135,354
, respectively. At June 30, 2021, we had $
1.0
million of unrecognized compensation expense related to nonvested share-based compensation granted under our stock compensation plans that we expect to recognize over a weighted average period of approximately
1.6
years.
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We received cash from option exercises under all stock compensation plans during the three months ended June 30, 2021 and 2020 of $7.0 million and $2.2 million, respectively. We received cash from option exercises under all stock compensation plans during the six months ended June 30, 2021 and 2020 of $11.4 million and $3.1 million, respectively. We realized actual tax benefits for the tax deductions related to those option exercises of $271,979
and $54,221 for the three months ended June 30, 2021 and 2020, respectively. We realized actual tax benefits for the tax deductions related to those option exercises of $421,135
and $68,878 for the six months ended June 30, 2021 and 2020, respectively.

9 - | Fair Value Measurements

We account for financial assets using a framework that establishes a hierarchy that ranks the quality and reliability of the inputs, or assumptions, we use 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 and include these investments in Level 2 of the fair value hierarchy. We classify our fixed maturity investments as Level 2. Our fixed maturity investments consist of U.S. Treasury securities and obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, corporate securities and mortgage-backed securities.
We present our investments in
available-for-sale
fixed maturity and equity securities at estimated fair value. The estimated fair value of a security may differ from the amount that could be realized if we sold the security in a forced transaction. In addition, the valuation of fixed maturity investments is more subjective when markets are less liquid, increasing the potential that the estimated fair value does not reflect the price at which an actual transaction would occur. We utilize nationally recognized independent pricing services to estimate fair values or obtain market quotations for substantially all of our fixed maturity and equity investments. These 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 verify that the estimates we obtain from the pricing services are representative of fair values based upon our investment personnel’s general knowledge 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 regularly monitor the market, 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, interest rates, security types and recent trading activity. Our investment personnel periodically review documentation with respect to the pricing services’ pricing methodology that they obtain to determine if the primary pricing sources, market inputs and pricing frequency for various security types are reasonable. At June 30, 2021, 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 June 30, 2021, 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. We classify these items as Level 1.
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The carrying values we report in our balance sheet for premium receivables and reinsurance receivables and payables for premiums and paid losses and loss expenses approximate their fair values. The carrying amounts we report in our balance sheets for our subordinated debentures and borrowings under lines of credit approximate their fair values. We classify these items as Level 3.
We evaluate our assets and liabilities to determine the appropriate level at which to classify them for each reporting period.
The following table presents our fair value measurements for our investments in
available-for-sale
fixed maturity and equity securities at June 30, 2021:

|  | Fair Value Measurements Using
|  | Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
|  | (in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 22,326 |  |  | $ | — |  |  | $ | 22,326 |  |  | $ | — |
Obligations of states and political subdivisions |  |  | 61,713 |  |  |  | — |  |  |  | 61,713 |  |  |  | — |
Corporate securities |  |  | 211,076 |  |  |  | — |  |  |  | 211,076 |  |  |  | — |
Mortgage-backed securities |  |  | 227,465 |  |  |  | — |  |  |  | 227,465 |  |  |  | — |
Equity securities |  |  | 72,757 |  |  |  | 70,467 |  |  |  | 2,290 |  |  |  | — |
Total investments in the fair value hierarchy |  | $ | 595,337 |  |  | $ | 70,467 |  |  | $ | 524,870 |  |  | $ | — |

The following table presents our fair value measurements for our investments in
available-for-sale
fixed maturity and equity securities at December 31, 2020:

|  | 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)
|  | (in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 47,815 |  |  | $ | — |  |  | $ | 47,815 |  |  | $ | — |
Obligations of states and political subdivisions |  |  | 68,965 |  |  |  | — |  |  |  | 68,965 |  |  |  | — |
Corporate securities |  |  | 212,708 |  |  |  | — |  |  |  | 212,708 |  |  |  | — |
Mortgage-backed securities |  |  | 225,648 |  |  |  | — |  |  |  | 225,648 |  |  |  | — |
Equity securities |  |  | 58,556 |  |  |  | 54,152 |  |  |  | 4,404 |  |  |  | — |
Totals |  | $ | 613,692 |  |  | $ | 54,152 |  |  | $ | 559,540 |  |  | $ | — |

