Financial Data and Key Metrics Changes - The company achieved net income of $3.7 million or $0.13 per diluted Class A share for Q1 2020, a decrease from $23 million or $0.82 per Class A share in Q1 2019, which included a gain from the sale of a banking subsidiary [36] - The combined ratio improved to 97% in Q1 2020 from 99.3% in Q1 2019, indicating better underwriting performance despite net investment losses of $10.7 million due to unrealized losses in equity securities [17][31] - Book value increased by 1.6% to $15.92 at March 31, 2020, compared to $15.67 at December 31, 2019 [18] Business Line Data and Key Metrics Changes - Commercial premiums accounted for approximately 61% of net premiums written in Q1 2020, up from 57% in Q1 2019, with commercial auto premiums growing by 11.9% [20] - Personal lines net written premiums declined by 11.2% in Q1 2020, primarily due to the exit from unprofitable markets in 7 states [23] - The statutory combined ratio for personal lines improved to 94.7% in Q1 2020 from 97.8% in the prior year, driven by reduced weather-related losses [23] Market Data and Key Metrics Changes - The company reported a 7.1% increase in net premiums written for commercial lines, while personal lines saw a decline of 11.2% [26] - Average renewal pricing increases for commercial lines were 2.9%, with a notable 10.8% increase in commercial auto rates [27] - The company maintained consistent commercial retention levels, indicating market stability [21] Company Strategy and Development Direction - The company is focused on enhancing underwriting profitability, improving operational efficiency, and growing its commercial lines business [37] - Plans to introduce new auto and homeowners products in 2021 are in place to stabilize personal lines [24] - The company is adapting its business plans in response to the ongoing economic impact of COVID-19 [16] Management's Comments on Operating Environment and Future Outlook - Management noted that COVID-19 had a minimal impact on Q1 2020 results, but they are closely evaluating its potential effects on the business moving forward [7][8] - The company does not expect significant financial impact from COVID-19 claims, as most policies require direct physical loss for coverage [11] - Management expressed concerns about potential legislative changes that could expand coverage for business interruption and Workers' compensation, which could destabilize the insurance industry [14] Other Important Information - The company borrowed $50 million from the Federal Home Loan Bank to bolster liquidity amid COVID-19 uncertainties [33] - Net investment losses of $10.7 million in Q1 2020 were primarily due to unrealized losses in equity securities, contrasting with net investment gains of $18.1 million in Q1 2019 [34][35] Q&A Session Summary Question: Workers' compensation exposure related to COVID-19 - Management indicated that they do not currently expect significant exposure to Workers' compensation claims related to COVID-19, as they have not received any claims thus far [39] Question: Agents' ability to write new business while working from home - Management confirmed that agents are well-prepared to write new business remotely, but the overall economic situation will determine future opportunities [40] Question: Policy retention in commercial lines - Management reported good policy retention rates currently, but future retention will depend on the duration of the economic shutdown [41][42] Question: Premium declines in personal lines - Management expects a low single-digit decrease in personal lines premiums going forward, following the exit from unprofitable states [45] Question: Workers' compensation reserves - Management confirmed that they are reserving at a higher rate than premium growth to protect against unexpected claims development [47] Question: Impact of COVID-19 on technology initiatives - Management noted a temporary pause in technology projects due to COVID-19, but they have resumed progress on modernization efforts [49] Question: Investment allocation changes due to emerging risks - Management stated that they are maintaining a conservative investment approach and building liquidity, without making significant changes to their investment strategy [53][54]

Table of Contents Title of Each ClassTrading SymbolsName 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) ...

Financial Data and Key Metrics Changes - The company reported a net income of $14.2 million or $0.50 per diluted Class A share for Q4 2019, compared to a net loss of $15 million or $0.54 per Class A share in Q4 2018 [44] - Full year net income for 2019 was $47.2 million or $1.67 per diluted Class A share, a significant improvement from a net loss of $32.8 million or $1.18 per Class A share in 2018 [44] - Book value per share increased by 11.5% during the full year to $15.67 at December 31, 2019 [10] Business Line Data and Key Metrics Changes - Net premiums written increased by 1.6% to $171 million in Q4 2019, with commercial lines premiums growing by 14.3% while personal lines premiums declined by 10.3% [28][29] - Commercial lines accounted for approximately 54% of total business writings in 2019, up from 48% in 2018, driven by growth in commercial multi-peril and commercial auto [12] - Personal lines net written premiums declined by 10.1% for the full year 2019, primarily due to the exit from unprofitable markets in seven states [18][19] Market Data and Key Metrics Changes - The company experienced a stable insurance market in 2020, allowing for additional pricing increases where warranted [8] - The statutory combined ratio for commercial lines improved to 95% in 2019 from 103.7% in 2018, reflecting lower weather-related losses and strong workers' compensation results [17] - The workers' compensation line reported a statutory combined ratio of 78.5% for the full year, benefiting from favorable reserve development trends [16] Company Strategy and Development Direction - The company aims to enhance operational efficiency and improve financial performance through strategic initiatives focused on underwriting profitability and book value growth [46] - A new underwriting platform is being implemented to modernize legacy systems, with plans to roll out new personal and homeowners products starting in Q2 2021 [23][24] - The company is focusing on maintaining strong relationships with agents to support new business opportunities and improve service [13] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the positive momentum entering 2020, driven by improved profitability and stable market conditions [7] - The company plans to take a cautious approach to growing personal lines in 2020, focusing on profitability rather than top-line growth [50] - Management acknowledged the challenges in the commercial auto segment but remains committed to aggressive rate increases to restore profitability [76] Other Important Information - The company consolidated several insurance subsidiaries to simplify operations and reduce administrative costs, with minimal impact on staffing and operations [26] - The company reduced reinsurance premiums in 2019, which positively impacted net premiums written and pre-tax income [33] Q&A Session Summary Question: Can you provide the fourth quarter reserve development breakdown by line? - The company reported favorable development of $5.9 million in workers' compensation, offset by unfavorable development of $2 million in commercial auto and $700,000 in commercial multi-peril [48] Question: What should we expect for top line and personal lines for 2020? - The company plans to take a cautious approach to growing personal lines, focusing on profitability and modest rate increases [50][52] Question: Are there any changes in frequency and severity trends in workers' compensation? - The company has not seen significant changes, with frequency continuing to decline modestly and severity holding steady [54] Question: How is the company thinking about growing the agency network? - The company is focusing on building relationships with large aggregators and small to mid-sized agencies amid ongoing consolidation in the independent agency networks [56] Question: Are you booking higher current accident year loss numbers in workers' compensation? - The company is projecting that the 2019 accident year will have similar results to previous years, without significant changes in loss expectations [61][64] Question: What is the impact of the policyholder dividend ratio increase? - The increase is influenced by the profitability of workers' compensation and growth in writings in Wisconsin, where dividends are part of the pricing mechanism [69][70] Question: Where does the company stand on commercial auto rates versus loss costs? - The company is taking aggressive rate increases, with retention levels remaining stable, indicating that the segment is underpriced [76]

