DONEGAL GROUP INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Donegal Mutual Insurance Company ("Donegal Mutual") organized us as an insurance
holding company on August 26, 1986. See "Business - History and Organizational
Structure" for more information. Our insurance subsidiaries, Atlantic States
Insurance Company ("Atlantic States"), Southern Insurance Company of Virginia
("Southern"), The Peninsula Insurance Company and Peninsula Indemnity Company
(collectively, "Peninsula"), and Michigan Insurance Company ("MICO") and their
affiliates write commercial and personal lines of property and casualty
coverages exclusively through a network of independent insurance agents in
certain Mid-Atlantic, Midwest, New England, Southern and Southwestern states.
The commercial lines products of our insurance subsidiaries consist primarily of
commercial automobile, commercial multi-peril and workers' compensation
policies. The personal lines products of our insurance subsidiaries consist
primarily of homeowners and private passenger automobile policies.

At December 31, 2022, Donegal Mutual held approximately 43% of our outstanding
Class A common stock and approximately 84% of our outstanding Class B common
stock. This ownership provides Donegal Mutual with approximately 71% of the
combined voting power of our outstanding shares of Class A common stock and our
outstanding shares of Class B common stock.

Donegal Mutual and Atlantic States have participated in a proportional
reinsurance agreement, or pooling agreement, since 1986. Under the pooling
agreement, Donegal Mutual and Atlantic States contribute substantially all of
their respective premiums, losses and loss expenses to the underwriting pool,
and the underwriting pool, acting through Donegal Mutual, then allocates 80% of
the pooled business to Atlantic States. Thus, Donegal Mutual and Atlantic States
share the underwriting results of the pooled business in proportion to their
respective participation in the underwriting pool. The operations of our
insurance subsidiaries and Donegal Mutual are interrelated due to the pooling
agreement and other factors. While maintaining the separate corporate existence
of each company, our insurance subsidiaries conduct business together with
Donegal Mutual and its insurance subsidiaries as the Donegal Insurance Group.
The Donegal Insurance Group is not a legal entity, is not an insurance company
and does not issue or administer insurance policies. Rather, it is a trade name
that refers to the group of insurance companies that are affiliated with Donegal
Mutual. See "Business - Relationship with Donegal Mutual" for more information
regarding the pooling agreement and other transactions with our affiliates.

Donegal Mutual and our insurance subsidiaries operate together as the Donegal
Insurance Group and share a combined business plan designed to achieve market
penetration and underwriting profitability objectives. The products our
insurance subsidiaries and Donegal Mutual offer are generally complementary,
thereby allowing Donegal Insurance Group to offer a broader range of products to
a given market and to expand Donegal Insurance Group's ability to service an
entire personal lines or commercial lines account. Distinctions within the
products of Donegal Mutual and our insurance subsidiaries generally 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.

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.

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In July 2013, our board of directors authorized a share repurchase program
pursuant to which we have the authority to purchase up to 500,000 additional
shares of our Class A common stock at prices prevailing from time to time in the
open market subject to the provisions of the SEC Rule 10b-18 and in privately
negotiated transactions. We did not purchase any shares of our Class A common
stock under this program during 2022 or 2021. We have purchased a total of
57,658 shares of our Class A common stock under this program from its inception
through December 31, 2022.

On April 29, 2022, Donegal Mutual disclosed that it will, at its discretion,
purchase shares of our Class A common stock and our Class B common stock at
market prices prevailing from time to time in the open market subject to the
provisions of SEC Rule 10b-18 and in privately negotiated transactions. Such
disclosure did not stipulate a maximum number of shares that may be purchased
under this program. During 2022, Donegal Mutual purchased 1,035,778 shares of
our Class A common stock and 54,231 shares of our Class B common stock.

In accordance with Section 12b-2 of the Exchange Act, we are no longer a
"smaller reporting company" as of December 31, 2022. However, under Item
10(f)(2)(i) of Regulation S-K, we are permitted to avail ourselves of the scaled
disclosure requirements available to smaller reporting companies in this Form
10-K Report. Having ceased to be a smaller reporting company, we will no longer
be able to avail ourselves of such scaled disclosure beginning with our
quarterly report on Form 10-Q for the quarterly period ending March 31, 2023. We
have historically not availed ourselves of most aspects of such scaled
disclosure and do not expect any material increase in financial or legal
expenses for additional disclosure requirements as a result of the change in
status.

Critical Accounting Policies and Estimates

We combine our financial statements with those of our insurance subsidiaries and
present them on a consolidated basis in accordance with GAAP.

Our insurance subsidiaries make estimates and assumptions that can have a
significant effect on amounts and disclosures we report in our financial
statements. The most significant estimates relate to the reserves of our
insurance subsidiaries for property and casualty insurance unpaid losses and
loss expenses. While we believe our estimates and the estimates of our insurance
subsidiaries are appropriate, the ultimate amounts may differ from the estimates
we provided. We regularly review our methods for making these estimates, and we
reflect any adjustment we consider necessary in our results of operations for
the period in which we make an adjustment.

