UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-Q

(Mark One)

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

For the quarterly period ended ~~September 30, 2019~~March 31, 2020

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

For the transition period from to .

Commission file number0-15341

Donegal Group Inc.

(Exact name of registrant as specified in its charter)

Delaware

23-2424711

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1195 River Road, P.O. Box 302, Marietta, PA 17547

(Address of principal executive offices) (Zip code)

(717)426-1931

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


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

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~23,106,528~~23,453,398 shares of Class A Common Stock, par value $0.01 per share, and 5,576,775 shares of Class B Common Stock, par value $0.01 per share, outstanding on ~~October 31, 2019.~~April 30, 2020.

DONEGAL GROUP INC.

INDEX TO FORM10-Q REPORT


		Page

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements		1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2118

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		3126

Item 4.	Controls and Procedures		3126

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		3227

Item 1A.	Risk Factors		3227

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		3228

Item 3.	Defaults upon Senior Securities		3228

Item 4.	Removed and Reserved		3228

Item 5.	Other Information		3228

Item 6.	Exhibits		3329

Signatures			3430

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

Donegal Group Inc. and Subsidiaries

Consolidated Balance Sheets


	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
	(Unaudited)						(Unaudited)
Assets
Investments
Fixed maturities
Held to maturity, at amortized cost	$	458,888,742		$	402,798,518		$	487,156,618		$	476,093,782
Available for sale, at fair value		559,101,387			526,558,304			554,463,492			564,951,803
Equity securities, at fair value		52,098,509			43,667,009			46,179,107			55,477,556
Investment in affiliate		—			41,025,975
Short-term investments, at cost, which approximates fair value		8,626,324			16,748,760			72,719,077			14,030,222

Total investments		1,078,714,962			1,030,798,566			1,160,518,294			1,110,553,363
Cash		55,268,760			52,594,461			52,281,735			49,318,930
Accrued investment income		7,285,349			6,561,199			7,800,132			7,066,029
Premiums receivable		173,749,759			156,702,250			182,064,297			165,732,949
Reinsurance receivable		362,366,588			343,369,065			374,758,028			367,021,468
Deferred policy acquisition costs		63,685,811			60,615,127			60,314,704			59,284,859
Deferred tax asset, net		8,965,877			13,069,755			9,665,172			8,514,311
Prepaid reinsurance premiums		141,958,161			135,379,777			163,622,680			142,475,767
Property and equipment, net		4,622,446			4,690,704			4,497,502			4,558,072
Accounts receivable - securities		48,428			261,829			23,211			4,961
Federal income taxes receivable		15,766,182			19,032,604
Goodwill		5,625,354			5,625,354			5,625,354			5,625,354
Other intangible assets		958,010			958,010			958,010			958,010
Other		2,069,524			2,419,566			1,242,243			2,047,058

Total assets	$	1,921,085,211		$	1,832,078,267		$	2,023,371,362		$	1,923,161,131

Liabilities and Stockholders’ Equity
Liabilities
Unpaid losses and loss expenses	$	864,534,338		$	814,665,224		$	888,212,299		$	869,673,849
Unearned premiums		528,037,212			506,528,606			542,278,223			510,147,485
Accrued expenses		26,964,878			25,442,146			22,025,916			28,453,744
Reinsurance balances payable		2,032,722			3,882,193			2,594,034			2,116,084
Borrowings under lines of credit		35,000,000			60,000,000			85,000,000			35,000,000
Cash dividends declared to stockholders		—			3,948,484			—			4,075,234
Subordinated debentures		5,000,000			5,000,000			5,000,000			5,000,000
Accounts payable - securities		1,956,151			1,003,810			2,920,388			1,119
Income taxes payable								870,829			84,831
Due to affiliate		7,015,832			10,874,540			7,189,211			10,069,171
Other		7,992,473			1,863,363			7,719,531			7,524,095

Total liabilities		1,478,533,606			1,433,208,366			1,563,810,431			1,472,145,612

Stockholders’ Equity
Preferred stock, $.01 par value, authorized 2,000,000 shares; none issued		—			—			—			—
Class A common stock, $.01 par value, authorized 50,000,000 shares, issued 26,052,220 and 25,819,341 shares and outstanding 23,049,632 and 22,816,753 shares		260,523			258,194
Class A common stock, $.01 par value, authorized 50,000,000 shares, issued 26,299,946 and 26,203,935 shares and outstanding 23,297,358 and 23,201,347 shares								263,000			262,040
Class B common stock, $.01 par value, authorized 10,000,000 shares, issued 5,649,240 shares and outstanding 5,576,775 shares		56,492			56,492			56,492			56,492
Additionalpaid-in capital		265,680,180			261,258,423			269,888,980			268,151,601
Accumulated other comprehensive income (loss)		418,394			(14,228,059	)
Accumulated other comprehensive income								3,704,010			504,170
Retained earnings		217,362,373			192,751,208			226,874,806			223,267,573
Treasury stock, at cost		(41,226,357	)		(41,226,357	)		(41,226,357	)		(41,226,357	)

Total stockholders’ equity		442,551,605			398,869,901			459,560,931			451,015,519

Total liabilities and stockholders’ equity	$	1,921,085,211		$	1,832,078,267		$	2,023,371,362		$	1,923,161,131

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)


	Three Months Ended September 30,					Three Months Ended March 31,
	2019			2018		2020			2019
Revenues:
Net premiums earned	$	189,821,058		$	187,661,705	$	187,252,778		$	188,073,242
Investment income, net of investment expenses		7,389,749			6,620,491		7,376,284			7,048,503
Net investment (losses) gains (includes $102,311 and ($20,512) accumulated other comprehensive income reclassifications)		(369,041	)		3,463,504
Net investment (losses) gains (includes $421,835 and ($39,264) accumulated other comprehensive income reclassifications)							(10,694,843	)		18,097,113
Lease income		110,598			119,934		109,267			111,099
Installment payment fees		1,057,536			1,305,778		867,720			1,088,917
Equity in earnings of Donegal Financial Services Corporation		—			732,768		—			295,000

Total revenues		198,009,900			199,904,180		184,911,206			214,713,874

Expenses:
Net losses and loss expenses		130,743,395			140,726,106		117,246,526			123,110,656
Amortization of deferred policy acquisition costs		31,304,000			31,110,000		29,937,000			30,592,000
Other underwriting expenses		26,516,518			24,528,860		32,597,629			30,684,883
Policyholder dividends		2,446,696			1,050,200		1,842,000			2,349,648
Interest		443,179			651,768		224,330			565,292
Other expenses, net		251,228			560,260		560,550			566,371

Total expenses		191,705,016			198,627,194		182,408,035			187,868,850

Income before income tax expense		6,304,884			1,276,986
Income tax expense (includes $21,485 and ($4,308) income tax expense (benefit) from reclassification items)		1,118,505			70,630
Income before income tax (benefit) expense							2,503,171			26,845,024
Income tax (benefit) expense (includes $88,585 and ($8,245) income tax expense (benefit) from reclassification items)							(1,227,950	)		3,821,860

Net income	$	5,186,379		$	1,206,356	$	3,731,121		$	23,023,164

Earnings per common share:
Class A common stock - basic	$	0.19		$	0.04

Class A common stock - diluted	$	0.18		$	0.04
Class A common stock - basic and diluted						$	0.13		$	0.82

Class B common stock - basic and diluted	$	0.16		$	0.04	$	0.12		$	0.75

Donegal Group Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

   Three Months Ended September 30,
   2019 2018
Net income
   $ 5,186,379 $ 1,206,356
Other comprehensive income (loss), net of tax

Unrealized gain (loss) on securities:

Unrealized holding gain (loss) during the period, net of income tax expense (benefit) of $621,120 and ($609,572)
   2,336,599 (2,293,154 )
Reclassification adjustment for (gains) losses included in net income, net of income tax expense (benefit) of $21,485 and ($4,308)
   (80,826 ) 16,204


Other comprehensive income (loss)
   2,255,773 (2,276,950 )


Comprehensive income (loss)
   $ 7,442,152 $ (1,070,594 )

~~See accompanying notes to consolidated financial statements.~~

~~Donegal Group Inc. and Subsidiaries~~

~~Consolidated Statements of Income (Loss)~~

~~(Unaudited)~~

   Nine Months Ended September 30,
   2019    2018
Revenues:

Net premiums earned
   $ 566,657,613    $ 555,140,395
Investment income, net of investment expenses
   21,727,904    19,341,012
Net investment gains (includes $154,725 and ($52,828) accumulated other comprehensive income reclassifications)
   19,294,229    4,062,475
Lease income
   333,852    365,930
Installment payment fees
   3,204,130    3,959,936
Equity in earnings of Donegal Financial Services Corporation
   295,000    2,152,738




Total revenues
   611,512,728    585,022,486




Expenses:

Net losses and loss expenses
   385,361,331    433,063,019
Amortization of deferred policy acquisition costs
   92,821,000    91,354,000
Other underwriting expenses
   85,409,737    82,343,932
Policyholder dividends
   6,765,834    3,565,971
Interest
   1,311,894    1,682,200
Other expenses, net
   1,155,493    1,604,595




Total expenses
   572,825,289    613,613,717




Income (loss) before income tax expense (benefit)
   38,687,439    (28,591,231 )
Income tax expense (benefit) (includes $32,492 and ($11,094) income tax expense (benefit) from reclassification items)
   5,689,442    (10,829,654 )