PART I FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Donegal Group Inc.'s unaudited consolidated financial statements and detailed notes for the periods ended September 30, 2019, and December 31, 2018 [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) | Metric | Sep 30, 2019 (Unaudited) | Dec 31, 2018 | | :--------------------------------------- | :----------------------- | :------------- | | **Assets** | | | | Total investments | $1,078,714,962 | $1,030,798,566 | | Cash | $55,268,760 | $52,594,461 | | Premiums receivable | $173,749,759 | $156,702,250 | | Reinsurance receivable | $362,366,588 | $343,369,065 | | Total assets | $1,921,085,211 | $1,832,078,267 | | **Liabilities** | | | | Unpaid losses and loss expenses | $864,534,338 | $814,665,224 | | Unearned premiums | $528,037,212 | $506,528,606 | | Borrowings under lines of credit | $35,000,000 | $60,000,000 | | Total liabilities | $1,478,533,606 | $1,433,208,366 | | **Stockholders' Equity** | | | | Total stockholders' equity | $442,551,605 | $398,869,901 | | Total liabilities and stockholders' equity | $1,921,085,211 | $1,832,078,267 | - Total assets increased by **$89.0 million (4.9%)** from December 31, 2018, to September 30, 2019, primarily driven by increases in total investments, premiums receivable, and reinsurance receivable[15](index=15&type=chunk) - Total liabilities increased by **$45.3 million (3.2%)** over the same period, mainly due to higher unpaid losses and loss expenses and unearned premiums, partially offset by a decrease in borrowings under lines of credit[15](index=15&type=chunk) - Total stockholders' equity increased by **$43.7 million (11.0%)** from December 31, 2018, to September 30, 2019[15](index=15&type=chunk) [Consolidated Statements of Income (Unaudited)](index=5&type=section&id=Consolidated%20Statements%20of%20Income%20(Unaudited)) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--------------------------------------- | :------------------------------ | :------------------------------ | | Net premiums earned | $189,821,058 | $187,661,705 | | Total revenues | $198,009,900 | $199,904,180 | | Net losses and loss expenses | $130,743,395 | $140,726,106 | | Total expenses | $191,705,016 | $198,627,194 | | Income before income tax expense | $6,304,884 | $1,276,986 | | Net income | $5,186,379 | $1,206,356 | | Class A common stock - basic EPS | $0.19 | $0.04 | | Class A common stock - diluted EPS | $0.18 | $0.04 | | Class B common stock - basic and diluted EPS | $0.16 | $0.04 | - Net income for the three months ended September 30, 2019, significantly increased to **$5.2 million** from **$1.2 million** in the prior year period, driven by higher income before income tax expense[17](index=17&type=chunk) - Net premiums earned saw a slight increase of **1.2% YoY**, while net losses and loss expenses decreased by **7.1% YoY**[17](index=17&type=chunk) [Consolidated Statements of Comprehensive Income (Loss) (Unaudited)](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)%20(Unaudited)) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--------------------------------------- | :------------------------------ | :------------------------------ | | Net income | $5,186,379 | $1,206,356 | | Other comprehensive income (loss) | $2,255,773 | $(2,276,950) | | Comprehensive income (loss) | $7,442,152 | $(1,070,594) | - Comprehensive income significantly improved to **$7.4 million** in Q3 2019 from a loss of **$1.1 million** in Q3 2018, primarily due to a positive shift in other comprehensive income (unrealized gains on securities)[19](index=19&type=chunk) [Consolidated Statements of Income (Loss) (Unaudited) (Nine Months)](index=6&type=section&id=Consolidated%20Statements%20of%20Income%20(Loss)%20(Unaudited)%20(Nine%20Months)) | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net premiums earned | $566,657,613 | $555,140,395 | | Total revenues | $611,512,728 | $585,022,486 | | Net losses and loss expenses | $385,361,331 | $433,063,019 | | Total expenses | $572,825,289 | $613,613,717 | | Income (loss) before income tax expense (benefit) | $38,687,439 | $(28,591,231) | | Net income (loss) | $32,997,997 | $(17,761,577) | | Class A common stock - basic EPS | $1.18 | $(0.64) | | Class A common stock - diluted EPS | $1.17 | $(0.64) | | Class B common stock - basic and diluted EPS | $1.06 | $(0.59) | - The company reported a significant turnaround, moving from a net loss of **$17.8 million** in the first nine months of 2018 to a net income of **$33.0 million** in the same period of 2019[22](index=22&type=chunk) - Total revenues increased by **4.5% YoY**, while net losses and loss expenses decreased by **11.0% YoY**, contributing to the improved profitability[22](index=22&type=chunk) [Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (Nine Months)](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)%20(Unaudited)%20(Nine%20Months)) | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $32,997,997 | $(17,761,577) | | Other comprehensive income (loss) | $14,646,453 | $(11,340,980) | | Comprehensive income (loss) | $47,644,450 | $(29,102,557) | - Comprehensive income for the first nine months of 2019 was **$47.6 million**, a substantial improvement from a comprehensive loss of **$29.1 million** in the prior year, primarily due to net income and positive other comprehensive income[24](index=24&type=chunk) [Consolidated Statement of Stockholders' Equity (Unaudited)](index=7&type=section&id=Consolidated%20Statement%20of%20Stockholders'%20Equity%20(Unaudited)) | Metric | Dec 31, 2018 | Sep 30, 2019 | | :--------------------------------------- | :----------- | :----------- | | Total Stockholders' Equity | $398,869,901 | $442,551,605 | | Net income (nine months) | $192,751,208 (Retained Earnings) | $217,362,373 (Retained Earnings) | | Other comprehensive income (loss) | $(14,228,059) | $418,394 | - Total stockholders' equity increased by **$43.7 million** from December 31, 2018, to September 30, 2019, primarily driven by net income and a positive shift in accumulated other comprehensive income[29](index=29&type=chunk) - The company issued common stock under stock compensation plans, contributing to additional paid-in capital[29](index=29&type=chunk) [Consolidated Statements of Cash Flows (Unaudited)](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20(Unaudited)) | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $48,438,450 | $59,855,104 | | Net cash used in investing activities | $(11,547,502) | $(33,873,052) | | Net cash used in financing activities | $(34,216,649) | $(8,556,831) | | Net increase in cash | $2,674,299 | $17,425,221 | | Cash at end of period | $55,268,760 | $55,258,656 | - Net cash provided by operating activities decreased by **$11.4 million YoY**, while net cash used in investing activities significantly decreased by **$22.3 million YoY**[37](index=37&type=chunk) - Net cash used in financing activities increased substantially by **$25.7 million YoY**, primarily due to higher payments on lines of credit[37](index=37&type=chunk) [Notes to Consolidated Financial Statements (Unaudited)](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements%20(Unaudited)) [1 - Organization](index=10&type=section&id=1%20-%20Organization) - Donegal Group Inc. is an insurance holding company with subsidiaries writing property and casualty insurance through independent agents in Mid-Atlantic, Midwestern, New England, and Southern states[39](index=39&type=chunk) - The company operates in three segments: investment, personal lines (homeowners, private passenger auto), and commercial lines (commercial auto, commercial multi-peril, workers' compensation)[40](index=40&type=chunk) - Donegal Mutual Insurance Company holds approximately **43%** of Class A common stock and **84%** of Class B common stock, giving it about **72%** of total voting power[40](index=40&type=chunk) - Atlantic States, the largest subsidiary, participates in a pooling agreement with Donegal Mutual, sharing **80%** of pooled business results[41](index=41&type=chunk) - The company sold its **48.2%** stake in Donegal Financial Services Corporation (DFSC) on March 8, 2019, for approximately **$85.8 million** in cash and stock, recognizing a **$12.7 million** gain[44](index=44&type=chunk)[46](index=46&type=chunk) [2 - Basis of Presentation](index=11&type=section&id=2%20-%20Basis%20of%20Presentation) - Interim financial information is unaudited and includes normal recurring adjustments necessary for fair presentation[48](index=48&type=chunk) - Results for the nine months ended September 30, 2019, are not necessarily indicative of the full year's results[48](index=48&type=chunk) [3 - Earnings Per Share](index=11&type=section&id=3%20-%20Earnings%20Per%20Share) - The company uses the two-class method for EPS calculation due to different dividend rates for Class A and Class B common stock (Class A dividend rate is at least **10%** greater than Class B)[50](index=50&type=chunk) Basic Earnings Per Share (Three Months Ended September 30) | Class | 2019 | 2018 | | :---- | :--- | :--- | | Class A | $0.19 | $0.04 | | Class B | $0.16 | $0.04 | Diluted Earnings Per Share (Three Months Ended September 