Liability for Losses and Loss Expenses

Liabilities for losses and loss expenses are estimates at a given point in time
of the amounts an insurer expects to pay with respect to incurred policyholder
claims based on facts and circumstances the insurer knows at that point in time.
For example, legislative, judicial and regulatory actions may expand coverage
definitions, retroactively mandate coverage or otherwise require our insurance
subsidiaries to pay losses for damages that their policies explicitly excluded
or did not intend to cover. At the time of establishing its estimates, an
insurer recognizes that its ultimate liability for losses and loss expenses will
exceed or be less than such estimates. Our insurance subsidiaries base their
estimates of liabilities for losses and loss expenses on assumptions as to
future loss trends, expected claims severity, judicial theories of liability and
other factors. However, during the loss adjustment period, our insurance
subsidiaries may learn additional facts regarding individual claims, and,
consequently, it often becomes necessary for our insurance subsidiaries to
refine and adjust their estimates for these liabilities. We reflect any
adjustments to the liabilities for losses and loss expenses of our insurance
subsidiaries in our consolidated results of operations in the period in which
our insurance subsidiaries make adjustments to their estimates.

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Our insurance subsidiaries maintain liabilities for the payment of losses and
loss expenses with respect to both reported and unreported claims. Our insurance
subsidiaries establish these liabilities for the purpose of covering the
ultimate costs of settling all losses, including investigation and litigation
costs. Our insurance subsidiaries base the amount of their liability for
reported losses primarily upon a case-by-case evaluation of the type of risk
involved, knowledge of the circumstances surrounding each claim and the
insurance policy provisions relating to the type of loss the policyholder
incurred. Our insurance subsidiaries determine the amount of their liability for
unreported claims and loss expenses on the basis of historical information by
line of insurance. Our insurance subsidiaries account for inflation in the
reserving function through analysis of costs and trends and reviews of
historical reserving results. Our insurance subsidiaries monitor their
liabilities closely and recompute them periodically using new information on
reported claims and a variety of statistical techniques. Our insurance
subsidiaries do not discount their liabilities for losses and loss expenses.

Reserve estimates can change over time because of unexpected changes in
assumptions related to our insurance subsidiaries' external environment and, to
a lesser extent, assumptions related to our insurance subsidiaries' internal
operations. For example, our insurance subsidiaries have experienced an increase
in claims severity and a lengthening of the claim settlement periods on bodily
injury claims during the past several years. In addition, the COVID-19 pandemic
and related government mandates and restrictions resulted in various changes
from historical claims reporting and settlement trends during 2020 and resulted
in significant increases in loss costs in 2021 and 2022 due to a number of
factors, including supply chain disruption, higher new and used automobile
values, increases in the cost of replacement automobile parts and rising labor
rates. These trend changes give rise to greater uncertainty as to the pattern of
future loss settlements. Related uncertainties regarding future trends include
social inflation, availability and cost of replacement automobile parts and
building materials, availability of skilled labor, the rate of plaintiff
attorney involvement in claims and the cost of medical technologies and
procedures. Assumptions related to our insurance subsidiaries' external
environment include the absence of significant changes in tort law and the legal
environment that increase liability exposure, consistency in judicial
interpretations of insurance coverage and policy provisions and the rate of loss
cost inflation. Internal assumptions include consistency in the recording of
premium and loss statistics, consistency in the recording of claims, payment and
case reserving methodology, accurate measurement of the impact of rate changes
and changes in policy provisions, consistency in the quality and characteristics
of business written within a given line of business and consistency in
reinsurance coverage and collectability of reinsured losses, among other items.
To the extent our insurance subsidiaries determine that underlying factors
impacting their assumptions have changed, our insurance subsidiaries make
adjustments in their reserves that they consider appropriate for such changes.
Accordingly, our insurance subsidiaries' ultimate liability for unpaid losses
and loss expenses will likely differ from the amount recorded at December 31,
2022. 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 $6.7 million.

The establishment of appropriate liabilities is an inherently uncertain process
and we can provide no assurance that our insurance subsidiaries' ultimate
liability will not exceed our insurance subsidiaries' loss and loss expense
reserves and have an adverse effect on our results of operations and financial
condition. Furthermore, we cannot predict the timing, frequency and extent of
adjustments to our insurance subsidiaries' estimated future liabilities, because
the historical conditions and events that serve as a basis for our insurance
subsidiaries' estimates of ultimate claim costs may change. As is the case for
substantially all property and casualty insurance companies, our insurance
subsidiaries have found it necessary in the past to increase their estimated
future liabilities for losses and loss expenses in certain periods and, in other
periods, their estimated future liabilities for losses and loss expenses have
exceeded their actual liabilities for losses and loss expenses. Changes in our
insurance subsidiaries' estimates of their liability for losses and loss
expenses generally reflect actual payments and their evaluation of information
received subsequent to the prior reporting period.

Our insurance subsidiaries recognized a decrease in their liability for losses
and loss expenses of prior years of $44.8 million, $31.2 million and $12.9
million in 2022, 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 2022 development represented 7.2% of the December 31, 2021 net carried
reserves and resulted primarily from lower-than-expected loss emergence in the
personal automobile and commercial automobile lines of business for accident
years prior to 2022. The majority of the 2022 development related to decreases
in the liability for losses and loss expenses of prior years for Atlantic States
and MICO. The 2021 development represented 5.6% of the December 31, 2020 net
carried reserves and resulted primarily from lower-than-expected loss emergence
in the personal automobile, workers' compensation and commercial automobile
lines of business for accident years prior to 2021. The majority of the 2021
development related to decreases in the liability for losses and loss expenses
of prior years for Atlantic States and MICO. The 2020 development represented
2.6% of the December 31, 2019 net carried reserves and resulted primarily from
lower-than-expected severity in the workers' compensation and personal
automobile lines of business, partially offset by higher-than-expected severity
in the commercial automobile and commercial multi-peril lines of business, for
accident years prior to 2020. The majority of the 2020 development related to
decreases in the liability for losses and loss expenses of prior years for
Atlantic States and MICO.