Net income (loss)
   $ 32,997,997    $ (17,761,577 )




Earnings (loss) per common share:

Class A common stock - basic
   $ 1.18    $ (0.64 )




Class A common stock - diluted
   $ 1.17    $ (0.64 )




Class B common stock - basic and diluted
   $ 1.06    $ (0.59 )

~~Donegal Group Inc. and Subsidiaries~~

~~Consolidated Statements of Comprehensive Income (Loss)~~

~~(Unaudited)~~

   Nine Months Ended September 30,
   2019 2018
Net income (loss)
   $ 32,997,997 $ (17,761,577 )
Other comprehensive income (loss), net of tax

Unrealized gain (loss) on securities:

Unrealized holding gain (loss) during the period, net of income tax expense (benefit) of $3,925,853 and ($3,025,784)
   14,768,686 (11,382,714 )
Reclassification adjustment for (gains) losses included in net income (loss), net of income tax expense (benefit) of $32,492 and ($11,094)
   (122,233 ) 41,734


Other comprehensive income (loss)
   14,646,453 (11,340,980 )


Comprehensive income (loss)
   $ 47,644,450 $ (29,102,557 )


	Three Months Ended March 31,
	2020			2019
Net income	$	3,731,121		$	23,023,164
Other comprehensive income, net of tax
Unrealized gain on securities:
Unrealized holding gain during the period, net of income tax expense of $939,175 and $1,711,222		3,533,090			6,437,454
Reclassification adjustment for (gains) losses included in net income, net of income tax expense (benefit) of $88,585 and ($8,245)		(333,250	)		31,019

Other comprehensive income		3,199,840			6,468,473

Comprehensive income	$	6,930,961		$	29,491,637

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Equity

(Unaudited)

~~Nine~~Three Months Ended ~~September 30,~~March 31, 2020


	Class A Shares		Class B Shares		Class A Amount		Class B Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income		Retained Earnings			Treasury Stock			Total Stockholders’ Equity
Balance, December 31, 2019		26,203,935		5,649,240	$	262,040	$	56,492	$	268,151,601	$	504,170	$	223,267,573		$	(41,226,357	)	$	451,015,519
Issuance of common stock (stock compensation plans)		28,924		—		289		—		376,539		—		—			—			376,828
Share-based compensation		67,087		—		671		—		1,242,315		—		—			—			1,242,986
Net income		—		—		—		—		—		—		3,731,121			—			3,731,121
Cash dividends declared		—		—		—		—		—		—		(5,363	)		—			(5,363	)
Grant of stock options		—		—		—		—		118,525		—		(118,525	)		—			—
Other comprehensive income		—		—		—		—		—		3,199,840		—			—			3,199,840

Balance, March 31, 2020		26,299,946		5,649,240	$	263,000	$	56,492	$	269,888,980	$	3,704,010	$	226,874,806		$	(41,226,357	)	$	459,560,931

Three Months Ended March 31, 2019

   Class A
Shares    Class B
Shares    Class A
Amount    Class B
Amount    Additional
Paid-In Capital    Accumulated
Other
Comprehensive
(Loss) Income Retained
Earnings Treasury Stock Total
Stockholders’
Equity
Balance, December 31, 2018
   25,819,341    5,649,240    $ 258,194    $ 56,492    $ 261,258,423    $ (14,228,059 ) $ 192,751,208 $ (41,226,357 ) $ 398,869,901
Issuance of common stock (stock compensation plans)
   33,334    —         333    —      403,722    —   —   —   404,055
Share-based compensation
   —      —      —      —      442,920    —   —   —   442,920
Net income
   —      —      —      —      —      —   23,023,164 —   23,023,164
Cash dividends declared
   —      —      —      —      —      —   (4,752 ) —   (4,752 )
Grant of stock options
   —      —      —      —      144,226    —   (144,226 ) —   —
Other comprehensive income
   —      —      —      —      —      6,468,473 —   —   6,468,473












Balance, March 31, 2019
   25,852,675    5,649,240    258,527    56,492    262,249,291    (7,759,586 ) 215,625,394 (41,226,357 ) 429,203,761












Issuance of common stock (stock compensation plans)
   55,933    —      560    —      752,354    —   —   —   752,914
Share-based compensation
   60,969    —      609    —      1,218,195    —   —   —   1,218,804
Net income
   —      —      —      —      —      —   4,788,454 —   4,788,454
Cash dividends declared
   —      —      —      —      —      —   (4,032,416 ) —   (4,032,416 )
Grant of stock options
   —      —      —      —      100,485    —   (100,485 ) —   —
Other comprehensive income
   —      —      —      —      —      5,922,207 —   —   5,922,207












Balance, June 30, 2019
   25,969,577    5,649,240    259,696    56,492    264,320,325    (1,837,379 ) 216,280,947 (41,226,357 ) 437,853,724












Issuance of common stock (stock compensation plans)
   22,926    —      229    —      280,385    —   —   —   280,614
Share-based compensation
   59,717    —      598    —      1,020,018    —   —   —   1,020,616
Net income
   —      —      —      —      —      —   5,186,379 —   5,186,379
Cash dividends declared
   —      —      —      —      —      —   (4,045,501 ) —   (4,045,501 )
Grant of stock options
   —      —      —      —      59,452    —   (59,452 ) —   —
Other comprehensive income
   —      —      —      —      —      2,255,773 —   —   2,255,773












Balance, September 30, 2019
   26,052,220    5,649,240    $ 260,523    $ 56,492    $ 265,680,180    $ 418,394 $ 217,362,373 $ (41,226,357 ) $ 442,551,605

~~See accompanying notes to consolidated financial statements.~~

~~Donegal Group Inc. and Subsidiaries~~

~~Consolidated Statement of Stockholders’ Equity~~

~~(Unaudited)~~

~~Nine Months Ended September 30, 2018~~


	Class A Shares		Class B Shares		Class A Amount		Class B Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Retained Earnings			Treasury Stock			Total Stockholders’ Equity			Class A Shares		Class B Shares		Class A Amount		Class B Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Retained Earnings			Treasury Stock			Total Stockholders’ Equity
Balance, December 31, 2017		25,564,481		5,649,240	$	255,645	$	56,492	$	255,401,558	$	(2,684,275	)	$	236,893,041		$	(41,226,357	)	$	448,696,104
Issuance of common stock (stock compensation plans)		29,162		—		292		—		422,318		—			—			—			422,610
Share-based compensation		32,176		—		322		—		1,024,328		—			—			—			1,024,650
Net loss		—		—		—		—		—		—			(18,178,078	)		—			(18,178,078	)
Cash dividends declared		—		—		—		—		—		—			(8,587	)		—			(8,587	)
Grant of stock options		—		—		—		—		187,444		—			(187,444	)		—			—
Reclassification of equity unrealized gains		—		—		—		—		—		(4,918,655	)		4,918,655			—			—
Other comprehensive loss		—		—		—		—		—		(6,602,985	)		—			—			(6,602,985	)

Balance, March 31, 2018		25,625,819		5,649,240		256,259		56,492		257,035,648		(14,205,915	)		223,437,587			(41,226,357	)		425,353,714

Issuance of common stock (stock compensation plans)		63,430		—		634		—		960,139		—			—			—			960,773
Share-based compensation		—		—		—		—		536,472		—			—			—			536,472
Net loss		—		—		—		—		—		—			(789,855	)		—			(789,855	)
Cash dividends declared		—		—		—		—		—		—			(3,930,019	)		—			(3,930,019	)
Grant of stock options		—		—		—		—		133,656		—			(133,656	)		—			—
Other comprehensive loss		—		—		—		—		—		(2,461,046	)		—			—			(2,461,046	)

Balance, June 30, 2018		25,689,249		5,649,240		256,893		56,492		258,665,915		(16,666,961	)		218,584,057			(41,226,357	)		419,670,039

Balance, December 31, 2018																								25,819,341		5,649,240	$	258,194	$	56,492	$	261,258,423	$	(14,228,059	)	$	192,751,208		$	(41,226,357	)	$	398,869,901
Issuance of common stock (stock compensation plans)		27,802		—		278		—		321,349		—			—			—			321,627			33,334		—		333		—		403,722		—			—			—			404,055
Share-based compensation		16,168		—		162		—		552,928		—			—			—			553,090			—		—		—		—		442,920		—			—			—			442,920
Net income		—		—		—		—		—		—			1,206,356			—			1,206,356			—		—		—		—		—		—			23,023,164			—			23,023,164
Cash dividends declared		—		—		—		—		—		—			(3,934,135	)		—			(3,934,135	)		—		—		—		—		—		—			(4,752	)		—			(4,752	)
Grant of stock options		—		—		—		—		126,870		—			(126,870	)		—			—			—		—		—		—		144,226		—			(144,226	)		—			—
Other comprehensive loss		—		—		—		—		—		(2,276,949	)		—			—			(2,276,949	)
Other comprehensive income																								—		—		—		—		—		6,468,473			—			—			6,468,473

Balance, September 30, 2018		25,733,219		5,649,240	$	257,333	$	56,492	$	259,667,062	$	(18,943,910	)	$	215,729,408		$	(41,226,357	)	$	415,540,028
Balance, March 31, 2019																								25,852,675		5,649,240	$	258,527	$	56,492	$	262,249,291	$	(7,759,586	)	$	215,625,394		$	(41,226,357	)	$	429,203,761