30) | Class | 2019 | 2018 | | :---- | :--- | :--- | | Class A | $0.18 | $0.04 | | Class B | $0.16 | $0.04 | Basic Earnings (Loss) Per Share (Nine Months Ended September 30) | Class | 2019 | 2018 | | :---- | :--- | :--- | | Class A | $1.18 | $(0.64) | | Class B | $1.06 | $(0.59) | Diluted Earnings (Loss) Per Share (Nine Months Ended September 30) | Class | 2019 | 2018 | | :---- | :--- | :--- | | Class A | $1.17 | $(0.64) | | Class B | $1.06 | $(0.59) | - Outstanding options to purchase **5,330,525 shares** (three months) and **5,531,561 shares** (nine months) of Class A common stock were excluded from diluted EPS for 2019 because their exercise price exceeded the average market price[54](index=54&type=chunk) [4 - Reinsurance](index=13&type=section&id=4%20-%20Reinsurance) - Atlantic States and Donegal Mutual participate in a pooling agreement, with Atlantic States holding an **80%** share of underwriting results[56](index=56&type=chunk) - A combined third-party reinsurance program was implemented effective January 1, 2019, including excess of loss reinsurance (retention of **$1.0 million** for property, **$2.0 million** for casualty) and catastrophe reinsurance (retention of **$10.0 million**, annual aggregate deductible of **$1.2 million** up to **$190.0 million** per occurrence)[57](index=57&type=chunk) - An additional catastrophe reinsurance agreement with Donegal Mutual provides coverage over a **$2.0 million** retention up to **$8.0 million** per occurrence for individual subsidiaries, and a combined retention of **$5.0 million** for multiple subsidiaries[58](index=58&type=chunk) [5 - Investments](index=13&type=section&id=5%20-%20Investments) Fixed Maturities at September 30, 2019 (in thousands) | Category | Amortized Cost | Estimated Fair Value | | :--------------------------------------- | :------------- | :------------------- | | Held to Maturity | $458,889 | $484,742 | | Available for Sale | $550,792 | $559,101 | Equity Securities at September 30, 2019 (in thousands) | Category | Cost | Estimated Fair Value | | :--------------------------------------- | :--- | :------------------- | | Equity securities | $43,407 | $52,099 | Net Investment (Losses) Gains (in thousands) | Period | 2019 | 2018 | | :--------------------------------------- | :--- | :--- | | Three Months Ended Sep 30 | $(369) | $3,464 | | Nine Months Ended Sep 30 | $19,294 | $4,062 | - Net investment gains for the nine months ended September 30, 2019, included **$12.7 million** from the sale of DFSC and **$5.5 million** from unrealized gains in the equity securities portfolio[146](index=146&type=chunk) - The company held **131 debt securities** with unrealized losses considered temporary at September 30, 2019, based on market conditions and underlying factors[70](index=70&type=chunk) [6 - Segment Information](index=17&type=section&id=6%20-%20Segment%20Information) - Segment performance for personal and commercial lines is evaluated using Statutory Accounting Principles (SAP) underwriting results, which are considered non-GAAP financial measures[73](index=73&type=chunk) Premiums Earned (in thousands) | Segment | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--------------------------------------- | :------------------------------ | :------------------------------ | | Commercial lines | $98,324 | $84,251 | | Personal lines | $91,497 | $103,410 | | Total premiums earned | $189,821 | $187,661 | Underwriting Income (Loss) (in thousands) | Segment | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--------------------------------------- | :------------------------------ | :------------------------------ | | Commercial lines | $2,521 | $2,125 | | Personal lines | $(3,312) | $(12,210) | | GAAP underwriting loss | $(1,190) | $(9,753) | Premiums Earned (in thousands) | Segment | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Commercial lines | $284,593 | $251,029 | | Personal lines | $282,065 | $304,111 | | Total premiums earned | $566,658 | $555,140 | Underwriting Income (Loss) (in thousands) | Segment | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Commercial lines | $4,946 | $(17,935) | | Personal lines | $(10,077) | $(42,358) | | GAAP underwriting loss | $(3,700) | $(55,187) | [7 - Borrowings](index=19&type=section&id=7%20-%20Borrowings) - In March 2019, the company entered into a new **$30.0 million** unsecured revolving line of credit with M&T, expiring July 2020, with no outstanding borrowings reported at September 30, 2019[78](index=78&type=chunk) - Atlantic States repaid a **$35.0 million** variable-rate cash advance and issued a new **$35.0 million** fixed-rate cash advance (**1.74%** interest, due August 2024) with the FHLB of Pittsburgh in August 2019, incurring a **$176,000** prepayment penalty[79](index=79&type=chunk) - Donegal Mutual holds a **$5.0 million** surplus note from MICO with a **5.00%** interest rate, requiring prior approval from the Michigan Department of Insurance and Financial Services for repayment[81](index=81&type=chunk) [8 - Share–Based Compensation](index=20&type=section&id=8%20-%20Share%E2%80%93Based%20Compensation) - Compensation expense related to stock compensation plans was **$247,301** for Q3 2019 (vs. **$317,526** in Q3 2018) and **$1.1 million** for the first nine months of 2019 (vs. **$1.4 million** in 2018)[83](index=83&type=chunk) - As of September 30, 2019, **$1.3 million** of unrecognized compensation expense related to nonvested share-based compensation is expected to be recognized over approximately **1.5 years**[83](index=83&type=chunk) [9 - Fair Value Measurements](index=20&type=section&id=9%20-%20Fair%20Value%20Measurements) - Financial assets are classified into a three-level hierarchy based on input reliability: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[85](index=85&type=chunk) - Publicly-traded equity securities are classified as Level 1, while fixed maturity investments (U.S. Treasury, state/political subdivisions, corporate, mortgage-backed securities) are classified as Level 2[86](index=86&type=chunk) Fair Value Measurements at September 30, 2019 (in thousands) | Category | Fair Value | Level 1 | Level 2 | Level 3 | | :--------------------------------------- | :--------- | :------ | :------ | :------ | | U.S. Treasury securities and obligations of U.S. government corporations and agencies | $19,446 | — | $19,446 | — | | Obligations of states and political subdivisions | $59,165 | — | $59,165 | — | | Corporate securities | $150,781 | — | $150,781 | — | | Mortgage-backed securities | $329,709 | — | $329,709 | — | | Equity securities | $52,099 | $49,746 | $2,353 | — | | Total investments in the fair value hierarchy | $611,200 | $49,746 | $561,454 | — | [10 - Income Taxes](index=22&type=section&id=10%20-%20Income%20Taxes) - No material unrecognized tax benefits or accrued interest and penalties were reported at September 30, 2019, or December 31, 2018[92](index=92&type=chunk) - A valuation allowance of **$264,467** was established for a portion of Le Mars' net operating loss carryforward and **$8.1 million** for the net state operating loss carryforward[92](index=92&type=chunk) - Deferred tax assets of **$25.2 million** (Sep 30, 2019) and **$32.4 million** (Dec 31, 2018) are expected to be realized[92](index=92&type=chunk) [11 - Liability for Losses and Loss Expenses](index=22&type=section&id=11%20-%20Liability%20for%20Losses%20and%20Loss%20Expenses) - The establishment of loss and loss expense liabilities is an inherently uncertain process, with ultimate liabilities potentially differing from estimates[94](index=94&type=chunk) Activity in Liability for Losses and Loss Expenses (in thousands) | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Balance at January 1 | $814,665 | $676,672 | | Net balance at January 1 | $475,398 | $383,401 | | Total incurred | $385,361 | $433,063 | | Total paid | $354,925 | $355,631 | | Net balance at end of period | $505,834 | $460,833 | | Balance at end of period | $864,534 | $779,980 | - The company recognized a decrease of **$7.9 million** in prior-year loss and loss expenses for the nine months ended September 30, 2019, primarily due to lower-than-expected severity in workers' compensation, mainly in Michigan[95](index=95&type=chunk)[97](index=97&type=chunk) - In contrast, the prior year (2018) saw an increase of **$28.9 million**, mainly from higher-than-expected severity in personal and commercial automobile lines, attributed to worsening litigation trends and reporting delays[95](index=95&type=chunk)[97](index=97&type=chunk) [12 - Impact of New Accounting Standards](index=24&type=section&id=12%20-%20Impact%20of%20New%20Accounting%20Standards) - Adoption of new lease accounting guidance (effective January 1, 2019) did not significantly impact financial position, results, or cash flows[106](index=106&type=chunk) - The company is evaluating the impact of new guidance on impairment of financial instruments (effective after December 15, 2019), which requires recognizing expected credit losses as an allowance[107](index=107&type=chunk) - New