10 - | Income Taxes

At June 30, 2021 and December 31, 2020, respectively, we had no material unrecognized tax benefits or accrued interest and penalties. Tax years 2016 through 2020 remained open for examination at June 30, 2021. We provide a valuation allowance when we believe it is more likely than not that we will not realize some portion of our tax assets. We established a valuation allowance of $7.9 million for our net state operating loss carryforward. We have determined that we are not required to establish a valuation allowance for our other deferred tax assets of $27.6 million and $26.7 million at June 30, 2021 and December 31, 2020, respectively, because it is more likely than not that we will realize these deferred tax assets through reversals of existing temporary differences, future taxable income and the implementation of tax planning strategies.
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On March 27, 2020, the Coronavirus Aid, Relief and Security Act (the “CARES Act”) was signed into law. The CARES Act amended net operating loss provisions in effect prior to its enactment. The CARES Act allows for the carryback of losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021 to each of the five taxable years preceding the taxable year of such loss. As a result, we filed amended tax returns to carry back net operating losses from taxable year 2018 to past tax years. We recorded a tax benefit of $1.6 million in the first quarter of 2020 in anticipation of a refund of taxes we paid in prior years as a result of the carryback.

11 - | Liabilities for Losses and Loss Expenses

The establishment of appropriate liabilities for losses and loss expenses is an inherently uncertain process, and we can provide no assurance that our insurance subsidiaries’ ultimate liabilities for losses and loss expenses will not exceed their 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’ estimate of their liabilities for losses and loss expenses generally reflect actual payments and their evaluation of information received subsequent to the prior reporting period.
We summarize activity in our insurance subsidiaries’ liabilities for losses and loss expenses as follows:

|  | Six Months Ended June 30, |
|  | 2021 |  |  | 2020 |
|  | (in thousands) |
Balance at January 1 |  | $ | 962,007 |  |  | $ | 869,674 |
Less reinsurance recoverable |  |  | (404,818 | ) |  |  | (362,768 | )
Net balance at January 1 |  |  | 557,189 |  |  |  | 506,906 |
Incurred related to: |  |  |  |  |  |  |  |
Current year |  |  | 254,740 |  |  |  | 233,460 |
Prior years |  |  | (21,564 | ) |  |  | (10,864 | )
Total incurred |  |  | 233,176 |  |  |  | 222,596 |
Paid related to: |  |  |  |  |  |  |  |
Current year |  |  | 98,966 |  |  |  | 97,473 |
Prior years |  |  | 111,300 |  |  |  | 106,716 |
Total paid |  |  | 210,266 |  |  |  | 204,189 |
Net balance at end of period |  |  | 580,099 |  |  |  | 525,313 |
Plus reinsurance recoverable |  |  | 418,559 |  |  |  | 376,511 |
Balance at end of period |  | $ | 998,658 |  |  | $ | 901,824 |

Our insurance subsidiaries recognized a decrease in their liabilities for losses and loss expenses of prior years of $21.6 million
and $10.9 million for the six months ended June 30, 2021 and 2020, respectively. Our insurance subsidiaries made no significant changes in their reserving philosophy or claims management personnel, and they have made no significant offsetting changes in estimates that increased or decreased their loss and loss expense reserves in those years. The 2021 development represented 3.9% of the December 31, 2020 net carried reserves and resulted primarily from lower-than-expected loss emergence or severity in nearly all lines of business. The majority of the 2021 development related to decreases in the liabilities for losses and loss expenses of prior years for Atlantic States and MICO. The 2020 development represented 2.1% of the December 31, 2019 net carried reserves and resulted primarily from lower-than-expected severity in nearly all lines of business,
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with the exception of modest higher-than-expected severity in commercial automobile. The majority of the 2020 development related to decreases in the liabilities 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 the material lines of business of our insurance subsidiaries 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, the IBNR reserves of our insurance subsidiaries 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 the six months ended June 30, 2021.
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 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 and 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. The actuaries base their selection of a point estimate on a judgmental weighting of the 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 and 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 at 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 predict loss frequency accurately 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.