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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 liability 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 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.

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Our insurance subsidiaries' liability for losses and loss expenses by major line
of business at December 31, 2022 and 2021 consisted of the following:

                                                  2022            2021
                                                     (in thousands)
Commercial lines:
Automobile                                     $   174,833     $   172,302
Workers' compensation                              120,539         122,398
Commercial multi-peril                             203,567         168,445
Other                                               23,071          18,530
Total commercial lines                             522,010         481,675

Personal lines:
Automobile                                         108,715         109,915
Homeowners                                          28,481          26,169
Other                                               10,656           8,600
Total personal lines                               147,852         144,684

Total commercial and personal lines                669,862         626,359
Plus reinsurance recoverable                       451,184         451,261

Total liability for losses and loss expenses $ 1,121,046 $ 1,077,620

We have evaluated the effect on our insurance subsidiaries' loss and loss
expense reserves and our stockholders' equity in the event of reasonably likely
changes in the variables we consider in establishing loss and loss expense
reserves. We established the range of reasonably likely changes based on a
review of changes in accident year development by line of business and applied
it to our insurance subsidiaries' loss reserves as a whole. The selected range
does not necessarily indicate what could be the potential best or worst case or
the most-likely scenario. The following table sets forth the effect on our
insurance subsidiaries' loss and loss expense reserves and our stockholders'
equity in the event of reasonably likely changes in the variables considered in
establishing loss and loss expense reserves:

                          Adjusted Loss and Loss                             Adjusted Loss and Loss
Change in Loss and Loss   Expense Reserves Net of    Percentage Change in    Expense Reserves Net of   Percentage Change in
Expense Reserves Net of       Reinsurance at        Equity at December 31,       Reinsurance at             Equity at
      Reinsurance            December 31, 2022             2022(1)              December 31, 2021      December 31, 2021(1)
                                                  (dollars in thousands)
        -10.0%                   $602,876                   10.9%                   $563,723                   9.3%
         -7.5                     619,622                    8.2                     579,382                   7.0
         -5.0                     636,369                    5.5                     595,041                   4.7
         -2.5                     653,115                    2.7                     610,700                   2.3
         Base                     669,862                     -                      626,359                    -
          2.5                     686,609                    -2.7                    642,018                   -2.3
          5.0                     703,355                    -5.5                    657,677                   -4.7
          7.5                     720,102                    -8.2                    673,336                   -7.0
         10.0                     736,848                   -10.9                    688,995                   -9.3






(1)     Net of income tax effect.

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Our insurance subsidiaries base their reserves for unpaid losses and loss
expenses on current trends in loss and loss expense development and reflect
their best estimates for future amounts needed to pay losses and loss expenses
with respect to incurred events currently known to them plus incurred but not
reported ("IBNR") claims. Our insurance subsidiaries develop their reserve
estimates based on an assessment of known facts and circumstances, review of
historical loss settlement patterns, estimates of trends in claims severity,
frequency, legal and regulatory changes and other assumptions. Our insurance
subsidiaries consistently apply actuarial loss reserving techniques and
assumptions, which rely on historical information as adjusted to reflect current
conditions, including consideration of recent case reserve activity. Our
insurance subsidiaries use the point estimate their actuaries select. For the
year ended December 31, 2022, the actuaries developed a range from a low of
$621.6 million to a high of $721.6 million and selected a point estimate of
$669.9 million. The actuaries' range of estimates for commercial lines in 2022
was $486.4 million to $560.5 million, and the actuaries selected a point
estimate of $522.0 million. The actuaries' range of estimates for personal lines
in 2022 was $135.2 million to $161.1 million, and the actuaries selected a point
estimate of $147.9 million. For the year ended December 31, 2021, the actuaries
developed a range from a low of $575.7 million to a high of $681.5 million and
selected a point estimate of $626.4 million. The actuaries' range of estimates
for commercial lines in 2021 was $442.8 million to $524.0 million, and the
actuaries selected a point estimate of $481.7 million. The actuaries' range of
estimates for personal lines in 2021 was $132.9 million to $157.5 million, and
the actuaries selected a point estimate of $144.7 million.

Our insurance subsidiaries seek to enhance their underwriting results by
carefully selecting the product lines they underwrite. For personal lines
products, our insurance subsidiaries insure standard and preferred risks in
private passenger automobile and homeowners lines. For commercial lines
products, the commercial risks that our insurance subsidiaries primarily insure
are business offices, wholesalers, service providers, contractors, artisans and
light manufacturing operations. Our insurance subsidiaries have limited exposure
to asbestos and other environmental liabilities. Through the consistent
application of this disciplined underwriting philosophy, our insurance
subsidiaries have avoided many of the "long-tail" issues other insurance
companies have faced. We consider workers' compensation to be a "long-tail" line
of business, in that workers' compensation claims tend to be settled over a
longer time frame than those in the other lines of business of our insurance
subsidiaries.

The following table presents 2022 and 2021 claim count and payment amount
information for workers' compensation. Workers' compensation losses primarily
consist of indemnity and medical costs for injured workers.