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2020			2019
Cash Flows from Operating Activities:
Net income (loss)	$	32,997,997		$	(17,761,577	)
Net income							$	3,731,121		$	23,023,164

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and othernon-cash items		4,299,566			5,288,171			1,737,307			1,460,943
Net investment gains		(19,294,229	)		(4,062,475	)
Net investment losses (gains)								10,694,843			(18,097,113	)
Equity in earnings of Donegal Financial Services Corporation		(295,000	)		(2,152,738	)		—			(295,000	)
Changes in assets and liabilities:
Losses and loss expenses		49,869,114			103,307,950			18,538,450			21,854,552
Unearned premiums		21,508,606			27,087,130			32,130,738			17,174,323
Premiums receivable		(17,047,509	)		87,668			(16,331,348	)		(14,813,728	)
Deferred acquisition costs		(3,070,684	)		(4,277,025	)		(1,029,845	)		(1,731,579	)
Deferred income taxes		210,518			83,985			(2,001,451	)		962,330
Reinsurance receivable		(18,997,523	)		(24,125,183	)		(7,736,560	)		(7,335,564	)
Prepaid reinsurance premiums		(6,578,384	)		(6,504,067	)		(21,146,913	)		(5,332,159	)
Accrued investment income		(724,150	)		(613,539	)		(734,103	)		(532,403	)
Due to affiliate		(3,858,708	)		(3,577,086	)		(2,879,960	)		(2,908,940	)
Reinsurance balances payable		(1,849,471	)		(924,413	)		477,950			(1,136,290	)
Current income taxes		3,266,422			(8,660,414	)		785,998			2,872,028
Accrued expenses		1,522,732			(3,652,271	)		(6,427,828	)		(3,943,576	)
Other, net		6,479,153			310,988			1,000,247			233,485

Net adjustments		15,440,453			77,616,681			7,077,525			(11,568,691	)

Net cash provided by operating activities		48,438,450			59,855,104			10,808,646			11,454,473

Cash Flows from Investing Activities:
Purchases of fixed maturities, held to maturity		(69,297,759	)		(42,834,707	)		(19,222,869	)		(8,396,937	)
Purchases of fixed maturities, available for sale		(125,791,644	)		(88,940,126	)		(13,558,579	)		(53,176,164	)
Purchases of equity securities, available for sale		(19,055,851	)		(11,255,867	)		(5,020,901	)		(30,672	)
Maturity of fixed maturities:
Held to maturity		13,723,483			9,485,969			9,287,575			3,852,973
Available for sale		88,459,874			84,617,730			29,078,287			15,904,570
Sales of fixed maturities, available for sale		20,548,077			1,388,934			—			19,527,660
Sales of equity securities, available for sale		37,968,114			7,843,437			3,202,672			20,537,415
Net purchases of property and equipment		(147,005	)		(132,290	)
Net (purchases) sales of property and equipment								(5,905	)		1,171,305
Sale of investment in Donegal Financial Services Corporation		19,863,949			—			—			33,922,773
Dividends received from Donegal Financial Services Corporation		14,058,824			—
Net sales of short-term investments		8,122,436			5,953,868
Net purchases of short-term investments								(58,688,855	)		(24,088,831	)

Net cash used in investing activities		(11,547,502	)		(33,873,052	)
Net cash (used in) provided by investing activities								(54,928,575	)		9,224,092

Cash Flows from Financing Activities:
Cash dividends paid		(12,031,153	)		(11,714,561	)		(4,080,597	)		(3,953,236	)
Issuance of common stock		2,814,504			2,157,730			1,163,331			288,115
Borrowings under line of credit		—			1,000,000
Borrowing under lines of credit								50,000,000			—
Payments on lines of credit		(25,000,000	)		—			—			(25,000,000	)

Net cash used in financing activities		(34,216,649	)		(8,556,831	)
Net cash provided by (used in) financing activities								47,082,734			(28,665,121	)

Net increase in cash		2,674,299			17,425,221
Net increase (decrease) in cash								2,962,805			(7,986,556	)
Cash at beginning of period		52,594,461			37,833,435			49,318,930			52,594,461

Cash at end of period	$	55,268,760		$	55,258,656		$	52,281,735		$	44,607,905

Cash paid during period - Interest	$	321,585		$	937,470		$	161,830		$	325,325
Net cash paid during period - Taxes	$	2,200,000		$	—		$	—		$	—

See accompanying notes to consolidated financial statements.

DONEGAL GROUP INC. AND SUBSIDIARIES

(Unaudited)

Notes to Consolidated Financial Statements

1 - Organization

Donegal Mutual Insurance Company (“Donegal Mutual”) organized us as an insurance holding company on August 26, 1986. Our insurance subsidiaries, Atlantic States Insurance Company (“Atlantic States”), Southern Insurance Company of Virginia (“Southern”), ~~Le Mars Insurance Company (“Le Mars”),~~ the Peninsula Insurance Group (“Peninsula”), which consists of Peninsula Indemnity Company and The Peninsula Insurance Company ~~Sheboygan Falls Insurance Company (“Sheboygan”)~~ and Michigan Insurance Company (“MICO”), write property and casualty insurance exclusively through independent insurance agents in certainMid-Atlantic, Midwestern, New England and Southern states. Until March 8, 2019, we also owned 48.2% of the outstanding stock of Donegal Financial Services Corporation (“DFSC”), a grandfathered unitary savings and loan holding company that owned Union Community Bank (“UCB”), a state savings bank. Donegal Mutual owned the remaining 51.8% of the outstanding stock of DFSC.

At ~~September 30, 2019,~~March 31, 2020, we had three segments: our investment function, our personal lines of insurance and our commercial lines of insurance. The personal lines products of our insurance subsidiaries consist primarily of homeowners and private passenger automobile policies. The commercial lines products of our insurance subsidiaries consist primarily of commercial automobile, commercial multi-peril and workers’ compensation policies.

At ~~September 30, 2019,~~March 31, 2020, Donegal Mutual held approximately ~~43%~~42% of our outstanding Class A common stock and approximately84% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately ~~72%~~71% of the total voting power of our common stock. Our insurance subsidiaries and Donegal Mutual have interrelated operations due to a pooling agreement and other intercompany agreements and transactions. While each company maintains its separate corporate existence, Donegal Mutual and our insurance subsidiaries conduct business together as the Donegal Insurance Group. As such, Donegal Mutual and our insurance subsidiaries share the same business philosophy, the same management, the same employees and the same facilities and offer the same types of insurance products.

Atlantic States, our largest subsidiary, participates in a pooling agreement with Donegal Mutual. Under the pooling agreement, the two companies pool their insurance business and each company receives an allocated percentage of the pooled business. Atlantic States has an 80% share of the results of the pooled business, and Donegal Mutual has a 20% share of the results of the pooled business.

The same executive management and underwriting personnel administer products, classes of business underwritten, pricing practices and underwriting standards of Donegal Mutual and our insurance subsidiaries. In addition, as the Donegal Insurance Group, Donegal Mutual and our insurance subsidiaries share a combined business plan to achieve market penetration and underwriting profitability objectives. The products our insurance subsidiaries and Donegal Mutual market are generally complementary, thereby allowing the Donegal Insurance Group to offer a broader range of products to a given market and to expand the Donegal Insurance Group’s ability to service entire personal lines or commercial lines accounts. Distinctions within the products Donegal Mutual and our insurance subsidiaries offer relate generally to specific risk profiles targeted within similar classes of business, such as preferred tier products versus standard tier products, but we do not allocate all of the standard risk gradients to any specific company within the Donegal Insurance Group. Therefore, the underwriting profitability of the business the individual companies write directly will vary. However, because the risk characteristics of all business Donegal Mutual and Atlantic States write directly are homogenized within the underwriting pool, Donegal Mutual and Atlantic States share the underwriting results in proportion to their respective participation in the underwriting pool.

In July 2018, we consolidated the branch office operations of Peninsula into our home office operations to achieve economies of scale and enhance service levels for policyholders of Peninsula. We recorded a restructuring charge for employee termination costs associated with the Peninsula consolidation of approximately $1.9 million and paid approximately $1.5 million of these costs in 2018. We paid approximately $195,000 of these costs in the first nine months of 2019 and had an accrual of approximately $195,000 remaining at September 30, 2019. We entered into a definitive purchase agreement for the sale of Peninsula’s branch office in 2018. The sale was completed in January 2019, and we received net proceeds of $1.2 million. We recorded an impairment charge of $1.1 million in other expenses in 2018 related to this real estate transaction and included the $1.2 million fair value of the real estate we held for sale in other assets at December 31, 2018.

We and Donegal Mutual sold ~~DFSC~~Donegal Financial Services Corporation (“DFSC”) to Northwest Bancshares, Inc. (“Northwest”) on March 8, 2019, resulting in proceeds valued at approximately $85.8 million in a combination of cash and Northwest common stock. Immediately prior to the closing of the merger, DFSC paid a dividend of approximately $29.2 million to us and Donegal Mutual. As the owner of 48.2% of DFSC’s common stock, we received a dividend payment from DFSC of approximately $14.1 million and consideration from

Northwest that included a combination of cash in the amount of $20.5 million and Northwest common stock with a fair value at the closing date of $20.9 million. We recorded a gain of $12.7 million from the sale of DFSC in our results of operations for the first quarter of 2019. We sold the Northwest common stock that we received as part of the consideration during the first quarter of 2019. This transaction represented the culmination of a banking strategy that began with the formation of DFSC in 2000.