12 | - Impact of New Accounting Standards

In September 2016, the FASB issued guidance that amends previous guidance on the impairment of financial instruments by adding an impairment model that requires an entity to recognize expected credit losses as an allowance rather than impairments as credit losses are incurred. The intent of this guidance is to reduce complexity and result in a more timely
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recognition of expected credit losses. In November 2019, the FASB issued guidance that delays the effective date for “smaller reporting companies,” as defined in Item 10(f)(1) of
Regulation S-K, to
annual and interim reporting periods beginning after December 15, 2022 from December 15, 2019. We are a smaller reporting company and are in the process of evaluating the impact of the adoption of this guidance on our financial position, results of operations and cash flows.
In December 2019, the FASB issued guidance that simplifies accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance was effective January 1, 2021, using the retrospective method or modified retrospective method for certain changes and the prospective method for all other changes, and permits early adoption. Our adoption of this guidance on January 1, 2021 did not have a significant impact on our financial position, results of operations or cash flows.
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, 2020.
Critical Accounting Policies and Estimates
We combine our financial statements with those of our insurance subsidiaries and present our financial statements 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 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 of these liabilities 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 current consolidated results of operations.
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 liabilities 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
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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.
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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. These trend changes give rise to greater uncertainty as to the pattern of future loss settlements on bodily injury claims. 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. Related uncertainties regarding future trends include social inflation, supply chain disruption, the rate of plaintiff attorney involvement in claims and the cost of medical technologies and procedures. Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our insurance subsidiaries’ ultimate liabilities for losses and loss expenses will likely differ from the amount recorded at June 30, 2021. 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 $5.8 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 liabilities 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 rising medical loss costs and increased litigation trends. 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 liabilities for losses and loss expenses.
Atlantic States’ participation in the pool with Donegal Mutual exposes Atlantic States to adverse loss development on the business of Donegal Mutual that the pool includes. 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 pool is homogeneous and each company has a
pro-rata
share of the entire 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
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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.
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 relate to specific risk profiles targeted within similar classes of business, such as preferred tier products compared to standard tier products, but we do not allocate all of the standard risk gradients to one company. Therefore, the underwriting profitability of the business the individual companies write directly will vary. However, 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.
Our insurance subsidiaries’ liabilities for losses and loss expenses by major line of business at June 30, 2021 and December 31, 2020 consisted of the following:

|  |  | June 30, 2021 |  |  |  | December 31, 2020 |
|  |  | (in thousands) |
Commercial lines: |  |  |  |  |  |  |  |
Automobile |  | $ | 159,162 |  |  | $ | 151,813 |
Workers’ compensation |  |  | 116,346 |  |  |  | 118,037 |
Commercial multi-peril |  |  | 139,497 |  |  |  | 126,299 |
Other |  |  | 16,476 |  |  |  | 13,212 |
Total commercial lines |  |  | 431,481 |  |  |  | 409,361 |
Personal lines: |  |  |  |  |  |  |  |
Automobile |  |  | 118,165 |  |  |  | 120,861 |
Homeowners |  |  | 23,169 |  |  |  | 20,976 |
Other |  |  | 7,284 |  |  |  | 5,991 |
Total personal lines |  |  | 148,618 |  |  |  | 147,828 |
Total commercial and personal lines |  |  | 580,099 |  |  |  | 557,189 |
Plus reinsurance recoverable |  |  | 418,559 |  |  |  | 404,818 |
Total liabilities for losses and loss expenses |  | $ | 998,658 |  |  | $ | 962,007 |

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:
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Percentage Change in Loss and Loss Expense Reserves Net of Reinsurance |  | Adjusted Loss and Loss Expense Reserves Net of Reinsurance at June 30, 2021 |  | Percentage Change in Stockholders’ Equity at June 30, 2021(1) |  | Adjusted Loss and Loss Expense Reserves Net of Reinsurance at December 31, 2020 |  | Percentage Change in Stockholders’ Equity at December 31, 2020(1)
(dollars in thousands)
(10.0)% |  | $522,089 |  | 8.3% |  | $501,470 |  | 8.5%
(7.5) |  | 536,592 |  | 6.2 |  | 515,400 |  | 6.4
(5.0) |  | 551,094 |  | 4.2 |  | 529,330 |  | 4.3
(2.5) |  | 565,597 |  | 2.1 |  | 543,259 |  | 2.1
Base |  | 580,099 |  | — |  | 557,189 |  | —
2.5 |  | 594,601 |  | (2.1) |  | 571,119 |  | (2.1)
5.0 |  | 609,104 |  | (4.2) |  | 585,048 |  | (4.3)
7.5 |  | 623,606 |  | (6.2) |  | 598,978 |  | (6.4)
10.0 |  | 638,109 |  | (8.3) |  | 612,908 |  | (8.5)