                                                   For the Year Ended 

December 31,

           (dollars in thousands)                    2022                  

2021

Number of claims pending, beginning of period             3,336             

2,898

Number of claims reported                                 6,683             

6,883

Number of claims settled or dismissed                     6,653             

6,445

Number of claims pending, end of period                   3,366                 3,336

Losses paid                                     $        55,809       $        50,664
Loss expenses paid                                       12,062                10,067

Management Evaluation of Operating Results

Despite challenging insurance market conditions and increasing property and
casualty loss severity trends that affected our results in recent years, we
believe that our focused business strategy, including our insurance
subsidiaries' ongoing implementation of premium rate increases and refinements
to their disciplined underwriting practices, have positioned us well for 2023
and beyond.

Because our insurance subsidiaries do not prepare GAAP financial statements, we
evaluate the performance of our commercial lines and personal lines segments
utilizing statutory accounting practices ("SAP"), which include financial
measures that reflect the growth trends and underwriting results of our
insurance subsidiaries.

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We use the following financial data to monitor and evaluate our operating
results:

                                       Year Ended December 31,
(in thousands)                    2022          2021          2020

Net premiums written:
Commercial lines:
Automobile                      $ 167,774     $ 161,947     $ 135,294
Workers' compensation             111,892       113,256       109,960
Commercial multi-peril            200,045       188,242       147,993
Other                              40,086        38,340        32,739
Total commercial lines            519,797       501,785       425,986
Personal lines:
Automobile                        181,129       170,578       184,602
Homeowners                        120,087       109,974       111,886
Other                              22,517        21,930        19,666
Total personal lines              323,733       302,482       316,154
Total net premiums written      $ 843,530     $ 804,267     $ 742,140

Components of combined ratio:
Loss ratio                           68.6 %        67.1 %        62.0 %
Expense ratio                        34.1          33.3          33.0
Dividend ratio                        0.6           0.6           1.0
Combined ratio                      103.3 %       101.0 %        96.0 %

Revenues:
Net premiums earned:
Commercial lines                $ 510,153     $ 468,433     $ 412,877
Personal lines                    312,337       307,582       329,163
Total net premiums earned         822,490       776,015       742,040
Net investment income              34,016        31,126        29,504
Investment (losses) gains         (10,185 )       6,477         2,778
Other                               1,900         2,848         3,497
Total revenues                  $ 848,221     $ 816,466     $ 777,819



                                                          Year Ended December 31,
(in thousands)                                        2022          2021          2020

Components of net (loss) income:
Underwriting (loss) income:
Commercial lines                                    $ (22,665 )   $ (35,174 )   $   (858 )
Personal lines                                        (13,506 )      17,235       31,764
SAP underwriting (loss) income                        (36,171 )     (17,939 )     30,906
GAAP adjustments                                        8,667         9,945         (959 )
GAAP underwriting (loss) income                       (27,504 )      (7,994 )     29,947
Net investment income                                  34,016        31,126       29,504
Investment (losses) gains                             (10,185 )       6,477        2,778
Other                                                      35           730        1,043

(Loss) income before income tax (benefit) expense (3,638 ) 30,339

      63,272
Income tax (benefit) expense                           (1,679 )       5,085       10,457
Net (loss) income                                   $  (1,959 )   $  25,254     $ 52,815



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Non-GAAP Information

We prepare our consolidated financial statements on the basis of GAAP. Our
insurance subsidiaries prepare financial statements based on SAP. SAP financial
measures are considered non-GAAP financial measures under applicable SEC rules
because the SAP financial measures include or exclude certain items that the
most comparable GAAP financial measures do not ordinarily include or exclude.
Our calculation of non-GAAP financial measures may differ from similar measures
other companies use. As a result, investors should exercise caution when
comparing our non-GAAP financial measures to the non-GAAP financial measures
other companies use. The SAP financial measures we utilize are net premiums
written and statutory combined ratio.

Net Premiums Written

We define net premiums written as the amount of full-term premiums our insurance
subsidiaries record for policies effective within a given period less premiums
our insurance subsidiaries cede to reinsurers. Net premiums earned is the most
comparable GAAP financial measure to net premiums written. Net premiums earned
represent the sum of the amount of net premiums written and the change in net
unearned premiums during a given period.  Our insurance subsidiaries earn
premiums and recognize them as revenue over the terms of their policies, which
are one year or less in duration. Therefore, increases or decreases in net
premiums earned generally reflect increases or decreases in net premiums written
in the preceding 12-month period compared to the comparable period one year
earlier.

The following table provides a reconciliation of our net premiums earned to our
net premiums written for 2022, 2021 and 2020:

                                               Year Ended December 31,
                                      2022              2021              2020

Net premiums earned               $ 822,489,450     $ 776,015,201     $ 742,040,339

Change in net unearned premiums 21,039,149 28,251,308

 99,554
Net premiums written              $ 843,528,599     $ 804,266,509     $ 742,139,893



The increase in the change in net unearned premiums for 2021 compared to 2020
primarily reflects the inclusion of the business of the Mountain States
Insurance Group in the underwriting pool beginning with policies effective in
2021.

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.