guidance simplifying goodwill impairment testing (effective after December 15, 2019) is not expected to have a significant impact[108](index=108&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and operational results, highlighting critical accounting policies and segment performance [Critical Accounting Policies and Estimates](index=24&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) - The most significant estimates relate to reserves for property and casualty insurance unpaid losses and loss expenses, which are inherently uncertain and can significantly affect financial statements[112](index=112&type=chunk) - Estimates are based on assumptions about future loss trends, claims severity, judicial theories of liability, and other factors, and are regularly reviewed and adjusted[113](index=113&type=chunk) [Liability for Unpaid Losses and Loss Expenses](index=25&type=section&id=Liability%20for%20Unpaid%20Losses%20and%20Loss%20Expenses) - Liabilities for reported losses are based on case-by-case evaluations, while unreported claims are estimated using historical information by line of insurance[115](index=115&type=chunk) - Reserve estimates can change due to unexpected shifts in external factors (e.g., tort law, medical costs, inflation) and internal operations (e.g., claims recording, rate changes)[116](index=116&type=chunk) - A **1%** change in net loss and loss expense reserves would impact pre-tax results by approximately **$5.1 million**[116](index=116&type=chunk) - The average claim outstanding has gradually increased over several years due to rising medical loss costs and increased litigation trends, alongside a general slowing of settlement rates in litigated claims[118](index=118&type=chunk) Unpaid Liability for Losses and Loss Expenses by Major Line of Business (in thousands) | Line of Business | Sep 30, 2019 | Dec 31, 2018 | | :--------------------------------------- | :----------- | :----------- | | **Commercial lines:** | | | | Automobile | $120,902 | $106,734 | | Workers' compensation | $112,322 | $109,512 | | Commercial multi-peril | $97,587 | $85,937 | | Other | $9,398 | $5,207 | | Total commercial lines | $340,209 | $307,390 | | **Personal lines:** | | | | Automobile | $137,897 | $144,788 | | Homeowners | $22,886 | $18,374 | | Other | $4,842 | $4,846 | | Total personal lines | $165,625 | $168,008 | | Total commercial and personal lines | $505,834 | $475,398 | | Plus reinsurance recoverable | $358,700 | $339,267 | | Total liability for unpaid losses and loss expenses | $864,534 | $814,665 | [Non-GAAP Information](index=27&type=section&id=Non-GAAP%20Information) - The company uses SAP financial measures (net premiums written and statutory combined ratio) to evaluate segment performance, as GAAP financial statements are not prepared for insurance subsidiaries[126](index=126&type=chunk) [Net Premiums Written](index=27&type=section&id=Net%20Premiums%20Written) - Net premiums written are defined as full-term premiums recorded for policies less premiums ceded to reinsurers[127](index=127&type=chunk) Net Premiums Written (in thousands) | Period | 2019 | 2018 | | :--------------------------------------- | :--- | :--- | | Three Months Ended Sep 30 | $183,870 | $184,518 | | Nine Months Ended Sep 30 | $581,588 | $575,723 | [Statutory Combined Ratio](index=28&type=section&id=Statutory%20Combined%20Ratio) - The statutory combined ratio is a standard measure of underwriting profitability, calculated as the sum of the statutory loss ratio, expense ratio, and dividend ratio, with a ratio below **100%** indicating underwriting profitability[129](index=129&type=chunk)[130](index=130&type=chunk) - Differences between GAAP and statutory combined ratios arise from installment payment fees, expense ratio basis (net premiums earned vs. written), and salvage/subrogation recoveries[131](index=131&type=chunk) [Combined Ratios](index=28&type=section&id=Combined%20Ratios) GAAP Combined Ratios (Total Lines) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--------------------------------------- | :------------------------------ | :------------------------------ | | Loss ratio (non-weather) | 61.6% | 63.7% | | Loss ratio (weather-related) | 7.3% | 11.3% | | Expense ratio | 30.5% | 29.6% | | Dividend ratio | 1.2% | 0.6% | | Combined ratio | 100.6% | 105.2% | Statutory Combined Ratios (Total Commercial and Personal Lines) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--------------------------------------- | :------------------------------ | :------------------------------ | | Total commercial lines | 97.9% | 97.6% | | Total personal lines | 103.9% | 111.5% | | Total commercial and personal lines | 100.8% | 105.2% | GAAP Combined Ratios (Total Lines) | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Loss ratio (non-weather) | 60.8% | 68.5% | | Loss ratio (weather-related) | 7.2% | 9.5% | | Expense ratio | 31.5% | 31.3% | | Dividend ratio | 1.2% | 0.6% | | Combined ratio | 100.7% | 109.9% | Statutory Combined Ratios (Total Commercial and Personal Lines) | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Total commercial lines | 95.8% | 104.5% | | Total personal lines | 103.3% | 113.0% | | Total commercial and personal lines | 99.5% | 109.0% | [Results of Operations - Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018](index=28&type=section&id=Results%20of%20Operations%20-%20Three%20Months%20Ended%20September%2030%2C%202019%20Compared%20to%20Three%20Months%20Ended%20September%2030%2C%202018) - Net premiums earned increased by **1.2%** to **$189.8 million**, while net premiums written decreased by **0.4%** to **$183.9 million**[133](index=133&type=chunk)[134](index=134&type=chunk) - Commercial lines net premiums written increased by **13.2%** due to rate increases, new accounts, and lower reinsurance premiums, while personal lines decreased by **11.6%** due to underwriting measures and non-renewal of unprofitable business[134](index=134&type=chunk) - Net investment income increased to **$7.4 million** (from **$6.6 million**), but net investment losses of **$369,041** were recorded (compared to gains of **$3.5 million** in 2018) due to unrealized losses in equity securities[135](index=135&type=chunk)[136](index=136&type=chunk) - The loss ratio decreased to **68.9%** (from **75.0%**), with weather-related losses contributing **7.3 percentage points** (down from **11.3 points**), and favorable loss reserve development of **$1.0 million** was experienced[137](index=137&type=chunk) - The expense ratio increased to **30.5%** (from **29.6%**) due to higher underwriting-based incentive costs, and policyholder dividends increased due to growth and profitability in workers' compensation[138](index=138&type=chunk)[139](index=139&type=chunk) - The combined ratio decreased to **100.6%** (from **105.2%**), primarily due to the lower loss ratio[139](index=139&type=chunk) - Net income rose to **$5.2 million** (EPS Class A diluted **$0.18**) from **$1.2 million** (EPS Class A diluted **$0.04**)[142](index=142&type=chunk) [Results of Operations - Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018](index=30&type=section&id=Results%20of%20Operations%20-%20Nine%20Months%20Ended%20September%2030%2C%202019%20Compared%20to%20Nine%20Months%20Ended%20September%2030%2C%202018) - Net premiums earned increased by **2.1%** to **$566.7 million**, and net premiums written increased by **1.0%** to **$581.6 million**[143](index=143&type=chunk)[144](index=144&type=chunk) - Commercial lines net premiums written increased by **13.1%**, while personal lines decreased by **10.1%** due to similar factors as the three-month period[144](index=144&type=chunk) - Net investment income increased to **$21.7 million** (from **$19.3 million**), with net investment gains of **$19.3 million** (up from **$4.1 million**) including **$12.7 million** from the DFSC sale and **$5.5 million** from equity securities' unrealized gains[145](index=145&type=chunk)[146](index=146&type=chunk) - The loss ratio decreased to **68.0%** (from **78.0%**), with weather-related losses contributing **7.2 percentage points** (down from **9.5 points**), and favorable loss reserve development of **$7.9 million** was experienced (compared to adverse development of **$28.9 million** in 2018)[147](index=147&type=chunk) - The expense ratio slightly increased to **31.5%** (from **31.3%**), and policyholder dividends increased due to workers' compensation growth and profitability[148](index=148&type=chunk)[149](index=149&type=chunk) - The combined ratio decreased to **100.7%** (from **109.9%**), primarily due to the lower loss ratio[149](index=149&type=chunk) - The company reported net income of **$33.0 million** (EPS Class A diluted **$1.17**) compared to a net loss of **$17.8 million** (EPS Class A diluted **$(0.64)**) in the prior year[153](index=153&type=chunk) [Liquidity and Capital Resources](index=31&type=section&id=Liquidity%20and%20Capital%20Resources) - Major funding sources include net cash flows from underwriting, investment income, and investment