(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.
The following table provides a reconciliation of our net premiums earned to our net premiums written for the three and six months ended June 30, 2021 and 2020:

|  | Three Months Ended June 30, |  | Six Months Ended June 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
|  |  | (in thousands) |
Net premiums earned |  |  | $192,489 |  |  |  | $184,374 |  |  |  | $379,740 |  |  |  | $371,627 |
Change in net unearned premiums |  |  | 17,116 |  |  |  | 9,329 |  |  |  | 45,727 |  |  |  | 20,313 |
Net premiums written |  |  | $209,605 |  |  |  | $193,703 |  |  |  | $425,467 |  |  |  | $391,940 |

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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.
Combined Ratios
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The following table presents comparative details with respect to our GAAP and statutory combined ratios for the three and six months ended June 30, 2021 and 2020:

|  | Three Months Ended June 30, |  | Six Months Ended June 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
GAAP Combined Ratios (Total Lines) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss ratio (non-weather) |  |  | 53.1 | % |  |  | 47.0 | % |  |  | 56.5 | % |  |  | 53.0 | %
Loss ratio (weather-related) |  |  | 6.1 |  |  |  | 10.1 |  |  |  | 4.9 |  |  |  | 6.9 |
Expense ratio |  |  | 36.0 |  |  |  | 34.3 |  |  |  | 35.1 |  |  |  | 33.8 |
Dividend ratio |  |  | 0.9 |  |  |  | 0.9 |  |  |  | 0.8 |  |  |  | 1.0 |
Combined ratio |  |  | 96.1 | % |  |  | 92.3 | % |  |  | 97.3 | % |  |  | 94.7 | %
Statutory Combined Ratios |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial lines: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automobile |  |  | 105.5 | % |  |  | 104.4 | % |  |  | 103.9 | % |  |  | 110.8 | %
Workers’ compensation |  |  | 84.0 |  |  |  | 80.9 |  |  |  | 89.3 |  |  |  | 85.5 |
Commercial multi-peril |  |  | 94.5 |  |  |  | 95.8 |  |  |  | 100.8 |  |  |  | 92.4 |
Other |  |  | 77.2 |  |  |  | 80.6 |  |  |  | 68.8 |  |  |  | 72.4 |
Total commercial lines |  |  | 94.3 |  |  |  | 93.5 |  |  |  | 96.6 |  |  |  | 94.7 |
Personal lines: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automobile |  |  | 91.1 |  |  |  | 76.1 |  |  |  | 92.2 |  |  |  | 88.4 |
Homeowners |  |  | 110.1 |  |  |  | 109.5 |  |  |  | 102.4 |  |  |  | 100.1 |
Other |  |  | 74.5 |  |  |  | 78.6 |  |  |  | 75.7 |  |  |  | 72.6 |
Total personal lines |  |  | 96.9 |  |  |  | 88.1 |  |  |  | 94.7 |  |  |  | 91.5 |
Total commercial and personal lines |  |  | 95.4 |  |  |  | 91.0 |  |  |  | 95.9 |  |  |  | 93.3 |