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The following table presents comparative details with respect to our GAAP and
statutory combined ratios for the years ended December 31, 2022, 2021 and 2020:

                                          Year Ended December 31,
                                        2022        2021        2020
GAAP Combined Ratios (Total Lines)
Loss ratio (non-weather)                  60.9 %      61.3 %      55.1 %
Loss ratio (weather-related)               7.7         5.8         6.9
Expense ratio                             34.1        33.3        33.0
Dividend ratio                             0.6         0.6         1.0
Combined ratio                           103.3 %     101.0 %      96.0 %

Statutory Combined Ratios
Commercial lines:
Automobile                                98.0 %     108.6 %     112.7 %
Workers' compensation                     97.3        94.6        86.3
Commercial multi-peril                   116.9       114.1        98.4
Other                                     80.8        77.5        74.0
Total commercial lines                   103.7       104.9        97.8
Personal lines:
Automobile                               103.8        94.4        91.3
Homeowners                               111.0       102.9        97.2
Other                                     52.1        49.3        74.9
Total personal lines                     102.8        94.4        92.4

Total commercial and personal lines 103.3 100.8 95.4

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Results of Operations

YEAR ENDED DECEMBER 31, 2022 COMPARED TO YEAR ENDED DECEMBER 31, 2021

Net Premiums Earned

Our insurance subsidiaries' net premiums earned increased to $822.5 million for
2022, an increase of $46.5 million, or 6.0%, compared to 2021, primarily
reflecting solid premium retention and renewal premium increases. Our insurance
subsidiaries earn premiums and recognize them as income over the terms of the
policies they issue. Such terms are generally one year or less in duration.
Therefore, increases or decreases in net premiums earned generally reflect
increases or decreases in net premiums written in the preceding twelve-month
period compared to the same period one year earlier.

Net Premiums Written

Our insurance subsidiaries' 2022 net premiums written increased 4.9% to $843.5
million, compared to $804.3 million for 2021. Commercial lines net premiums
written increased $18.0 million, or 3.6%, for 2022 compared to 2021. We
attribute the increase in commercial lines net premiums written primarily to
modest new business writings, strong premium retention and a continuation of
renewal premium increases in lines other than workers' compensation, offset
partially by planned attrition in regions we have targeted for profit
improvement. Personal lines net premiums written increased $21.3 million, or
7.0%, for 2022 compared to 2021. We attribute the increase in personal lines net
premiums written primarily to renewal premium increases, strong policy retention
and new business writings in certain states where we have introduced an updated
suite of products.

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Investment Income

For 2022, our net investment income increased 9.3% to $34.0 million, compared to
$31.1 million for 2021, due primarily to higher average reinvestment yields and
higher average invested assets for 2022 compared to 2021.

Net Investment (Losses) Gains

Our net investment losses for 2022 were $10.2 million.  Our net investment gains
for 2021 were $6.5 million. The net investment (losses) gains for 2022 and 2021
were primarily related to (decreases) increases in unrealized (losses) gains
within our equity securities portfolio. We did not recognize any impairment
losses during 2022 or 2021.

Losses and Loss Expenses

Our insurance subsidiaries' loss ratio, which is the ratio of incurred losses
and loss expenses to premiums earned, was 68.6% for 2022, compared to 67.1% for
2021. Our insurance subsidiaries' commercial lines loss ratio decreased to 67.1%
for 2022, compared to 68.6% for 2021. This decrease resulted primarily from the
commercial automobile loss ratio decreasing to 64.2% for 2022, compared to 75.0%
for 2021. The personal lines loss ratio increased to 71.0% for 2022, compared to
64.8% for 2021. The personal automobile loss ratio increased to 72.1% for 2022,
compared to 65.6% for 2021, primarily due to an increase in automobile claim
severity due to the ongoing impact of supply chain disruption and labor
shortages on the costs of repair and replacement vehicles. The homeowners loss
ratio increased to 76.1% for 2022, compared to 69.6% for 2021, primarily due to
increased average claim severity due to the ongoing impact of supply chain
disruption and labor shortages on repair and replacement costs for homes. Our
insurance subsidiaries experienced favorable loss reserve development of
approximately $44.8 million, or 5.4 percentage points of the loss ratio, during
2022 in their reserves for prior accident years, compared to approximately $31.2
million, or 4.0 percentage points of the loss ratio, during 2021. The favorable
loss reserve development in 2022 resulted primarily from lower-than-expected
loss emergence in the personal automobile and commercial automobile lines of
business for accident years prior to 2022. Weather-related losses of $63.5
million, or 7.7 percentage points of the loss ratio, for 2022 increased from
$45.3 million, or 5.8 percentage points of the loss ratio, for 2021, with the
increase primarily impacting the commercial multi-peril line of business. Large
fire losses, which we define as individual fire losses in excess of $50,000,
were $53.5 million, or 6.5 percentage points of the loss ratio, for 2022,
compared to $45.6 million, or 5.9 percentage points of the loss ratio, for 2021.
The increase was related to increased average claim severity of both commercial
property and home fires in 2022 compared to 2021, which we attribute in part to
inflationary repair cost increases.

Underwriting Expenses

Our insurance subsidiaries' expense ratio, which is the ratio of policy
acquisition and other underwriting expenses to premiums earned, was 34.1% for
2022, compared to 33.3% for 2021. We attribute the modest increase to higher
technology system-related expenses for 2022 compared to 2021, offset somewhat by
lower commercial growth incentive costs for our agents and decreased
underwriting-based incentive costs for our employees for 2022 compared to 2021.
The increase in technology systems-related expenses for 2022 was primarily due
to an increased allocation of costs from Donegal Mutual to our insurance
subsidiaries following the successful implementation of the second phase of our
ongoing systems modernization project in August 2021.