maturities, with operations historically generating sufficient positive cash flow[154](index=154&type=chunk)[155](index=155&type=chunk) - Net cash provided by operating activities was **$48.4 million** for the first nine months of 2019 (vs. **$59.9 million** in 2018)[155](index=155&type=chunk) - At September 30, 2019, there were no outstanding borrowings on the **$30.0 million** M&T line of credit, and Atlantic States had **$35.0 million** in outstanding FHLB advances at **1.74%** interest[156](index=156&type=chunk) Expected Payments for Contractual Obligations at September 30, 2019 (in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | | :--------------------------------------- | :---- | :--------------- | :-------- | :-------- | :------------ | | Net liability for unpaid losses and loss expenses of our insurance subsidiaries | $505,834 | $234,446 | $237,036 | $18,341 | $16,011 | | Subordinated debentures | $5,000 | — | — | — | $5,000 | | Borrowings under lines of credit | $35,000 | — | — | $35,000 | — | | Total contractual obligations | $545,834 | $234,446 | $237,036 | $53,341 | $21,011 | - The board declared quarterly cash dividends of **14.5 cents** per Class A share and **12.75 cents** per Class B share, payable November 15, 2019[162](index=162&type=chunk) - Available dividends from insurance subsidiaries without prior approval for 2019 total approximately **$30.9 million**[162](index=162&type=chunk) [Equity Price Risk](index=32&type=section&id=Equity%20Price%20Risk) - The marketable equity securities portfolio is exposed to the risk of loss from adverse price changes, managed through investment personnel analysis and regular portfolio reviews[164](index=164&type=chunk) [Credit Risk](index=32&type=section&id=Credit%20Risk) - The fixed-maturity and short-term investment portfolios are subject to credit risk, managed by investment analysis, regular reviews, and limiting investment concentration in any single issuer[165](index=165&type=chunk) - Atlantic States faces credit risk from business ceded to Donegal Mutual under the pooling agreement, mitigated by reinsurance agreements with Donegal Mutual and other unaffiliated reinsurers[168](index=168&type=chunk) [Impact of Inflation](index=33&type=section&id=Impact%20of%20Inflation) - Property and casualty insurance premium rates are established with an anticipation of inflation's potential impact on future losses and expenses[169](index=169&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=34&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section addresses the company's exposure to market risk, primarily from its investment portfolio's sensitivity to price and interest rate fluctuations - Market risk stems from potential changes in the fair value of investment securities due to price and interest rate fluctuations[171](index=171&type=chunk) - Interest rate risk is managed by maintaining an appropriate relationship between the average duration of the investment portfolio and the approximate duration of liabilities[171](index=171&type=chunk) - No material changes in quantitative or qualitative market risk exposure occurred from December 31, 2018, through September 30, 2019[172](index=172&type=chunk) [Item 4. Controls and Procedures](index=34&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2019, for timely and accurate reporting[173](index=173&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter[174](index=174&type=chunk) [Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995](index=34&type=section&id=Safe%20Harbor%20Statement%20Under%20the%20Private%20Securities%20Litigation%20Reform%20Act%20of%201995) This statement clarifies that all forward-looking statements in the report are based on current expectations and involve inherent risks and uncertainties - All forward-looking statements are based on current expectations and involve risks and uncertainties[175](index=175&type=chunk) - Factors that could cause actual results to vary include adverse weather, profitability, adequacy of loss reserves, IT system availability, economic conditions, interest rates, competition, terrorism, reinsurance costs, legal developments, regulatory changes, and A.M. Best rating changes[175](index=175&type=chunk) - The company disclaims any obligation to publicly update forward-looking statements[175](index=175&type=chunk) Part II. Other Information [Item 1. Legal Proceedings](index=35&type=section&id=Item%201.%20Legal%20Proceedings) This section states that there are no legal proceedings to report - No legal proceedings to report[178](index=178&type=chunk) [Item 1A. Risk Factors](index=35&type=section&id=Item%201A.%20Risk%20Factors) This section refers to the risk factors detailed in the company's 2018 Annual Report on Form 10-K, noting no material changes during the nine months ended September 30, 2019 - No material changes in risk factors from those disclosed in the 2018 Annual Report on Form 10-K[179](index=179&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=35&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section indicates that there were no unregistered sales of equity securities or use of proceeds to report - No unregistered sales of equity securities or use of proceeds to report[180](index=180&type=chunk) [Item 3. Defaults upon Senior Securities](index=35&type=section&id=Item%203.%20Defaults%20upon%20Senior%20Securities) This section states that there were no defaults upon senior securities - No defaults upon senior securities to report[181](index=181&type=chunk) [Item 4. Removed and Reserved](index=35&type=section&id=Item%204.%20Removed%20and%20Reserved) This item is removed and reserved [Item 5. Other Information](index=35&type=section&id=Item%205.%20Other%20Information) This section indicates that there is no other information to report - No other information to report[183](index=183&type=chunk) [Item 6. Exhibits](index=36&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q report, including certifications from the Chief Executive Officer and Chief Financial Officer, and XBRL-related documents | 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 | [Signatures](index=37&type=section&id=Signatures) This section contains the signatures of the authorized officers, Kevin G. Burke (President and Chief Executive Officer) and Jeffrey D. Miller (Executive Vice President and Chief Financial Officer), certifying the report on November 8, 2019 - The report is signed by Kevin G. Burke, President and Chief Executive Officer, and Jeffrey D. Miller, Executive Vice President and Chief Financial Officer, on November 8, 2019[190](index=190&type=chunk)

Financial Data and Key Metrics Changes - Net income for Q3 2019 was $5.2 million or $0.18 per diluted Class A share, compared to $1.2 million or $0.04 per Class A share in Q3 2018 [39] - Overall net premiums written decreased by 0.4% to $183.9 million, while net premiums earned grew by 1.2% to $189.8 million for Q3 2019 [20] - The combined ratio for Q3 2019 was 100.6%, an improvement from 105.2% in the prior year quarter [36] Business Line Data and Key Metrics Changes - Commercial lines net premiums written increased by 13.2%, representing approximately 51% of total writings for the quarter, up from 45% in the prior year [20][21] - Personal lines net written premiums declined by 11.6% to approximately $89.4 million, with about 4% of that decline due to exiting unprofitable markets in 7 states [15][23] - The commercial lines segment generated a solid underwriting profit with a combined ratio of 97.9% for Q3 2019, significantly improved from 104.5% in the prior year [11] Market Data and Key Metrics Changes - Commercial renewal pricing increases averaged 1.8% for the quarter, with an 8.4% average rate increase in commercial auto, offset by a 5.1% average decrease in Workers' compensation rates [22] - Weather-related losses for Q3 2019 were $13.9 million, significantly lower than $21.2 million in Q3 2018 [24] Company Strategy and Development Direction - The company aims to develop a solid foundation for consistent underwriting profitability and book value growth over time, focusing on profitable growth in specific geographical markets [6][8] - A high-priority project is underway to design and implement new personal auto and homeowners products utilizing enhanced data analytics and modern technology tools, expected to launch in early 2021 [18] Management's Comments on Operating Environment and Future Outlook - Management expressed satisfaction with the incremental progress in Q3 results and emphasized the importance of executing key strategies to enhance operational efficiency and financial performance [40] - The company remains cautious about the impact of social inflation on claims and is taking conservative actions regarding reserves [44] Other Important Information - The expense ratio for Q3 2019 was 30.5%, up from 29.6% in Q3 2018, attributed to higher underwriting-based incentive costs [36] - Net investment income increased by 11.6% to $7.4 million, primarily due to an increase in average