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Results of Operations - Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Net Premiums Earned.
Our insurance subsidiaries’ net premiums earned for the second quarter of 2021 were $192.5 million, an increase of $8.1 million, or 4.4 %, compared to $184.4 million for the second quarter of 2020, primarily reflecting the inclusion of the business of the Mountain States Insurance Group in the underwriting pool beginning with policies effective in 2021, as well as new business growth and renewal premium increases.
Net Premiums Written.
Our insurance subsidiaries’ net premiums written for the three months ended
June 30, 2021 were $209.6 million, an increase of $15.9 million, or 8.2%, from the $193.7 million of net premiums written for the second quarter of 2020. Commercial lines net premiums written increased $21.4 million, or 19.9%, for the second quarter of 2021 compared to the second quarter of 2020. We attribute the increase in commercial lines net premiums written primarily to the inclusion of the business of the Mountain States Insurance Group in the underwriting pool beginning with policies effective in 2021, as well as new business growth and renewal premium increases. Personal lines net premiums written decreased $5.5 million, or
6.4%, for the second quarter of 2021 compared to the second quarter of 2020. We attribute the decrease in personal lines net premiums written primarily to net attrition as a result of measures our insurance subsidiaries have implemented to improve underwriting profitability, partially offset by the impact of premium rate increases our insurance subsidiaries have implemented.
Investment Income.
Our net investment income was $7.7 million for the second quarter of 2021, compared to $7.2 for the second quarter of 2020. We attribute the increase primarily to an increase in average invested assets.
Net Investment Gains.
Net investment gains for the second quarter of 2021 were $4.2 million, compared to $6.5 million for the second quarter of 2020. The net investment gains for the second quarters of 2021 and 2020 resulted primarily from unrealized gains within our equity securities portfolio at June 30, 2021 and 2020, respectively. We did not recognize any impairment losses in our investment portfolio during the second quarter of 2021 or 2020.
Losses and Loss Expenses.
Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 59.2% for the second quarter of 2021, an increase from our insurance subsidiaries’ loss ratio of 57.1% for the second quarter of 2020. We attribute this increase primarily to increased frequency of personal automobile claims compared to the second quarter of 2020 when lower driving activity resulted from
COVID-19
related shutdowns and elevated fire losses that primarily impacted the loss ratios for our homeowners and commercial multi-peril lines of business. Weather-related losses of $11.7 million for the second quarter of 2021, or 6.1 percentage points of the loss ratio, decreased from $18.7 million for the second quarter of 2020, or 10.1 percentage points of the loss ratio. Weather-related loss activity for the second quarter of 2021 was lower than our previous five-year average of $17.0 million for second quarter weather-related losses. On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 56.4% for the second quarter of 2021, compared to 58.5% for the second quarter of 2020, primarily due to a decrease in the commercial multi-peril and workers’ compensation loss ratios. The personal lines statutory loss ratio of our insurance subsidiaries increased to 63.9% for the second quarter of 2021, compared to 55.3% for the second quarter of 2020. We attribute this increase primarily to an increase in the personal automobile loss ratio. Our insurance subsidiaries experienced favorable loss reserve development of approximately $13.4 million and $6.6 million during the second quarters of 2021 and 2020, respectively.
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 36.0% for the second quarter of 2021, compared to 34.3% for the second quarter of 2020. The increase in the expense ratio primarily reflected an increase in technology systems-related expenses and higher growth and underwriting-based incentive costs for our agents during the second quarter of 2021 compared to the second quarter of 2020. The expense ratio increase also reflected a reallocation from loss expenses to underwriting expenses that resulted from the implementation of a new software system during the second quarter of 2021 that enhanced our expense allocation methodology.
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 96.1% and
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92.3% for the three months ended June 30, 2021 and 2020, respectively. We attribute the increase in the combined ratio primarily to an increase in the loss ratio for the second quarter of 2021 compared to the second quarter of 2020.
Interest Expense.
Our interest expense for the second quarter of 2021 was $217,290, compared to $428,092 for the second quarter of 2020. We attribute the decrease to lower average borrowings under our lines of credit during the second quarter of 2021 compared to the second quarter of 2020.
Income Taxes.
We recorded income tax expense of $3.5 million for the second quarter of 2021, representing an effective tax rate of 17.9%. We recorded income tax expense of $5.3 million for the second quarter of 2020, representing an effective tax rate of 19.0%. The income tax expense and effective tax rates for the second quarters of 2021 and 2020 represented estimates based on our projected annual taxable income.
Net Income and Income Per Share.
Our net income for the second quarter of 2021 was $16.2 million, or $.53
per share of Class A common stock on a diluted basis and $.48 per share of Class B common stock, compared to $22.7 million, or $.79 per share of Class A common stock on a diluted basis and $.72 per share of Class B common stock, for the second quarter of 2020. We had 25.6 million and 23.5 million Class A shares outstanding at June 30, 2021 and 2020, respectively. We had 5.6 million Class B shares outstanding at the end of both periods.
Results of Operations - Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Net Premiums Earned.
Our insurance subsidiaries’ net premiums earned for the first half of 2021 were $379.7 million, an increase of $8.1 million, or 2.2%, compared to $371.6 million for the first half of 2020, primarily reflecting the inclusion of the business of the Mountain States Insurance Group in the underwriting pool beginning with policies effective in 2021, as well as new business growth and renewal premium increases.
Net Premiums Written.
Our insurance subsidiaries’ net premiums written for the six months ended