On July 18, 2013, our board of directors authorized a share repurchase program pursuant to which we have the authority to purchase up to 500,000 shares of our Class A common stock at prices prevailing from time to time in the open market subject to the provisions of applicable rules of the Securities and Exchange Commission (“SEC”) and in privately negotiated transactions. We did not purchase any shares of our Class A common stock under this program during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 or ~~2018.~~2019. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through ~~September 30, 2019.~~March 31, 2020.

2 - Basis of Presentation

Our financial information for the interim periods included in this Form10-Q Report is unaudited; however, our financial information we include in this Form10-Q Report reflects all adjustments, consisting only of normal recurring adjustments that, in the opinion of our management, are necessary for a fair presentation of our financial position, results of operations and cash flows for those interim periods. Our results of operations for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 are not necessarily indicative of the results of operations we expect for the year ending December 31, ~~2019.~~2020.

We recommend you read the interim financial statements we include in this Form10-Q Report in conjunction with the financial statements and the notes to our financial statements contained in our Annual Report on Form10-K for the year ended December 31, ~~2018.~~2019.

3 - Earnings Per Share

We have two classes of common stock, which we refer to as our Class A common stock and our Class B common stock. Our certificate of incorporation provides that whenever our board of directors declares a dividend on our Class B common stock, our board of directors shall simultaneously declare a dividend on our Class A common stock that is payable to the holders of our Class A common stock at the same time and as of the same record date at a rate that is at least 10% greater than the rate at which our board of directors declared a dividend on our Class B common stock. Accordingly, we use thetwo-class method to compute our earnings per common share. Thetwo-class method is an earnings allocation formula that determines earnings per share separately for each class of common stock based on dividends we have declared and an allocation of our remaining

undistributed earnings using a participation percentage that reflects the dividend rights of each class. The table below presents for the periods indicated a reconciliation of the numerators and denominators we used to compute basic and diluted net income per share for our Class A common stock and our Class B common stock:

   Three Months Ended September 30,
   2019    2018
   Class A    Class B    Class A    Class B
   (in thousands, except per share data)
Basic earnings per share:

Numerator:

Allocation of net income
   $ 4,269    $ 917    $ 1,006    $ 200








Denominator:

Weighted-average shares outstanding
   23,015    5,577    22,717    5,577








Basic earnings per share
   $ 0.19    $ 0.16    $ 0.04    $ 0.04








Diluted earnings per share:

Numerator:

Allocation of net income
   $ 4,269    $ 917    $ 1,006    $ 200








Denominator:

Number of shares used in basic computation
   23,015    5,577    22,717    5,577
Weighted-average shares effect of dilutive securities:

Director and employee stock options
   277    —      178    —








Number of shares used in diluted computation
   23,292    5,577    22,895    5,577








Diluted earnings per share
   $ 0.18    $ 0.16    $ 0.04    $ 0.04








   Nine Months Ended September 30,
   2019    2018
   Class A    Class B    Class A    Class B
   (in thousands, except per share data)
Basic earnings (loss) per share:

Numerator:

Allocation of net income (loss)
   $ 27,065    $ 5,933    $ (14,472 )    $ (3,290 )








Denominator:

Weighted-average shares outstanding
   22,933    5,577    22,673    5,577








Basic earnings (loss) per share
   $ 1.18    $ 1.06    $ (0.64 )    $ (0.59 )








Diluted earnings (loss) per share:

Numerator:

Allocation of net income (loss)
   $ 27,065    $ 5,933    $ (14,472 )    $ (3,290 )









Denominator:

Number of shares used in basic computation
   22,933    5,577    22,673    5,577
Weighted-average shares effect of dilutive securities:

Director and employee stock options
   183    —      —      —








Number of shares used in diluted computation
   23,116    5,577    22,673    5,577








Diluted earnings (loss) per share
   $ 1.17    $ 1.06    $ (0.64 )    $ (0.59 )


	Three Months Ended March 31,
	2020				2019
	Class A		Class B		Class A		Class B
	(in thousands, except per share data)
Basic earnings per share:
Numerator:
Allocation of net income	$	3,064	$	667	$	18,843	$	4,180

Denominator:
Weighted-average shares outstanding		23,260		5,577		22,850		5,577

Basic earnings per share	$	0.13	$	0.12	$	0.82	$	0.75

Diluted earnings per share:
Numerator:
Allocation of net income	$	3,064	$	667	$	18,843	$	4,180

Denominator:
Number of shares used in basic computation		23,260		5,577		22,850		5,577
Weighted-average shares effect of dilutive securities:
Director and employee stock options		188		—		71		—

Number of shares used in diluted computation		23,448		5,577		22,921		5,577

Diluted earnings per share	$	0.13	$	0.12	$	0.82	$	0.75

We did not include outstanding options to purchase ~~5,330,525 shares and 5,531,561~~the following number of shares of Class A common stock in our computation of diluted earnings per share ~~for the three months and nine months ended September 30, 2019~~ because the exercise price of the options exceeded the average market price of our Class A common stock during the ~~period.~~applicable periods.

We did not include outstanding options to purchase 6,731,481 shares of Class A common stock in our computation of diluted earnings per share for the three months ended September 30, 2018 because the exercise price of the options exceeded the average market price of our Class A common stock during the period. We did not include any effect of dilutive securities in the computation of diluted earnings per share for the nine months ended September 30, 2018 because we sustained a net loss for this period.


	Three Months Ended March 31,
	2020		2019
Number of options to purchase Class A shares excluded		6,196,526		8,967,857

4 - Reinsurance

Atlantic States and Donegal Mutual have participated in a pooling agreement since 1986 under which they pool ~~substantially all of~~ their direct premiums written, and Atlantic States and Donegal Mutual then share the underwriting results of the pool in accordance with the terms of the pooling agreement. Atlantic States has an 80% share of the results of the pool, and Donegal Mutual has a 20% share of the results of the pool. Donegal Mutual currently excludes from the pool its underwriting results in four Southwestern states in which Donegal Mutual markets its products together with its insurance subsidiaries as the Mountain States Insurance Group. Donegal Mutual currently plans to place the business of the Mountain States Insurance Group into the pool beginning with policies effective in 2021.

Our insurance subsidiaries and Donegal Mutual ~~implemented~~have a combined third-party reinsurance ~~program effective January 1, 2019.~~program. The coverage and parameters of the ~~fully consolidated~~ program are common to all of our insurance subsidiaries and Donegal Mutual. Our insurance subsidiaries use several different reinsurers, all of which have an A.M. Best rating ofA- (Excellent) or better or, with respect to foreign reinsurers, have a financial condition that, in the opinion of our management, is equivalent to a company with at least anA- rating from A.M. Best. The following information describes the external reinsurance our insurance subsidiaries have in place for ~~2019:~~2020:

excess of loss reinsurance, under which the losses of Donegal Mutual and our insurance subsidiaries are automatically reinsured, through a series of contracts, over a set retention of ~~$1.0 million for property losses and a retention of~~ $2.0 ~~million for casualty losses (including workers’ compensation losses);~~million; and

catastrophe reinsurance, under which Donegal Mutual and our insurance subsidiaries recover, through a series of reinsurance agreements, 100% of an accumulation of many losses resulting from a single event, including natural disasters, over a set retention of ~~$10.0 million and after exceeding an annual aggregate deductible of $1.2~~$15.0 million up to aggregate losses of ~~$190.0~~$185.0 million per occurrence.

~~Our insurance subsidiaries and Donegal Mutual also purchase facultative reinsurance to cover exposures in excess of the covered limits of their third-party reinsurance agreements.~~

In addition to the pooling agreement and third-party reinsurance, our insurance subsidiaries have a catastrophe reinsurance agreement with Donegal Mutual, under which each of our insurance subsidiaries recovers 100% of an accumulation of multiple losses resulting from a single event, including natural disasters, over a set retention of $2.0 million up to aggregate losses of ~~$8.0~~$13.0 million per occurrence. The agreement also provides additional coverage for an accumulation of losses from a single event including a combination of our insurance subsidiaries over a combined retention of $5.0 million.

Our insurance subsidiaries and Donegal Mutual also purchase facultative reinsurance to cover certain exposures, including property exposures that exceeded the limits provided by their respective treaty reinsurance.