invested assets [37] Q&A Session Summary Question: How much did reserve releases contribute to this quarter's results versus last year's? - Reserve development contributed an 8-point reduction in the loss ratio for Q3 2019, compared to 9.8% in Q3 2018 [42] Question: Are you seeing any pressure from social inflation in auto casualty or commercial property? - Management noted elevation in average paid claims on both personal and commercial auto sides, reflecting actions taken in previous years [43][44] Question: Any unusual items driving the underwriting loss in homeowners? - Unusual claims not related to weather or fires, such as liability claims and water damage, contributed to the underwriting loss [45] Question: Update on Mountain States and plans for pooling arrangement? - Mountain States is making solid progress, but the company will not include it in the pooling arrangement for now, planning to revisit in 6 to 12 months [46] Question: Can you break out reserve development by line? - Favorable development of about $2.3 million in Workers' comp, with unfavorable development in CMP and commercial auto [49] Question: Are rate increases exceeding the loss trend in commercial auto? - Rate increases are significant, but ultimate losses are projected at levels reflecting high large loss activity [51] Question: How have retention rates been affected by rate increases? - Commercial lines retention is steady around 84%, while personal lines retention has dropped to about 79% due to exiting unprofitable states [57]

PART I FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) The company presents its unaudited consolidated financial statements for the three and six months ended June 30, 2019 [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) Total assets grew to $1.90 billion, driven by investments, with stockholders' equity increasing to $437.9 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 (Unaudited) | December 31, 2018 | | :--- | :--- | :--- | | **Total Assets** | **$1,901,282** | **$1,832,078** | | Total Investments | $1,075,428 | $1,030,798 | | Cash | $35,946 | $52,594 | | **Total Liabilities** | **$1,463,429** | **$1,433,208** | | Unpaid losses and loss expenses | $845,282 | $814,665 | | Unearned premiums | $535,999 | $506,529 | | **Total Stockholders' Equity** | **$437,854** | **$398,870** | [Consolidated Statements of Income (Loss)](index=5&type=section&id=Consolidated%20Statements%20of%20Income%20(Loss)) The company achieved a significant turnaround to a net income of $27.8 million for the six-month period Three Months Ended June 30 (in thousands, except per share data) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Total Revenues | $198,789 | $195,790 | | Total Expenses | $193,251 | $197,123 | | Income (Loss) Before Tax | $5,538 | $(1,333) | | **Net Income (Loss)** | **$4,788** | **$(790)** | | Diluted EPS (Class A) | $0.17 | $(0.03) | Six Months Ended June 30 (in thousands, except per share data) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Total Revenues | $413,503 | $385,118 | | Total Expenses | $381,120 | $414,987 | | Income (Loss) Before Tax | $32,383 | $(29,868) | | **Net Income (Loss)** | **$27,812** | **$(18,968)** | | Diluted EPS (Class A) | $0.99 | $(0.68) | [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operations was $21.2 million for the first half of 2019, with an overall decrease in cash of $16.6 million Cash Flow Summary - Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $21,191 | $36,132 | | Net Cash from Investing Activities | $(6,615) | $(15,152) | | Net Cash from Financing Activities | $(31,225) | $(5,161) | | **Net (Decrease) Increase in Cash** | **$(16,649)** | **$15,819** | [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Key disclosures include the $12.7 million gain from the DFSC sale and favorable loss reserve development - On March 8, 2019, the company sold its 48.2% stake in Donegal Financial Services Corporation (DFSC), resulting in a **pre-tax gain of $12.7 million** in the first quarter of 2019[40](index=40&type=chunk)[42](index=42&type=chunk) - The company's insurance subsidiaries and Donegal Mutual implemented a combined third-party reinsurance program effective January 1, 2019, with key retentions of **$1.0 million for property** and **$2.0 million for casualty losses**[55](index=55&type=chunk) - For the first six months of 2019, the company recognized a **$6.9 million decrease (favorable development)** in its liability for losses and loss expenses from prior years, a sharp contrast to the **$26.2 million increase (adverse development)** in H1 2018[91](index=91&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the improved financial results to a lower loss ratio and the gain from the DFSC sale [Critical Accounting Policies and Estimates](index=24&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The liability for unpaid losses and loss expenses is identified as the most significant accounting estimate - The liability for unpaid losses and loss expenses is the company's most critical accounting estimate, where a **1% change** in these net reserves would affect pre-tax operating results by approximately **$4.9 million**[107](index=107&type=chunk)[111](index=111&type=chunk) [Results of Operations](index=28&type=section&id=Results%20of%20Operations) Net income reached $27.8 million in H1 2019, with the combined ratio improving significantly to 100.7% GAAP Combined Ratios | Period | 2019 | 2018 | Change (bps) | | :--- | :--- | :--- | :--- | | **Three Months Ended June 30** | **102.0%** | **105.6%** | **-360** | | Loss ratio | 69.7% | 73.1% | -340 | | Expense ratio | 31.3% | 31.8% | -50 | | **Six Months Ended June 30** | **100.7%** | **112.4%** | **-1170** | | Loss ratio | 67.6% | 79.6% | -1200 | | Expense ratio | 32.0% | 32.1% | -10 | - For the first half of 2019, net premiums written increased **1.7% to $397.7 million**, driven by a **13.1% increase in commercial lines** offset by a **9.3% decrease in personal lines**[139](index=139&type=chunk)[141](index=141&type=chunk) - Net income for H1 2019 was **$27.8 million**, or $0.99 per Class A share, a significant improvement from a net loss of **$19.0 million**, or ($0.68) per Class A share, in H1 2018, positively impacted by a **$12.7 million gain** on the sale of DFSC[143](index=143&type=chunk)[149](index=149&type=chunk) [Liquidity and Capital Resources](index=31&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity through operating cash flows and access to a $30.0 million credit facility - Operating activities provided net cash flow of **$21.2 million** in the first six months of 2019, and the company has access to an undrawn **$30.0 million line of credit**[152](index=152&type=chunk)[153](index=153&type=chunk) - The board declared quarterly cash dividends of **14.5 cents per Class A share** and **12.75 cents per Class B share**, with **$30.9 million** available for further distribution from insurance subsidiaries in 2019 without prior regulatory approval[159](index=159&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=33&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company reports no material changes to its market risk exposure from year-end 2018 - There have been **no material changes** to the company's quantitative or qualitative market risk exposure between December 31, 2018, and June 30, 2019[168](index=168&type=chunk) [Item 4. Controls and Procedures](index=33&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2019 - Management, including the CEO and CFO, concluded that as of June 30, 2019, the company's disclosure controls and procedures were **effective**[169](index=169&type=chunk) - **No changes** in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[170](index=170&type=chunk) PART II OTHER INFORMATION [Item 1. Legal Proceedings](index=34&type=section&id=Item%201.%20Legal%20Proceedings) The company reports no material legal proceedings during the period - None[174](index=174&type=chunk) [Item 1A. Risk Factors](index=34&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors from the 2018 Annual Report on Form 10-K are reported - There have been **no material changes** in risk factors from those disclosed in the 2018 Annual Report on Form 10-K[175](index=175&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=34&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reports no unregistered sales of equity securities or related use of proceeds - None[176](index=176&type=chunk) [Item 6. Exhibits](index=35&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including required certifications

Donegal Group, Inc. (NASDAQ:DGICA) Q2 2019 Earnings Conference Call July 30, 2019 11:00 AM ET Company Participants Jeff Miller - Chief Financial Officer Kevin Burke - President and Chief Executive Officer Conference Call Participants Christopher Campbell - KBW Bob Farnam - Boenning and Scattergood Operator Good morning. My name is Cheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the Donegal Group Inc. Q2 2019 Earnings Conference Call. [Operator Instructi ...