June 30, 2021 were $425.5 million, an increase of $33.6 million, or 8.6%, from the $391.9 million of net premiums written for the first half of 2020. Commercial lines net premiums written increased $44.2 million, or 19.3%, for the first half of 2021 compared to the first half of 2020. We attribute the increase in commercial lines net premiums written primarily to the inclusion of the business of the Mountain States Insurance Group in the underwriting pool beginning with policies effective in 2021, as well as new business growth and renewal premium increases. Personal lines net premiums written decreased $10.6 million, or 6.5%, for the first half of 2021 compared to the first half of 2020. We attribute the decrease in personal lines net premiums written primarily to net attrition as a result of measures our insurance subsidiaries have implemented to improve underwriting profitability, partially offset by the impact of premium rate increases our insurance subsidiaries have implemented.
Investment Income.
Our net investment income was $15.2 million for the first half of 2021, compared to $14.5 million for the first half of 2020. We attribute the increase primarily to an increase in average invested assets.
Net Investment Gains (Losses).
Net investment gains for the first half of 2021 were $6.7 million, compared to net investment losses of $4.2 million for the first half of 2020. The net investment gains for the first half of 2021 resulted primarily from unrealized gains within our equity securities portfolio at June 30, 2021. The net investment losses for the first half of 2020 resulted primarily from realized losses on sales of equity securities and unrealized losses within our equity securities portfolio due to a decline in equity markets at June 30, 2020. We did not recognize any impairment losses in our investment portfolio during the first half of 2021 or 2020.
Losses and Loss Expenses.
Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 61.4% for the first half of 2021, an increase from our insurance subsidiaries’ loss ratio of 59.9% for the first half of 2020. We attribute this increase primarily to elevated fire losses that primarily impacted the loss ratio for our commercial multi-peril line of business. Weather-related losses of $18.6 million for the first half of 2021, or 4.9 percentage points of the loss ratio, decreased from $25.6 million for the first half of 2020, or 6.9 percentage points of the loss ratio. On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 61.2% for the first half of 2021, compared to 60.6%
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for the first half of 2020, primarily due to an increase in the commercial multi-peril loss ratio. The personal lines statutory loss ratio of our insurance subsidiaries increased to 62.4% for the first half of 2021, compared to 59.3% for the first half of 2020. We attribute this increase primarily to an increase in the personal automobile and homeowners’ loss ratios. Our insurance subsidiaries experienced favorable loss reserve development of approximately $21.6 million and $10.9 million during the first half of 2021 and 2020, respectively.
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 35.1% for the first half of 2021, compared to 33.8% for the first half of 2020. The increase in the expense ratio primarily reflected an increase in technology systems-related expenses, higher agency growth incentive and underwriting-based incentive costs for our agents during the first half of 2021 compared to the first half of 2020.
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 97.3% and 94.7% for the first half of 2021 and 2020, respectively. We attribute the increase in the combined ratio primarily to an increase in the loss ratio for the first half of 2021 compared to the first half of 2020.
Interest Expense.
Our interest expense for the first half of 2021 was $529,616, compared to $652,422 for the first half of 2020. We attribute the decrease to lower average borrowings under our lines of credit during the first half of 2021 compared to the first half of 2020.
Income Taxes.
We recorded income tax expense of $5.8 million for the first half of 2021, representing an effective tax rate of 17.7%. We recorded income tax expense of $4.1 million for the first half of 2020, representing an effective tax rate of 13.4%. The income tax expense and effective tax rate for the first half of 2021 represented an estimate based on our projected annual taxable income. Income tax expense for the first half of 2020 included a $1.6 million income tax benefit related to the anticipated carryback of 2018 net operating losses to past tax years with higher statutory income tax rates than are currently in effect, as allowed under the Coronavirus Aid, Relief and Economic Security Act that was enacted in March 2020.
Net Income and Income Per Share.
Our net income for the first half of 2021 was $26.7 million, or $.88
per share of Class A common stock on a diluted basis and $.80 per share of Class B common stock, compared to $26.4 million, or $.92 per share of Class A common stock on a diluted basis and $.84 per share of Class B common stock, for the first half of 2020. We had 25.6 million and 23.5 million Class A shares outstanding at June 30, 2021 and 2020, 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 investment maturities.
Our operations have historically generated sufficient net positive cash flow to fund our commitments and add to our investment portfolio, thereby increasing future investment returns and enhancing our liquidity. 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 pool. Donegal Mutual and Atlantic States settle their respective obligations to each other under the pool monthly, thereby resulting in cash flows substantially similar to the cash flows that would result from each company writing the business directly. We have not experienced any unusual variations in the timing of claim payments associated with the loss reserves of our insurance subsidiaries. We maintain significant liquidity in our investment portfolio in the form of readily 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, thereby providing an additional measure of liquidity to meet our obligations
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should an unexpected variation occur in the future. Our operating activities provided net cash flows in the first six months of 2021 and 2020 of $59.2 million and $48.0 million, respectively.
At June 30, 2021, 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 LIBOR rate plus 2.00%. At June 30, 2021, Atlantic States had $35.0 million in outstanding advances with the FHLB of Pittsburgh that carry a fixed interest rate of 1.74%.
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. We show these liabilities net of reinsurance recoverable on unpaid losses and loss expenses to reflect expected future cash flows related to such liabilities. 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.
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.