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Policyholder Dividends

Our insurance subsidiaries pay policyholder dividends primarily on workers'
compensation policies on a sliding scale based on the profitability of a given
policy.

Combined Ratio

Our insurance subsidiaries' combined ratio was 103.3% and 101.0% for 2022 and
2021, respectively. The combined ratio represents the sum of the loss ratio, the
expense ratio and the dividend ratio, which is the ratio of workers'
compensation policy dividends incurred to premiums earned. We attribute the
increase in our combined ratio primarily to the increase in the loss ratio.

Interest Expense

Our interest expense for 2022 decreased to $620,558, compared to $895,605 for
2021. We attribute the decrease to lower average borrowings under our lines of
credit during 2022 compared to 2021.

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Income Taxes

Our income tax benefit was $1.7 million for 2022, compared to income tax expense
of $5.1 million for 2021. Our effective tax rate for 2021 was 16.8%.

Net (Loss) Income and (Loss) Earnings Per Share

Our net loss for 2022 was $2.0 million, or $.06 per share of Class A common
stock and $.07 per share of Class B common stock, compared to net income for
2021 of $25.3 million, or $0.83 per share of Class A common stock on a diluted
basis and $0.74 per share of Class B common stock. We had 27.1 million and 25.8
million Class A shares outstanding at December 31, 2022 and 2021, respectively.
We had 5.6 million Class B shares outstanding for both periods. There are no
outstanding securities that dilute our shares of Class B common stock.

Book Value Per Share

Our stockholders' equity decreased by $47.4 million during 2022, primarily due
to $45.4 million of after-tax unrealized losses within our available-for-sale
fixed-maturity portfolio, resulting in a decrease in our book value per share to
$14.79 at December 31, 2022, compared to $16.95 a year earlier.

     YEAR ENDED DECEMBER 31, 2021 COMPARED TO YEAR ENDED DECEMBER 31, 2020

Net Premiums Earned

Our insurance subsidiaries' net premiums earned increased to $776.0 million for
2021, an increase of $34.0 million, or 4.6%, compared to 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
solid premium retention and renewal premium increases. Our insurance
subsidiaries earn premiums and recognize them as income over the terms of the
policies they issue. Such terms are generally one year or less in duration.
Therefore, increases or decreases in net premiums earned generally reflect
increases or decreases in net premiums written in the preceding twelve-month
period compared to the same period one year earlier.

Net Premiums Written

Our insurance subsidiaries' 2021 net premiums written increased 8.4% to $804.3
million, compared to $742.1 million for 2020. Commercial lines net premiums
written increased $75.8 million, or 17.8%, for 2021 compared to 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 solid
premium retention and renewal premium increases. Personal lines net premiums
written decreased $13.7 million, or 4.3%, for 2021 compared to 2020. We
attribute the decrease in personal lines net premiums written primarily to net
attrition as a result of measures our insurance subsidiaries implemented to
improve underwriting profitability, partially offset by the impact of premium
rate increases.

Investment Income

For 2021, our net investment income increased to $31.1 million, compared to
$29.5 million for 2020, due primarily to higher average invested assets for 2021
compared to 2020.

Net Investment Gains

Our net investment gains for 2021 and 2020 were $6.5 million and $2.8 million,
respectively. The net investment gains for 2021 and 2020 were primarily related
to increases in unrealized gains within our equity securities portfolio. We did
not recognize any impairment losses during 2021 or 2020.

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Losses and Loss Expenses

Our insurance subsidiaries' loss ratio, which is the ratio of incurred losses
and loss expenses to premiums earned, was 67.1% for 2021, compared to 62.0% for
2020. Our insurance subsidiaries' commercial lines loss ratio increased to 68.6%
for 2021, compared to 63.9% for 2020. This increase resulted primarily from the
workers' compensation loss ratio increasing to 57.7% for 2021, compared to 51.1%
for 2020, and the commercial multi-peril loss ratio increasing to 76.9% for
2021, compared to 65.9% for 2020. The personal lines loss ratio increased to
64.8% for 2021, compared to 59.5% for 2020. The personal automobile loss ratio
increased to 65.6% for 2021, compared to 60.1% for 2020, primarily due to an
increase in automobile claim frequency as driving activity generally returned to
pre-pandemic levels. The homeowners loss ratio increased to 69.6% for 2021,
compared to 61.8% for 2020. Our insurance subsidiaries experienced favorable
loss reserve development of approximately $31.2 million, or 4.0 percentage
points of the loss ratio, during 2021 in their reserves for prior accident
years, compared to favorable loss reserve development of approximately $12.9
million, or 1.7 percentage points of the loss ratio, during 2020. The favorable
loss reserve development in 2021 resulted primarily from lower-than-expected
loss emergence in the personal automobile, workers' compensation and commercial
automobile lines of business for accident years prior to 2021. Weather-related
losses of $45.3 million, or 5.8 percentage points of the loss ratio, for 2021
decreased from $51.4 million, or 6.9 percentage points of the loss ratio, for
2020, with the decrease primarily impacting the commercial multi-peril line of
business. Large fire losses, which we define as individual fire losses in excess
of $50,000, were $45.6 million, or 5.9 percentage points of the loss ratio, for
2021, compared to $22.8 million, or 3.1 percentage points of the loss ratio, for
2020. The significant increase was related to a higher incidence of both
commercial property and home fires in 2021 compared to 2020.