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 March 31, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | --- | --- | |-----------------------------------------------------------------------------------------------------------------------------------|------------------------ ...

PART I [Business](index=4&type=section&id=Item%201.%20Business) Donegal Group Inc. is a property and casualty insurance holding company operating in 22 states, controlled by Donegal Mutual, focusing on underwriting profitability and organic growth through independent agents - Donegal Group Inc. is an insurance holding company whose subsidiaries offer personal and commercial lines of property and casualty insurance across **22 states**[14](index=14&type=chunk) - Donegal Mutual Insurance Company is the controlling entity, holding approximately **43% of Class A common stock** and **84% of Class B common stock**, which translates to about **72% of the combined voting power**[15](index=15&type=chunk) - A significant operational aspect is the pooling agreement between DGI's subsidiary, Atlantic States, and Donegal Mutual. Atlantic States has an **80% participation** in the pooled premiums, losses, and expenses, which aims to create stable and uniform underwriting results[24](index=24&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk) Net Premiums Written by Line of Insurance (2016-2018) | Line of Insurance | 2018 Amount ($ thousands) | 2018 % | 2017 Amount ($ thousands) | 2017 % | 2016 Amount ($ thousands) | 2016 % | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **Personal Lines** | | | | | | | | Automobile | $249,275 | 33.5% | $255,297 | 35.0% | $229,789 | 33.7% | | Homeowners | $123,782 | 16.6% | $125,054 | 17.2% | $122,811 | 18.0% | | Other | $21,064 | 2.9% | $19,672 | 2.7% | $19,057 | 2.8% | | **Total Personal Lines** | **$394,121** | **53.0%** | **$400,023** | **54.9%** | **$371,657** | **54.5%** | | **Commercial Lines** | | | | | | | | Automobile | $108,123 | 14.5% | $99,333 | 13.6% | $87,849 | 12.9% | | Commercial Multi-Peril | $117,509 | 15.8% | $110,313 | 15.1% | $104,728 | 15.4% | | Workers' Compensation | $109,022 | 14.7% | $109,884 | 15.1% | $108,349 | 15.9% | | Other | $15,241 | 2.0% | $9,586 | 1.3% | $9,451 | 1.3% | | **Total Commercial Lines** | **$349,895** | **47.0%** | **$329,116** | **45.1%** | **$310,377** | **45.5%** | | **Total Business** | **$744,016** | **100.0%** | **$729,139** | **100.0%** | **$682,034** | **100.0%** | Direct Premiums Written by State (2018) | State | Percentage of Direct Premiums | | :--- | :--- | | Pennsylvania | 34.3% | | Michigan | 15.4% | | Maryland | 8.7% | | Virginia | 8.0% | | Georgia | 7.9% | | Delaware | 5.7% | | Wisconsin | 3.8% | | Ohio | 3.1% | | Iowa | 2.6% | | Nebraska | 2.3% | | Tennessee | 2.3% | | South Dakota | 1.2% | | Other | 4.7% | | **Total** | **100.0%** | - The company sold its **48.2%** stake in Donegal Financial Services Corporation (DFSC) to Northwest Bancshares, Inc. on March 8, 2019. DGI received a dividend of approximately **$14.1 million** and consideration valued at about **$41.4 million** from the sale[21](index=21&type=chunk) [Risk Factors](index=26&type=section&id=Item%201A.%20Risk%20Factors) The company faces industry-specific risks like rising costs and litigation, company-specific risks including control by Donegal Mutual and geographic concentration, and stock-related risks - **Industry Risks:** The company is exposed to trends of increased litigation, rising jury awards, escalating medical costs, and higher loss frequency and severity, which may lead to the deterioration of loss reserves[127](index=127&type=chunk)[128](index=128&type=chunk) - **Control Risk:** Donegal Mutual's majority voting control (approx. **72%**) presents potential conflicts of interest between its policyholders and DGI's stockholders. This control allows Donegal Mutual to elect the entire board and determine the outcome of all corporate matters[146](index=146&type=chunk)[147](index=147&type=chunk)[149](index=149&type=chunk) - **Geographic Concentration Risk:** A substantial portion of business is concentrated in Pennsylvania (**34.3%**), Michigan (**15.4%**), Maryland (**8.7%**), Virginia (**8.0%**), and Georgia (**7.9%**). A single catastrophic event in these states could materially affect results[157](index=157&type=chunk)[158](index=158&type=chunk)[74](index=74&type=chunk) - **Distribution Risk:** The company markets its products exclusively through a network of approximately **2,400 independent insurance agencies**, making it dependent on their performance and adherence to underwriting guidelines[160](index=160&type=chunk) - **Stock Risk:** The Class A and Class B common stocks have limited liquidity and low trading volume. Anti-takeover provisions and Donegal Mutual's control make an acquisition unlikely, which may negatively affect the stock price by removing any potential "takeover" premium[193](index=193&type=chunk)[194](index=194&type=chunk) [Unresolved Staff Comments](index=36&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved written comments from the Securities and Exchange Commission staff regarding its Exchange Act filings - There are no unresolved written comments from the SEC staff regarding the company's filings[197](index=197&type=chunk) [Properties](index=36&type=section&id=Item%202.%20Properties) The company shares its administrative headquarters with Donegal Mutual in Marietta, Pennsylvania, and its subsidiaries own additional facilities in other states - The main administrative headquarters are shared with and owned by Donegal Mutual in Marietta, PA. Other properties are owned by subsidiaries Southern (Glen Allen, VA), Le Mars (Le Mars, IA), and Sheboygan (Sheboygan Falls, WI)[198](index=198&type=chunk) [Legal Proceedings](index=36&type=section&id=Item%203.%20Legal%20Proceedings) The company's insurance subsidiaries are involved in routine litigation that is not expected to materially affect its financial condition or results of operations - The company is party to routine litigation arising from its insurance business, which is not expected to have a material adverse effect on its financial condition[199](index=199&type=chunk) [Executive Officers of the Registrant](index=37&type=section&id=Executive%20Officers%20of%20the%20Registrant) This section lists the executive officers of Donegal Group Inc. and Donegal Mutual as of December 31, 2018, including their age, position, and tenure Executive Officers as of December 31, 2018 | Name | Age | Position | | :--- | :--- | :--- | | Kevin G. Burke | 53 | President and Chief Executive Officer | | Cyril J. Greenya | 74 | Senior Vice President and Chief Underwriting Officer | | Richard G. Kelley | 64 | Senior Vice President and Head of Field Operations | | Jeffrey D. Miller | 54 | Executive Vice President and Chief Financial Officer | | Sanjay Pandey | 52 | Senior Vice President and Chief Information Officer | | Robert G. Shenk | 65 | Senior Vice President, Claims (retiring March 2019) | | Daniel J. Wagner | 58 | Senior Vice President and Treasurer | PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=38&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) This section details the trading of the company's Class A and Class B common stock on NASDAQ, stockholder information, dividends, and a five-year stock performance comparison Dividends Declared Per Share | Stock Class | 2018 | 2017 | | :--- | :--- | :--- | | Class A | $0.57 | $0.56 | | Class B | $0.50 | $0.49 | - As of March 1, 2019, there were approximately **1,843 holders** of record for Class A common stock and **274 for Class B common stock**[204](index=204&type=chunk) - The stock performance graph for the five years ending December 31, 2018, shows that both Class A and Class B stocks underperformed the Russell 2000 Index and the peer group index[206](index=206&type=chunk)[207](index=207&type=chunk) [Selected Financial Data](index=40&type=section&id=Item%206.