We discuss in Note 7 – Borrowings our estimate of the timing of the amounts payable for the subordinated debentures based on their contractual maturity. The subordinated debentures carry an interest rate of 5.00%, and any repayment of principal or payment of interest on the subordinated debentures requires prior approval of the Michigan Department of Insurance and Financial Services. Our annual interest cost associated with the subordinated debentures is $250,000.
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 and in privately negotiated transactions. We did not purchase any shares of our Class A common stock under this program during the six months ended June 30, 2021 or 2020. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through June 30, 2021.
On July 15, 2021, our board of directors declared quarterly cash dividends of 16.0 cents per share of our Class A common stock and 14.25
cents per share of our Class B common stock, payable on August 16, 2021 to our stockholders of record as of the close of business on August 2, 2021. We are not subject to any restrictions on our payment of dividends to our stockholders, although there are state law restrictions on the payment of dividends by our insurance subsidiaries to us. Dividends from our insurance subsidiaries are our principal source of cash for payment of dividends to our stockholders. 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 limit their ability to pay dividends to us. Our insurance subsidiaries’ statutory capital and surplus at December 31, 2020 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin. Our insurance subsidiaries paid $5.0 million in dividends to us during the first six months of 2021. Amounts remaining available for distribution to us as dividends from our insurance subsidiaries without prior approval of their domiciliary insurance regulatory authorities in 2021 are $28.0 million from Atlantic States, $300,000 from Southern, $5.9 million from Peninsula and $12.2 million from MICO, or a total of approximately $46.4 million.
At June 30, 2021, we had no material commitments for capital expenditures.
Equity Price Risk
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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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our market risk generally represents the risk of gain or loss that may result from the potential change in the fair value of the securities we hold in our investment portfolio as a result of fluctuations in prices and interest rates and, to a lesser extent, our debt obligations. We manage our interest rate risk by maintaining an appropriate relationship between the average duration of our investment portfolio and the approximate duration of our liabilities, i.e., policy claims of our insurance subsidiaries and our debt obligations.
There have been no material changes to our quantitative or qualitative market risk exposure from December 31, 2020 through June 30, 2021.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules
13a-15(e)
and
15d-15(e)
under the Exchange Act). Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, at June 30, 2021, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information we are required to disclose in the reports that we file or submit under the Exchange Act, and our disclosure controls and procedures were also effective to ensure that information we disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
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There has been no change in our internal control over financial reporting during the quarter covered by this Quarterly Report on Form
10-Q
that has materially affected, or is reasonably likely to affect materially, our internal control over financial reporting.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
We base all statements contained in this Quarterly Report on Form
10-Q
that are not historic facts on our current expectations. Such statements are forward-looking in nature (as defined in the Private Securities Litigation Reform Act of 1995) and necessarily involve risks and uncertainties. Forward-looking statements we make may be identified by our use of words such as “will,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “seeks,” “estimates” and similar expressions. Our actual results could vary materially from our forward-looking statements. The factors that could cause our actual results to vary materially from the forward-looking statements we have previously made include, but are not limited to, prolonged economic challenges resulting from the
COVID-19
pandemic, the availability and cost of labor and materials, adverse and catastrophic weather events, our ability to maintain profitable operations, the adequacy of the loss and loss expense reserves of our insurance subsidiaries, the availability and successful operation of the information technology systems our insurance subsidiaries utilize, the successful development of new information technology systems to allow our insurance subsidiaries to compete effectively, business and economic conditions in the areas in which we and our insurance subsidiaries operate, interest rates, competition from various insurance and other financial businesses, terrorism, the availability and cost of reinsurance, legal and judicial developments including those related to
COVID-19
business interruption coverage exclusions, adverse litigation and other industry trends that could increase our loss costs, changes in regulatory requirements, changes in our A.M. Best rating, our ability to integrate and manage successfully the companies we may acquire from time to time and the other risks that we describe from time to time in our filings with the SEC. We disclaim any obligation to update such statements or to announce publicly the results of any revisions that we may make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
Part II. Other Information
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
Our business, results of operations and financial condition, and, therefore, the value of our Class A common stock and our Class B common stock, are subject to a number of risks. For a description of certain risks, we refer to “Risk Factors” in our 2020 Annual Report on Form
10-K
that we filed with the SEC on March 5, 2021. There have been no material changes in the risk factors we disclosed in that Form
10-K
Report during the six months ended June 30, 2021.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Period |  | (a) Total Number of Shares (or Units) Purchased |  | (b) Average Price Paid per Share (or Unit) |  | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |  | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Month #1 April 1-30, 2021 |  | Class A – None Class B – None |  | Class A – None Class B – None |  | Class A – None Class B – None |  |
Month #2 May 1-31, 2021 |  | Class A – None Class B – None |  | Class A – None Class B – None |  | Class A – None Class B – None |  |
Month #3 June 1-30, 2021 |  | Class A – 200,000 Class B – None |  | Class A – $15.22 Class B – None |  | Class A – 200,000 Class B – None |  | (1)
Total |  | Class A – 200,000 Class B – None |  | Class A – $15.22 Class B – None |  | Class A – 200,000 Class B – None |  |