Underwriting Expenses

Our insurance subsidiaries' expense ratio, which is the ratio of policy
acquisition and other underwriting expenses to premiums earned, was 33.3% for
2021, compared to 33.0% for 2020. We attribute the modest increase to higher
technology system-related expenses for 2021 compared to 2020, offset somewhat by
lower commercial growth incentive costs for our agents and decreased
underwriting-based incentive costs for our agents and employees for 2021
compared to 2020. The increase in technology systems-related expenses for 2021
was primarily due to an increased allocation of costs from Donegal Mutual to our
insurance subsidiaries following the successful implementation of the second
phase of our ongoing systems modernization project in August 2021.

Policyholder Dividends

Our insurance subsidiaries pay policyholder dividends primarily on workers'
compensation policies on a sliding scale based on the profitability of a given
policy. We attribute the decrease in dividends incurred for 2021 compared to
2020 to a modest decline in the profitability of the workers' compensation line
of business over the respective periods to which the dividends applied.

Combined Ratio

Our insurance subsidiaries' combined ratio was 101.0% and 96.0% for 2021 and
2020, respectively. The combined ratio represents the sum of the loss ratio, the
expense ratio and the dividend ratio, which is the ratio of workers'
compensation policy dividends incurred to premiums earned. We attribute the
increase in our combined ratio primarily to the increase in the loss ratio.

Interest Expense

Our interest expense for 2021 decreased to $895,605, compared to $1.2 million
for 2020. We attribute the decrease to lower average borrowings under our lines
of credit during 2021 compared to 2020.

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Income Taxes

Our income tax expense was $5.1 million for 2021, compared to $10.5 million for
2020. Our effective tax rate for 2021 was 16.8%, compared to 16.5% for 2020. Our
income tax expense for 2020 included a $1.6 million income tax benefit related
to the 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 Earnings Per Share

Our net income for 2021 was $25.3 million, or $0.83 per share of Class A common
stock on a diluted basis and $0.74 per share of Class B common stock, compared
to net income for 2020 of $52.8 million, or $1.83 per share of Class A common
stock on a diluted basis and $1.65 per share of Class B common stock. We had
25.8 million and 24.6 million Class A shares outstanding at December 31, 2021
and 2020, respectively.  We had 5.6 million Class B shares outstanding for both
periods. There are no outstanding securities that dilute our shares of Class B
common stock.

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Book Value Per Share

Our stockholders' equity increased by $13.3 million during 2021 as a result of
our net income, offset somewhat by a reduction of net unrealized gains within
our available-for-sale fixed maturity investments. Our book value per share
decreased to $16.95 at December 31, 2021, compared to $17.13 a year earlier,
primarily as a result of an increase in the number of Class A shares outstanding
during the year.

Financial Condition

Liquidity and Capital Resources

Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual obligations and operating needs as they arise. Our major sources of
funds from operations are the net cash flows generated from our insurance
subsidiaries' underwriting results, investment income and maturing investments.

We have historically generated sufficient net positive cash flow from our
operations to fund our commitments and build our investment portfolio, thereby
increasing future investment returns. The pooling agreement with Donegal Mutual
historically has been cash flow positive because of the profitability of the
underwriting pool. Because we settle the pool monthly, our cash flows are
substantially similar to the cash flows that would result from the underwriting
of direct business. We maintain a high degree of liquidity in our investment
portfolio in the form of marketable fixed maturities, equity securities and
short-term investments. We structure our fixed-maturity investment portfolio
following a "laddering" approach so that projected cash flows from investment
income and principal maturities are evenly distributed from a timing
perspective. This laddering approach provides an additional measure of liquidity
to meet our obligations and the obligations of our insurance subsidiaries should
an unexpected variation occur in the future. Net cash flows provided by
operating activities in 2022, 2021 and 2020 were $67.1 million, $76.7 million
and $101.1 million, respectively.

At December 31, 2022, 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 December 31, 2022, Atlantic
States had a $35.0 million outstanding advance with the FHLB of Pittsburgh that
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 for 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.
In September 2021, upon receipt of approval from the Michigan Department of
Insurance and Financial Services, MICO repaid in full the $5.0 million surplus
note held previously by Donegal Mutual, along with accrued interest of $178,082.
We discuss in Note 9 - Borrowings our estimate of the timing of the amounts
payable for the borrowings under our lines of credit based on their contractual
maturities.

We estimate the timing of claim payments associated with the liabilities for
losses and loss expenses of our insurance subsidiaries based on historical
experience and expectations of future payment patterns. Amounts Atlantic States
assumes pursuant to the pooling agreement with Donegal Mutual represent a
substantial portion of our insurance subsidiaries' gross liabilities for losses
and loss expenses, and amounts Atlantic States cedes pursuant to the pooling
agreement represent a substantial portion of our insurance subsidiaries'
reinsurance recoverable on unpaid losses and loss expenses. We include cash
settlement of Atlantic States' assumed liabilities from the pool in monthly
settlements of pooled activity, as we net amounts ceded to and assumed from the
pool. Although Donegal Mutual and we do not anticipate any changes in the pool
participation levels in the foreseeable future, any such change would be
prospective in nature and therefore would not impact the timing of expected
payments by Atlantic States for its percentage share of pooled losses occurring
in periods prior to the effective date of such change.