%20Selected%20Financial%20Data) This section presents a five-year summary of key income statement and balance sheet data for the company from 2014 through 2018 Five-Year Selected Financial Data (in thousands, except per share data) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Income Statement Data** | | | | | | | Premiums earned | $741,291 | $702,515 | $656,205 | $605,641 | $556,498 | | Total revenues | $771,828 | $739,027 | $688,423 | $636,387 | $586,548 | | Net (loss) income | $(32,760) | $7,116 | $30,801 | $20,990 | $14,539 | | Diluted (loss) earnings per share—Class A | $(1.18) | $0.26 | $1.16 | $0.77 | $0.55 | | Cash dividends per share—Class A | $0.57 | $0.56 | $0.55 | $0.54 | $0.53 | | **Balance Sheet Data** | | | | | | | Total investments | $1,030,799 | $1,005,870 | $945,520 | $900,822 | $832,941 | | Total assets | $1,832,078 | $1,737,920 | $1,623,131 | $1,537,834 | $1,458,655 | | Stockholders' equity | $398,870 | $448,696 | $438,615 | $408,389 | $416,135 | | Book value per share | $14.05 | $15.95 | $16.21 | $15.66 | $15.40 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=41&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the 2018 net loss primarily due to higher weather-related losses and significant unfavorable prior-year loss reserve development, alongside premium growth and liquidity - The company reported a net loss of **$32.8 million** in 2018, compared to net income of **$7.1 million** in 2017. The loss was primarily driven by underwriting losses resulting from weather events and significant strengthening of loss reserves[239](index=239&type=chunk)[262](index=262&type=chunk) - The company recognized a **$35.6 million** increase in its liability for losses and loss expenses from prior years in 2018, a sharp increase from **$6.6 million** in 2017. This was mainly due to higher-than-expected severity in commercial multi-peril, personal auto, and commercial auto lines[225](index=225&type=chunk)[256](index=256&type=chunk) Key Performance Indicators (2016-2018) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net Premiums Written | $744.0M | $729.1M | $682.0M | | Net Premiums Earned | $741.3M | $702.5M | $656.2M | | Loss Ratio | 77.8% | 69.4% | 64.5% | | Expense Ratio | 31.6% | 32.9% | 33.0% | | Combined Ratio | 110.1% | 103.0% | 98.1% | | Net (Loss) Income | $(32.8M) | $7.1M | $30.8M | - Net premiums written increased by **2.0%** in 2018, driven by a **6.3% growth** in commercial lines, while personal lines decreased by **1.5%** due to pricing actions and underwriting measures to slow new policy growth[252](index=252&type=chunk) - The company's liquidity is supported by net cash from operations (**$63.8 million** in 2018), a marketable investment portfolio, a **$30.0 million** revolving line of credit with M&T Bank, and **$35.0 million** in outstanding advances from the FHLB of Pittsburgh[279](index=279&type=chunk)[280](index=280&type=chunk)[281](index=281&type=chunk) - A significant subsequent event was the sale of DFSC on March 8, 2019, which resulted in proceeds of approximately **$55.5 million** to DGI (a **$14.1 million** dividend and **$41.4 million** in consideration). A gain from this sale will be recorded in Q1 2019[213](index=213&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=55&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is primarily exposed to interest rate, equity price, and credit risks, which are managed through portfolio structuring, diversification, and quality investments - The company's main market risks are interest rate risk, equity price risk, and credit risk[298](index=298&type=chunk) - Interest rate risk is managed by structuring the fixed-maturity portfolio with a "laddering" approach to ensure evenly distributed cash flows and maturities. The company generally holds these investments to maturity rather than hedging[299](index=299&type=chunk) - Credit risk is managed through investment in a diversified portfolio of high-quality securities, regular portfolio reviews, and limits on investment in any single security[303](index=303&type=chunk) [Financial Statements and Supplementary Data](index=57&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains the company's audited consolidated financial statements for 2018, including balance sheets, income statements, cash flows, and detailed notes Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Total Investments | $1,030,799 | $1,005,870 | | Total Assets | $1,832,078 | $1,737,920 | | Losses and loss expenses | $814,665 | $676,672 | | Total Liabilities | $1,433,208 | $1,289,224 | | Total Stockholders' Equity | $398,870 | $448,696 | Consolidated Statement of (Loss) Income Highlights (in thousands) | Account | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net premiums earned | $741,291 | $702,515 | $656,205 | | Total revenues | $771,828 | $739,027 | $688,423 | | Net losses and loss expenses | $576,458 | $487,268 | $423,316 | | Net (loss) income | $(32,760) | $7,116 | $30,801 | - The Notes to Financial Statements provide critical details, including the **80% participation** of the Atlantic States subsidiary in the reinsurance pool with Donegal Mutual (Note 3), a detailed breakdown of the investment portfolio (Note 4), and a reconciliation of the liability for losses, which shows a **$35.6 million** adverse development from prior years in 2018 (Note 8)[372](index=372&type=chunk)[380](index=380&type=chunk)[408](index=408&type=chunk) - Note 22 (Subsequent Event) confirms the sale of Donegal Financial Services Corporation (DFSC) on March 8, 2019, from which DGI received a **$14.1 million** dividend and **$41.4 million** in consideration. A gain will be recognized in Q1 2019[483](index=483&type=chunk) [Controls and Procedures](index=100&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with an unqualified auditor opinion - Management concluded that disclosure controls and procedures were effective as of December 31, 2018[493](index=493&type=chunk) - Management concluded that internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[494](index=494&type=chunk) - The independent auditor, KPMG LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[495](index=495&type=chunk) PART III [Directors, Executive Compensation, and Corporate Governance](index=102&type=section&id=Item%2010-14) This section incorporates by reference information from the company's 2019 proxy statement regarding directors, executive compensation, and corporate governance - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive proxy statement for its annual meeting of stockholders to be held on April 18, 2019[507](index=507&type=chunk)[509](index=509&type=chunk)[510](index=510&type=chunk)[511](index=511&type=chunk)[512](index=512&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=103&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed with or incorporated by reference into the Form 10-K report - This section lists all financial statements, schedules, and exhibits included in or incorporated by reference into the Form 10-K[515](index=515&type=chunk) - Key exhibits filed with this report include consents of the independent registered public accounting firm, CEO/CFO certifications (Rule 13a-14(a) and Section 1350), and XBRL data files[517](index=517&type=chunk)