| (1) | Donegal Mutual purchased these shares pursuant to its announcement on August 17, 2004 that it will, at its discretion, purchase shares of our Class A common stock and 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 announcement did not stipulate a maximum number of shares that may be purchased under this program.

Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosure.
Not Applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.

Exhibit No. |  | Description
Exhibit 31.1 |  | Certification of Chief Executive Officer
Exhibit 31.2 |  | Certification of Chief Financial Officer
Exhibit 32.1 |  | Statement of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of Title 18 of the United States Code
Exhibit 32.2 |  | Statement of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of Title 18 of the United States Code
Exhibit 101.INS |  | XBRL Instance Document
Exhibit 101.SCH |  | XBRL Taxonomy Extension Schema Document
Exhibit 101.PRE |  | XBRL Taxonomy Presentation Linkbase Document
Exhibit 101.CAL |  | XBRL Taxonomy Calculation Linkbase Document
Exhibit 101.LAB |  | XBRL Taxonomy Label Linkbase Document
Exhibit 101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document

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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|  |  |  | DONEGAL GROUP INC.
August 6, 2021 |  |  |  | By: |  | /s/ Kevin G. Burke
|  |  |  |  |  | Kevin G. Burke, President and Chief Executive Officer
August 6, 2021 |  |  |  | By: |  | /s/ Jeffrey D. Miller
|  |  |  |  |  | Jeffrey D. Miller, Executive Vice President
|  |  |  |  |  | and Chief Financial Officer