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The cash dividends we declared to our stockholders totaled $20.9 million, $19.6
million and $17.3 million in 2022, 2021 and 2020, respectively. There are no
regulatory restrictions on our payment of dividends to our stockholders,
although there are restrictions under applicable state laws on the payment of
dividends from our insurance subsidiaries to us. Our insurance subsidiaries are
required by law to maintain certain minimum surplus on a statutory basis and are
subject to regulations under which their payment of dividends from statutory
surplus is restricted and may require prior approval of their domiciliary
insurance regulatory authorities. Our insurance subsidiaries are also subject to
risk-based capital ("RBC") requirements. The amount of statutory capital and
surplus necessary for our insurance subsidiaries to satisfy regulatory
requirements, including the RBC requirements, was not significant in relation to
our insurance subsidiaries' statutory capital and surplus at December 31, 2022.
Amounts available for distribution to us as dividends from our insurance
subsidiaries without prior approval of insurance regulatory authorities in 2023
are approximately $26.4 million from Atlantic States, $6.5 million from
Southern, $6.0 million from Peninsula and $7.5 million from MICO, or a total of
approximately $46.4 million.

Investments

At December 31, 2022 and 2021, our investment portfolio of primarily
investment-grade bonds, common stock, short-term investments and cash totaled
$1.3 billion, representing 58.2% and 59.2%, respectively, of our total assets.
See "Business - Investments" for more information.

                                                   December 31,
                                       2022                             2021
                                            Percent of                       Percent of
(dollars in thousands)       Amount           Total           Amount           Total
Fixed maturities:
Total held to maturity     $   688,439             52.8 %   $   668,105             52.3 %
Total available for sale       523,792             40.1         532,629             41.7
Total fixed maturities       1,212,231             92.9       1,200,734             94.0
Equity securities               35,105              2.7          63,420              5.0
Short-term investments          57,321              4.4          12,692              1.0
Total investments          $ 1,304,657            100.0 %   $ 1,276,846            100.0 %

The carrying value of our fixed maturity investments represented 92.9% and 94.0%
of our total invested assets at December 31, 2022 and 2021, respectively.

Our fixed maturity investments consisted of high-quality marketable bonds, of
which 100.0% were rated at investment-grade levels at December 31, 2022 and
2021, respectively.

At December 31, 2022, the net unrealized loss on our available-for-sale fixed
maturity investments, net of deferred taxes, amounted to $38.0 million, compared
to a net unrealized gain of $7.4 million at December 31, 2021.

Impact of Inflation

Our insurance subsidiaries establish their property and casualty insurance
premium rates before they know the amount of losses and loss settlement expenses
or the extent to which inflation may impact such expenses. Consequently, our
insurance subsidiaries attempt, in establishing rates, to anticipate the
potential future impact of inflation. Our insurance subsidiaries account for
inflation in the reserving function through analysis of costs and trends and
reviews of historical reserving results.

Impact of Changing Climate Conditions

Insured losses from severe weather events could significantly impact the
underwriting results of our insurance subsidiaries. Losses from catastrophic
events are a function of both the extent of our insurance subsidiaries'
exposures, the frequency and severity of the events themselves and the level of
reinsurance coverage our insurance subsidiaries purchase. The increased
frequency and severity of weather-related catastrophes and other losses, such as
from wildfires and flooding, incurred by the industry in recent years may be
indicative of changing weather patterns due to climate change. Should those
patterns continue to emerge, increased weather-related catastrophes in the
states in which our insurance subsidiaries operate would lead to higher overall
losses that they may be unable to offset through pricing actions.

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Our insurance subsidiaries seek to reduce their exposure to catastrophe losses
through their underwriting strategies and their purchase of catastrophe
reinsurance. While the emerging science regarding climate change and its
connection to extreme weather events continues to be studied, climate change, to
the extent it produces rising temperatures and changes in weather patterns,
could affect the frequency and severity of weather events and other losses and
thus impact the affordability and availability of catastrophe reinsurance
coverage for our insurance subsidiaries. Our insurance subsidiaries' ability to
appropriately manage catastrophe risk depends partially on catastrophe models,
which rely on historical data that might not be representative of the frequency
and severity of future events. Such models might also be unable to anticipate
the uncertain impact of changing climate conditions that tend to occur gradually
over time. Because the policies of our insurance subsidiaries renew not less
frequently than annually, our insurance subsidiaries have the ability to respond
to the impact of changing climate conditions through adjustments to their
underwriting standards, pricing, and policy terms and conditions, subject to
applicable regulatory approvals.

Changing climate conditions could lead to new or revised regulations with which
our insurance subsidiaries would have to comply. Such regulations could impact
the ability of our insurance subsidiaries to manage their exposures in areas
impacted by increased weather activity, require our insurance companies to alter
the terms and conditions of their policies or impact the ability of our
insurance subsidiaries to obtain sufficient pricing increases to offset higher
loss activity.

Impact of New Accounting Standards

In September 2016, the 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 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 our
adoption of this guidance on January 1, 2023 will result in an after-tax
adjustment to retained earnings estimated between $1.5 million and $2.5 million.
We do not expect the adoption of this guidance to have a significant impact on
our results of operations or cash flows.

Off-Balance Sheet Arrangements

As of December 31, 2022 and 2021, we did not have any off-balance sheet
arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.