5 - Investments

The amortized cost and estimated fair values of our fixed maturities at ~~September 30, 2019~~March 31, 2020 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)								(in thousands)
Held to Maturity
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	91,485	$	2,336	$	47	$	93,774	$	81,198	$	4,589	$	—	$	85,787
Obligations of states and political subdivisions		181,575		15,124		86		196,613		214,108		15,793		89		229,812
Corporate securities		151,654		8,281		353		159,582		161,681		5,041		4,199		162,523
Mortgage-backed securities		34,175		623		25		34,773		30,170		1,424		—		31,594

Totals	$	458,889	$	26,364	$	511	$	484,742	$	487,157	$	26,847	$	4,288	$	509,716


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)								(in thousands)
Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	19,325	$	128	$	7	$	19,446	$	15,850	$	571	$	—	$	16,421
Obligations of states and political subdivisions		57,178		1,990		3		59,165		61,607		1,868		135		63,340
Corporate securities		146,644		4,295		158		150,781		152,968		2,622		2,045		153,545
Mortgage-backed securities		327,645		2,902		838		329,709		312,136		9,141		120		321,157

Totals	$	550,792	$	9,315	$	1,006	$	559,101	$	542,561	$	14,202	$	2,300	$	554,463

At ~~September 30, 2019,~~March 31, 2020, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of ~~$170.9~~$195.5 million and an amortized cost of ~~$160.4~~$184.3 million. Our holdings at ~~September 30, 2019~~March 31, 2020 also included special revenue bonds with an aggregate fair value of ~~$84.9~~$97.7 million and an amortized cost of ~~$78.4~~$91.4 million. With respect to both categories of those bonds at ~~September 30, 2019,~~March 31, 2020, we held no securities of any issuer that comprised more than 10% of our holdings of either bond category. Education bonds and water and sewer utility bonds represented ~~45%~~42% and ~~34%~~38%, respectively, of our total investments in special revenue bonds based on the carrying values of these investments at ~~September 30, 2019.~~March 31, 2020. Many of the issuers of the special revenue bonds we held at ~~September 30, 2019~~March 31, 2020 have the authority to impose ad valorem taxes. In that respect, many of the special revenue bonds we held at ~~September 30, 2019~~March 31, 2020 are similar to general obligation bonds.

The amortized cost and estimated fair values of our fixed maturities at December 31, ~~2018~~2019 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)								(in thousands)
Held to Maturity
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	76,222	$	175	$	1,087	$	75,310	$	82,916	$	1,803	$	69	$	84,650
Obligations of states and political subdivisions		159,292		8,237		704		166,825		204,634		14,237		288		218,583
Corporate securities		127,010		396		4,391		123,015		156,398		8,275		333		164,340
Mortgage-backed securities		40,274		64		450		39,888		32,146		611		16		32,741

Totals	$	402,798	$	8,872	$	6,632	$	405,038	$	476,094	$	24,926	$	706	$	500,314


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)
Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	45,188	$	25	$	1,003	$	44,210
Obligations of states and political subdivisions		73,761		1,762		307		75,216
Corporate securities		140,689		203		3,059		137,833
Mortgage-backed securities		275,475		149		6,325		269,299

Totals	$	535,113	$	2,139	$	10,694	$	526,558


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)
Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	19,302	$	82	$	19	$	19,365
Obligations of states and political subdivisions		55,162		1,641		7		56,796
Corporate securities		154,946		4,477		180		159,243
Mortgage-backed securities		327,429		2,857		738		329,548

Totals	$	556,839	$	9,057	$	944	$	564,952

At December 31, ~~2018,~~2019, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of ~~$157.7~~$182.0 million and an amortized cost of ~~$152.2~~$172.3 million. Our holdings also included special revenue bonds with an aggregate fair value of ~~$84.3~~$93.4 million and an amortized cost of ~~$80.9~~$87.5 million. With respect to both categories of bonds, we held no securities of any issuer that comprised more than 10% of that category at December 31, ~~2018.~~2019. Education bonds and water and sewer utility bonds represented ~~49%~~44% and ~~29%~~35%, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, ~~2018.~~2019. Many of the issuers of the special revenue bonds we held at December 31, ~~2018~~2019 have the authority to impose ad valorem taxes. In that respect, many of the special revenue bonds we held are similar to general obligation bonds.

We made reclassifications from available for sale to held to maturity of certain fixed maturities at fair value on November 30, 2013. We segregated within accumulated other comprehensive ~~loss~~income the net unrealized losses of $15.1 million arising prior to the November 30, 2013 reclassifications. We are amortizing this balance over the remaining life of the related securities as an adjustment to yield in a manner consistent with the accretion of discount on the same fixed maturities. We recorded amortization of ~~$870,186~~$260,368 and ~~$912,229~~$270,543 in other comprehensive income ~~(loss)~~ during the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, net unrealized losses of ~~$7.8~~$7.2 million and ~~$8.6~~$7.5 million, respectively, remained within accumulated other comprehensive ~~income (loss).~~income.

We show below the amortized cost and estimated fair value of our fixed maturities at ~~September 30, 2019~~March 31, 2020 by contractual maturity. Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)				(in thousands)
Held to maturity
Due in one year or less	$	22,801	$	22,881	$	32,274	$	32,482
Due after one year through five years		72,894		75,680		84,232		88,324
Due after five years through ten years		179,648		189,376		184,263		191,792
Due after ten years		149,371		162,032		156,218		165,524
Mortgage-backed securities		34,175		34,773		30,170		31,594

Total held to maturity	$	458,889	$	484,742	$	487,157	$	509,716

Available for sale
Due in one year or less	$	16,975	$	17,152	$	33,593	$	33,619
Due after one year through five years		90,226		92,564		95,836		97,160
Due after five years through ten years		100,580		103,705		89,588		90,691
Due after ten years		15,366		15,971		11,408		11,836
Mortgage-backed securities		327,645		329,709		312,136		321,157

Total available for sale	$	550,792	$	559,101	$	542,561	$	554,463

The cost and estimated fair values of our equity securities at ~~September 30,~~March 31, 2020 were as follows:


	Cost		Gross Gains		Gross Losses		Estimated Fair Value
	(in thousands)
Equity securities	$	42,523	$	6,815	$	3,159	$	46,179

The cost and estimated fair values of our equity securities at December 31, 2019 were as follows:

   Cost    Gross Gains    Gross Losses    Estimated Fair
Value
   (in thousands)
Equity securities
   $ 43,407    $ 10,078    $ 1,386    $ 52,099
The cost and estimated fair values of our equity securities at December 31, 2018 were as follows:

   Cost    Gross Gains    Gross Losses    Estimated Fair
Value
   (in thousands)
Equity securities
   $ 40,943    $ 4,818    $ 2,094    $ 43,667


	Cost		Gross Gains		Gross Losses		Estimated Fair Value
	(in thousands)
Equity securities	$	43,419	$	12,180	$	121	$	55,478

Gross investment gains and losses before applicable income taxes for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,				Three Months Ended March 31,
	2019			2018			2019		2018		2020			2019
	(in thousands)						(in thousands)				(in thousands)
Gross investment gains:
Fixed maturities	$	107		$	5		$	479	$	16	$	423		$	358
Equity securities		721			2,976			8,293		6,246		431			5,986
Investment in affiliate		—			—			12,662		—		—			12,662

		828			2,981			21,434		6,262		854			19,006

Gross investment losses:
Fixed maturities		4			25			324		70		1			318
Equity securities		1,193			(508	)		1,816		2,130		11,548			591

		1,197			(483	)		2,140		2,200		11,549			909

Net investment (losses) gains	$	(369	)	$	3,464		$	19,294	$	4,062	$	(10,695	)	$	18,097

We recognized ~~$6.7 million~~$430,676 of gains and ~~$1.2~~$8.5 million of losses on equity securities we held at ~~September 30,~~March 31, 2020 in net investment losses for the three months ended March 31, 2020. We recognized $6.0 million of gains and $7,040 of losses on equity securities we held at March 31, 2019 in net investment gains for the ~~nine~~three months ended ~~September 30,~~March 31, 2019. ~~We recognized $3.9 million of gains and $1.6 million of losses on equity securities held at September 30, 2018 in net investment gains for the nine months ended September 30, 2018.~~

We held fixed maturities with unrealized losses representing declines that we considered temporary at ~~September 30, 2019~~March 31, 2020 as follows:


	Less Than 12 Months				More Than 12 Months				Less Than 12 Months				More Than 12 Months
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)								(in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	3,466	$	34	$	6,429	$	20
Obligations of states and political subdivisions		4,582		86		2,321		3	$	11,918	$	224	$	—	$	—
Corporate securities		14,152		179		25,113		332		111,062		4,957		11,196		1,287
Mortgage-backed securities		18,686		75		89,643		788		5,681		59		4,287		61

Totals	$	40,886	$	374	$	123,506	$	1,143	$	128,661	$	5,240	$	15,483	$	1,348

We held fixed maturities with unrealized losses representing declines that we considered temporary at December 31, ~~2018~~2019 as follows:


	Less Than 12 Months				More Than 12 Months				Less Than 12 Months				More Than 12 Months
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)								(in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	26,342	$	166	$	54,900	$	1,924	$	7,461	$	46	$	5,395	$	42
Obligations of states and political subdivisions		28,322		477		21,560		534		23,339		293		2,327		2
Corporate securities		149,270		4,483		59,397		2,968		19,363		263		18,803		250
Mortgage-backed securities		82,594		913		181,379		5,862		28,507		56		74,089		698

Totals	$	286,528	$	6,039	$	317,236	$	11,288	$	78,670	$	658	$	100,614	$	992

We make estimates concerning the valuation of our investments and the recognition of other-than-temporary declines in the value of our investments. For equity securities, we measure investments at fair value, and we recognize changes in fair value in our results of operations. With respect to a debt security that is in an unrealized loss position, we first assess if we intend to sell the debt security. If we determine we intend to sell the debt security, we recognize the impairment loss in our results of operations. If we do not intend to sell the debt security, we determine whether it is more likely than not that we will be required to sell the debt security prior to recovery. If we determine it is more likely than not that we will be required to sell the debt security prior to recovery, we recognize the impairment loss in our results of operations. If we determine it is more likely than not that we will not be required to sell the debt security prior to recovery, we then evaluate whether a credit loss has occurred with respect to that security. We determine whether a credit loss has occurred by comparing the amortized cost of the debt security to the present value of the cash flows we expect to collect. If we expect a cash flow shortfall, we consider that a credit loss has occurred. If we determine that a credit loss has occurred, we consider the impairment to be other than temporary. We then recognize the amount of the impairment loss related to the credit loss in our results of operations, and we recognize the remaining portion of the impairment loss in our other comprehensive income, net of applicable taxes. In addition, we may write down securities in an unrealized loss position based on a number of other factors, including when the fair value of an investment is significantly below its cost, when the financial condition of the issuer of a security has deteriorated, the occurrence of industry, issuer or geographic events that have negatively impacted the value of a security and rating agency downgrades. We held ~~131~~141 debt securities that were in an unrealized loss position at ~~September 30, 2019.~~March 31, 2020. Based upon our analysis of general market conditions and underlying factors impacting these debt securities, we considered these declines in value to be temporary.

We amortize premiums and discounts on debt securities over the life of the security as an adjustment to yield using the effective interest method. We compute realized investment gains and losses using the specific identification method.

We amortize premiums and discounts on mortgage-backed debt securities using anticipated prepayments.

6 - Segment Information

We evaluate the performance of our personal lines and commercial lines segments based upon the underwriting results of our insurance subsidiaries using statutory accounting principles (“SAP”) that various state insurance departments prescribe or permit. Our management uses SAP to measure the performance of our insurance subsidiaries instead of United States generally accepted accounting principles (“GAAP”). SAP financial measures are considerednon-GAAP financial measures under applicable SEC rules because they include or exclude certain items that the most comparable GAAP financial measures do not ordinarily include or exclude.

Financial data by segment for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ is as follows:

   Three Months Ended September 30,
   2019    2018
   (in thousands)
Revenues:

Premiums earned:

Commercial lines
   $ 98,324    $ 84,251
Personal lines
   91,497    103,410




Premiums earned
   189,821    187,661
Net investment income
   7,390    6,620
Investment (losses) gains
   (369 )    3,464
Equity in earnings of DFSC
   —      733
Other
   1,168    1,426




Total revenues
   $ 198,010    $ 199,904




Income before income tax expense:

Underwriting income (loss):

Commercial lines
   $ 2,521    $ 2,125
Personal lines
   (3,312 )    (12,210 )




SAP underwriting loss
   (791 )    (10,085 )
GAAP adjustments
   (399 )    332




GAAP underwriting loss
   (1,190 )    (9,753 )
Net investment income
   7,390    6,620
Investment (losses) gains
   (369 )    3,464
Equity in earnings of DFSC
   —      733
Other
   474    213




Income before income tax expense
   $ 6,305    $ 1,277


	Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2020			2019
	(in thousands)						(in thousands)
Revenues:
Premiums earned:
Commercial lines	$	284,593		$	251,029		$	101,775		$	91,481
Personal lines		282,065			304,111			85,478			96,592

Premiums earned		566,658			555,140			187,253			188,073
Net investment income		21,728			19,341			7,376			7,049
Investment gains		19,294			4,062
Investment (losses) gains								(10,695	)		18,097
Equity in earnings of DFSC		295			2,153			—			295
Other		3,538			4,326			977			1,200

Total revenues	$	611,513		$	585,022		$	184,911		$	214,714

Income (loss) before income tax expense (benefit):
Income before income tax expense:
Underwriting income (loss):
Commercial lines	$	4,946		$	(17,935	)	$	(566	)	$	(1,688	)
Personal lines		(10,077	)		(42,358	)		4,811			2,473

SAP underwriting loss		(5,131	)		(60,293	)
SAP underwriting income								4,245			785
GAAP adjustments		1,431			5,106			1,385			551

GAAP underwriting loss		(3,700	)		(55,187	)
GAAP underwriting income								5,630			1,336
Net investment income		21,728			19,341			7,376			7,049
Investment gains		19,294			4,062
Investment (losses) gains								(10,695	)		18,097
Equity in earnings of DFSC		295			2,153			—			295
Other		1,070			1,040			192			68

Income (loss) before income tax expense (benefit)	$	38,687		$	(28,591	)
Income before income tax (benefit) expense							$	2,503		$	26,845

7 - Borrowings

Lines of Credit

In March 2019, we terminated our previous credit agreement with Manufacturers and Traders Trust Company (“M&T”) and entered into a new credit agreement with M&T. The new credit agreement relates to a $30.0 million unsecured revolving line of credit. The line of credit expires in July 2020. At ~~September 30, 2019,~~March 31, 2020, we had no outstanding borrowings from M&T and had the ability to borrow up to $30.0 million at interest rates equal to M&T’s current prime rate or the then-current LIBOR rate plus 2.25%. We pay a fee of 0.15% per annum on the loan commitment amount regardless of usage. The credit agreement requires our compliance with certain covenants. These covenants include minimum levels of our net worth, leverage ratio, statutory surplus and the A.M. Best ratings of our insurance subsidiaries. In addition, Atlantic States has guaranteed our payment obligations under the new credit agreement. WeWith the exception of a requirement that we not incur any additional indebtedness beyond that which existed as of March 2019 or pursuant to the credit agreement with M&T, we complied with ~~all~~the requirements of the credit agreement during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. M&T waived the additional indebtedness requirement prior to Atlantic States issuing additional debt to the Federal Home Loan Bank (“FHLB”) of Pittsburgh in March 2020.

Atlantic States is a member of the FHLB of Pittsburgh. Through its membership, Atlantic States has the ability to issue debt to the FHLB of Pittsburgh in exchange for cash advances. In August 2019, Atlantic States ~~repaid~~exchanged a variable-rate cash advance of $35.0 million that was due in March 2020 ~~and issued debt to the FHLB of Pittsburgh in exchange~~ for a fixed-rate cash advance of $35.0 million that was outstanding at ~~September 30, 2019.~~March 31, 2020. Atlantic States incurred a~~pre-payment~~ penalty of $176,000 related to the early ~~repayment~~termination of its previous cash advance. The new cash advance carries a fixed interest rate of 1.74% and is due in August 2024. In March 2020, Atlantic States Insurance Company issued $50.0 million of debt to the FHLB of Pittsburgh in exchange for a cash advance in the same amount

that was outstanding at March 31, 2020. The debt carries a fixed interest rate of 0.83% and is due in March 2021. Atlantic States obtained this contingent liquidity funding in light of uncertainty surrounding the economic impact of theCOVID-19 pandemic. The table below presents the amount of FHLB of Pittsburgh stock Atlantic States purchased, collateral pledged and assets related to Atlantic States’ membership in the FHLB of Pittsburgh at ~~September 30, 2019.~~March 31, 2020.

FHLB of Pittsburgh stock purchased and owned
   $ 1,639,200
Collateral pledged, at par (carrying value $37,535,059)
   37,635,763
Borrowing capacity currently available
   1,428,241


FHLB of Pittsburgh stock purchased and owned	$	3,639,200
Collateral pledged, at par (carrying value $107,645,543)		106,140,378
Borrowing capacity currently available		21,278,660

Subordinated Debentures

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

8 - Share–Based Compensation

We measure all share-based payments to employees, including grants of stock options, and use a fair-value-based method for the recording of related compensation expense in our results of operations. In determining the expense we record for stock options granted to directors and employees of our subsidiaries and affiliates, we estimate the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The significant assumptions we utilize in applying the Black-Scholes option pricing model are the risk-free interest rate, the expected term, the dividend yield and the expected volatility.

We charged compensation expense related to our stock compensation plans against income before income taxes of ~~$247,301~~$330,304 and ~~$317,526~~$442,653 for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, with a corresponding income tax benefit of ~~$51,933~~$69,364 and $66,680, respectively. We charged compensation expense related to our stock compensation plans against income before income taxes of $1.1 million and $1.4 million for the nine months ended September 30, 2019 and 2018, respectively, with a corresponding income tax benefit of $233,851 and $285,578,$92,957, respectively. At ~~September 30, 2019,~~March 31, 2020, we had ~~$1.3~~$1.6 million of unrecognized compensation expense related to nonvested share-based compensation granted under our stock compensation plans that we expect to recognize over a weighted average period of approximately ~~1.5years.~~1.7years.

We received cash from option exercises under all stock compensation plans during the three months ended ~~September 30, 2019 and 2018~~March 31, 2020 of ~~$772,969and 217,112, respectively.~~$912,388. We did not receive any cash from option exercises during the three months ended March 31, 2019. We realized actual tax benefits for the tax deductions related to those option exercises of ~~$22,414and $2,516~~$14,657and $0 for the three months ended ~~September 30,~~March 31, 2020 and 2019, and 2018, respectively. We received cash from option exercises under all stock compensation plans during the nine months ended September 30, 2019 and 2018 of $1.6 million and $695,762, respectively. We realized actual tax benefits for the tax deductions related to those option exercises of $38,376and $21,319 for the nine months ended September 30, 2019 and 2018, respectively.

9 - Fair Value Measurements

We account for financial assets using a framework that establishes a hierarchy that ranks the quality and reliability of the inputs, or assumptions, we use in the determination of fair value, and we classify financial assets and liabilities carried at fair value in one of the following three categories:

Level 1 – quoted prices in active markets for identical assets and liabilities;

Level 2 – directly or indirectly observable inputs other than Level 1 quoted prices; and

Level 3 – unobservable inputs not corroborated by market data.

For investments that have quoted market prices in active markets, we use the quoted market price as fair value and include these investments in Level 1 of the fair value hierarchy. We classify publicly-traded equity securities as Level 1. When quoted market prices in active markets are not available, we base fair values on quoted market prices of comparable instruments or price estimates we obtain from independent pricing services and include these investments in Level 2 of the fair value hierarchy. We classify our fixed maturity investments as Level 2. Our fixed maturity investments consist of U.S. Treasury securities and obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, corporate securities and mortgage-backed securities.

We present our investments inavailable-for-sale fixed maturity and equity securities at estimated fair value. The estimated fair value of a security may differ from the amount that could be realized if we sold the security in a forced transaction. In addition, the valuation of fixed maturity investments is more subjective when markets are less liquid, increasing the potential

that the estimated fair value does not reflect the price at which an actual transaction would occur. We utilize nationally recognized independent pricing services to estimate fair values or obtain market quotations for substantially all of our fixed maturity and equity investments. These pricing services utilize market quotations for fixed maturity and equity securities that have quoted prices in active markets. For fixed maturity securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements based predominantly on observable market inputs. The pricing services do not use broker quotes in determining the fair values of our investments. Our investment personnel review the estimates of fair value the pricing services provide to verify that the estimates we obtain from the pricing services are representative of fair

values based upon our investment personnel’s general knowledge of the market, their research findings related to unusual fluctuations in value and their comparison of such values to execution prices for similar securities. Our investment personnel regularly monitor the market, current trading ranges for similar securities and the pricing of specific investments. Our investment personnel review all pricing estimates that we receive from the pricing services against their expectations with respect to pricing based on fair market curves, security ratings, interest rates, security types and recent trading activity. Our investment personnel periodically review documentation with respect to the pricing services’ pricing methodology that they obtain to determine if the primary pricing sources, market inputs and pricing frequency for various security types are reasonable. At ~~September 30, 2019,~~March 31, 2020, we received two estimates per security from the pricing services, and we priced substantially all of our Level 1 and Level 2 investments using those prices. In our review of the estimates the pricing services provided at ~~September 30, 2019,~~March 31, 2020, we did not identify any material discrepancies, and we did not make any adjustments to the estimates the pricing services provided.

We present our cash and short-term investments at estimated fair value. We classify these items as Level 1.

The carrying values we report in our balance sheet for premium receivables and reinsurance receivables and payables for premiums and paid losses and loss expenses approximate their fair values. The carrying amounts we report in our balance sheets for our subordinated debentures and borrowings under lines of credit approximate their fair values. We classify these items as Level 3.

We evaluate our assets and liabilities to determine the appropriate level at which to classify them for each reporting period.

The following table presents our fair value measurements for our investments inavailable-for-sale fixed maturity and equity securities at ~~September 30, 2019:~~March 31, 2020:


	Fair Value Measurements Using								Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
			(in thousands)						(in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	19,446	$	—	$	19,446	$	—	$	16,421	$	—	$	16,421	$	—
Obligations of states and political subdivisions		59,165		—		59,165		—		63,340		—		63,340		—
Corporate securities		150,781		—		150,781		—		153,545		—		153,545		—
Mortgage-backed securities		329,709		—		329,709		—		321,157		—		321,157		—
Equity securities		52,099		49,746		2,353		—		46,179		41,826		4,353		—

Total investments in the fair value hierarchy	$	611,200	$	49,746	$	561,454	$	—	$	600,642	$	41,826	$	558,816	$	—

The following table presents our fair value measurements for our investments inavailable-for-sale fixed maturity and equity securities at December 31, ~~2018:~~2019:

   Fair Value Measurements Using
   Fair Value    Quoted Prices in
Active Markets
for Identical
Assets (Level 1)    Significant
Other
Observable
Inputs (Level 2)    Significant
Unobservable
Inputs (Level 3)
      (in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies
   $ 44,210    $ —      $ 44,210    $ —
Obligations of states and political subdivisions
   75,216    —      75,216    —
Corporate securities
   137,833    —      137,833    —
Mortgage-backed securities
   269,299    —      269,299    —
Equity securities
   30,675    28,351    2,324    —








Total investments in the fair value hierarchy
   557,233    28,351    528,882    —








Investment measured at net asset value
   12,992    —      —      —








Totals
   $ 570,225    $ 28,351    $ 528,882    $ —


	Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	19,364	$	—	$	19,364	$	—
Obligations of states and political subdivisions		56,796		—		56,796		—
Corporate securities		159,243		—		159,243		—
Mortgage-backed securities		329,548		—		329,548		—
Equity securities		55,478		53,124		2,354		—

Totals	$	620,429	$	53,124	$	567,305	$	—

10 - Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief and Security Act (the “CARES Act”) was signed into law. The CARES Act amended net operating loss provisions in effect prior to its enactment. The CARES Act allows for the carryback of losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021 to each of the five taxable years preceding the taxable year of such loss. As a result, we will file amended tax returns to carry back net operating losses from taxable year 2018 to past tax years. We recorded a tax benefit of $1.6 million in the first quarter of 2020 in anticipation of a refund of taxes we paid in prior years as a result of the carryback.

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, we had no material unrecognized tax benefits or accrued interest and penalties. Tax years 2016 through ~~2018~~2019 remained open for examination at ~~September 30, 2019.~~March 31, 2020. We provide a valuation allowance when we believe it is more likely than not that we will not realize some portion of our tax assets. We established a valuation allowance of ~~$264,467 related to a portion of the net operating loss carryforward of Le Mars at January 1, 2004 and a valuation allowance of $8.1~~$7.5 million for our net state operating loss carryforward. We have determined that we are not required to establish a valuation allowance for our other deferred tax assets of ~~$25.2~~$25.0 million and ~~$32.4~~$26.1 million at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, because it is more likely than not that we will realize these deferred tax assets through reversals of existing temporary differences, future taxable income and the implementation of tax planning strategies.

Our deferred tax assets include a net operating loss carryforward of $1.2 million related to Le Mars, which will begin to expire in 2020 if not previously utilized. This carryforward is subject to an annual limitation of approximately $376,000.

11 - Liability for Losses and Loss Expenses

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

We summarize activity in our insurance subsidiaries’ liability for losses and loss expenses as follows:


	Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2020			2019
	(in thousands)						(in thousands)
Balance at January 1	$	814,665		$	676,672		$	869,674		$	814,665
Less reinsurance recoverable		(339,267	)		(293,271	)		(362,768	)		(339,267	)

Net balance at January 1		475,398			383,401			506,906			475,398

Incurred related to:
Current year		393,301			404,150			121,551			127,117
Prior years		(7,940	)		28,913			(4,304	)		(4,006	)

Total incurred		385,361			433,063			117,247			123,111

Paid related to:
Current year		197,234			214,825			39,689			43,232
Prior years		157,691			140,806			68,050			66,305

Total paid		354,925			355,631			107,739			109,537

Net balance at end of period		505,834			460,833			516,414			488,972
Plus reinsurance recoverable		358,700			319,147			371,798			347,548

Balance at end of period	$	864,534		$	779,980		$	888,212		$	836,520

Our insurance subsidiaries recognized a ~~(decrease) increase~~decrease in their liability for losses and loss expenses of prior years of ~~($7.9 million)and $28.9~~$4.3 millionand $4.0 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ 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 2020 development represented 0.8% of the December 31, 2019 net carried reserves and resulted primarily from lower-than-expected severity in nearly all lines of business, with the exception of modest higher-than-expected severity in homeowners and commercial automobile. The majority of the 2020 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States. The 2019 development represented ~~1.7%~~0.8% of the December 31, 2018 net carried reserves and resulted primarily from lower-than-expected severity in the workers’ compensation line of business. The majority of the 2019 development related to decreases in the liability for losses and loss expenses of prior years for Michigan. During the first quarter of 2018, our insurance subsidiaries received new information on previously-reported commercial automobile and personal automobile claims that led our insurance subsidiaries to conclude that their prior actuarial assumptions did not fully anticipate recent changes in severity and reporting trends. Our insurance subsidiaries have encountered increasing difficulties in projecting the ultimate severity of automobile losses over recent accident years, which our insurance subsidiaries attribute to worsening litigation trends and an increased delay in the reporting to our insurance subsidiaries of information with respect to the severity of claims. As a result, our insurance subsidiaries’ actuaries increased their projections of the ultimate cost of our insurance subsidiaries’ prior-year personal automobile and commercial automobile losses, and our insurance subsidiaries added $13.0 million to their reserves for personal automobile and $19.1 million to their reserves for commercial automobile for accident years prior to 2018 at September 30, 2018. The 2018 development represented 7.5% of the December 31, 2017 net carried reserves and resulted primarily from higher-than-expected severity in the personal automobile and commercial automobile lines of business, offset by lower-than-expected severity in the workers’ compensation line of business, in accident years prior to 2018. The majority of the 2018 development related to increases in the liability for losses and loss expenses of prior years for Atlantic States and Southern.

Short-duration contracts are contracts for which our insurance subsidiaries receive premiums that they recognize as revenue over the period of the contract in proportion to the amount of insurance protection our insurance subsidiaries provide. Our insurance subsidiaries consider the policies they issue to be short-duration contracts. We consider the material lines of business of our insurance subsidiaries to be personal automobile, homeowners, commercial automobile, commercial multi-peril and workers’ compensation.

Our insurance subsidiaries determine incurred but not reported (“IBNR”) reserves by subtracting the cumulative loss and loss expense amounts our insurance subsidiaries have paid and the case reserves our insurance subsidiaries have established at the balance sheet date from their actuaries’ estimate of the ultimate cost of losses and loss expenses. Accordingly, the IBNR reserves of our insurance subsidiaries include their actuaries’ projections of the cost of unreported claims as well as their actuaries’ projected development of case reserves on known claims and reopened claims. Our insurance subsidiaries’ methodology for estimating IBNR reserves has been in place for many years, and their actuaries made no significant changes to that methodology during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

The actuaries for our insurance subsidiaries generally prepare an initial estimate for ultimate losses and loss expenses for the current accident year by multiplying earned premium by an expected loss ratio for each line of business our insurance subsidiaries write. Expected loss ratios represent the actuaries’ expectation of losses at the time our insurance subsidiaries price and write their policies and before the emergence of any actual claims experience. The actuaries determine an expected loss ratio by analyzing historical experience and adjusting for loss cost trends, loss frequency and severity trends, premium rate level changes, reported and paid loss emergence patterns and other known or observed factors.

The actuaries use a variety of actuarial methods to estimate the ultimate cost of losses and loss expenses. These methods include paid loss development, incurred loss development and the Bornhuetter-Ferguson method. The actuaries base their selection of a point estimate on a judgmental weighting of the estimates each of these methods produce.

The actuaries consider loss frequency and severity trends when they develop expected loss ratios and point estimates. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors that affect loss frequency include changes in weather patterns and economic activity. Factors that affect loss severity include changes in policy limits, reinsurance retentions, inflation rates and judicial interpretations.

Our insurance subsidiaries create a claim file when they receive notice of an actual demand for payment, an event that may lead to a demand for payment or when they otherwise determine that a demand for payment could potentially lead to a future demand for payment on another coverage under the same policy or another policy they have issued. In recent years, our insurance subsidiaries have noted an increase in the period of time between the occurrence of a casualty loss event and the date at which they receive notice of a liability claim. Changes in the length of time between the loss occurrence date and the claim reporting date affect the actuaries’ ability to predict loss frequency accurately and the amount of IBNR reserves our insurance subsidiaries require.

Our insurance subsidiaries generally create a claim file for a policy at the claimant level by type of coverage and generally recognize one count for each claim event. In certain lines of business where it is common for multiple parties to claim damages arising from a single claim event, our insurance subsidiaries recognize one count for each claimant involved in the event. Atlantic States recognizes one count for each claim event, or claimant involved in a multiple-party claim event, related to losses Atlantic States assumes through its participation in its pooling agreement with Donegal Mutual. Our insurance subsidiaries accumulate the claim counts and report them by line of business.

12 - Impact of New Accounting Standards

In February 2016, the FASB issued guidance that requires lessees to recognize leases, including operating leases, on the lessee’s balance sheet, unless a lease is considered a short-term lease. This guidance also requires entities to make new judgments to identify leases. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018 and permits early adoption. Our adoption of this guidance on January 1, 2019 did not have a significant impact on our financial position, results of operations or cash flows.

In June 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. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. We are in the process of evaluating the impact of the adoption of this guidance on our financial position, results of operations and cash flows.

In January 2017, the FASB issued guidance that simplifies the measurement of goodwill by modifying the goodwill impairment test previous guidance required. The guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize impairment for the amount by which the reporting unit’s carrying amount exceeds its fair value. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019 and permits early adoption. We ~~do not expect the~~early adopted this guidance in 2019. The adoption of this guidance todid not have a significant impact on our financial position, results of operations or cash flows.

In August 2018, the FASB issued guidance that modifies disclosure requirements related to fair value measurements. The guidance removes the requirements to disclose the amounts of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019 and permits early adoption. We early adopted this guidance in 2019. The adoption of this guidance on January 1, 2019 did not have a significant impact on our financial position, results of operations or cash flows.

In June 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) ofRegulation S-K, to annual and interim reporting periods beginning after December 15, 2022 from December 15, 2019. We are a smaller reporting company and are in the process of evaluating the impact of the adoption of this guidance on our financial position, results of operations and cash flows.

In December 2019, the FASB issued guidance that simplifies accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance is effective January 1, 2021, using the retrospective method or modified retrospective method for certain changes and the prospective method for all other changes, and permits early adoption. We are in the process of evaluating the impact of the adoption of this guidance on our financial position, results of operations and cash flows.

13 - Risks and Uncertainties

Beginning in March 2020, theCOVID-19 pandemic resulted in significant disruptions in economic activity throughout our operating regions.COVID-19 concerns contributed to substantial declines in equity markets and a sharp decrease in market interest rates. We cannot predict at this time the ultimate impact that the economic and financial disruption related to the ongoingCOVID-19 pandemic or any other future pandemic will have on our financial position, results of operations and cash flows. The impact of the following risks and uncertainties could be material:

the revenues of our insurance subsidiaries may decrease as a result of reduced demand for their insurance products as the ongoing economic disruption adversely impacts current and potential insurance customers;

our insurance subsidiaries may incur an increase in their losses and loss expenses in certain lines of business as a result ofCOVID-19 and related economic disruption, and such losses and loss expenses may exceed the reserves our insurance subsidiaries have established or may establish in the future;

our insurance subsidiaries may incur increased costs related to legal disputes over policy coverages or exclusions and their defense against litigation related toCOVID-19;

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;

legislative, judicial and regulatory actions may require our insurance subsidiaries to reduce or refund premiums, suspend cancellation of policies fornon-payment of premiums or otherwise grant extended grace periods and time allowances for the payment of premium balances due to them;

our insurance subsidiaries may not be able to collect premium balances due to them, resulting in reduced operating cash flows and an increase in premium write-offs that would increase their operating expenses;

our insurance subsidiaries may suffer declines in the market values of their investments as a result of financial market volatility related toCOVID-19 concerns and related economic disruption; and

our insurance subsidiaries may experience declines in investment income as a result of lower interest rates that may be available upon reinvestment of the proceeds of maturing investments.

Item 2.

~~Item 2.~~ Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We recommend that you read the following information in conjunction with the historical financial information and the footnotes to that financial information we include in this Quarterly Report on Form10-Q. We also recommend you read Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form10-K for the year ended December 31, ~~2018.~~2019.

Critical Accounting Policies and Estimates

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

Our insurance subsidiaries make estimates and assumptions that can have a significant effect on amounts and disclosures we report in our financial statements. The most significant estimates relate to the 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 of these liabilities may differ from the estimates we provided. We regularly review our methods for making these estimates and we reflect any adjustment we consider necessary in our current consolidated results of operations.

Liability for Unpaid 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. At the time of establishing its estimates, an insurer recognizes that its ultimate liability for losses and loss expenses will exceed or be less than such estimates. Our insurance subsidiaries base their estimates of liabilities for losses and loss expenses on assumptions as to future loss trends, expected claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, our insurance subsidiaries may learn additional facts regarding individual claims, and, consequently, it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates for these liabilities. We reflect any adjustments to the liabilities for losses and loss expenses of our insurance subsidiaries in our consolidated results of operations in the period in which our insurance subsidiaries make adjustments to their estimates.

Our insurance subsidiaries maintain liabilities for the payment of losses and loss expenses with respect to both reported and unreported claims. Our insurance subsidiaries establish these liabilities for the purpose of covering the ultimate costs of settling all losses, including investigation and litigation costs. Our insurance subsidiaries base the amount of their liability for reported losses primarily upon acase-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. These trend changes give rise to greater uncertainty as to the pattern of future loss settlements on bodily injury claims. Related uncertainties regarding future trends include the cost of medical technologies and procedures and changes in the utilization of medical 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 ~~September 30, 2019.~~March 31, 2020. For every 1% change in our insurance subsidiaries’ loss and loss expense reserves, net of reinsurance recoverable, the effect on ourpre-tax results of operations would be approximately ~~$5.1~~$5.2 million.

The establishment of appropriate liabilities is an inherently uncertain process and we can provide no assurance that our

insurance subsidiaries’ ultimate liability will not exceed our insurance subsidiaries’ loss and loss expense reserves and have an

adverse effect on our results of operations and financial condition. Furthermore, we cannot predict the timing, frequency and

extent of adjustments to our insurance subsidiaries’ estimated future liabilities, because the historical conditions and events that serve as a basis for our insurance subsidiaries’ estimates of ultimate claim costs may change. As is the case for substantially all property and casualty insurance companies, our insurance subsidiaries have found it necessary in the past to increase their estimated future liabilities for losses and loss expenses in certain periods and, in other periods, their estimated future liabilities for losses and loss expenses have exceeded their actual liabilities for losses and loss expenses. Changes in our insurance subsidiaries’ estimates of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received subsequent to the prior reporting period.

Excluding the impact of severe weather events, 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 apro-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.

Donegal Mutual and our insurance subsidiaries operate together as the Donegal Insurance Group and share a combined business plan designed to achieve market penetration and underwriting profitability objectives. The products our insurance subsidiaries and Donegal Mutual offer are generally complementary, thereby allowing Donegal Insurance Group to offer a broader range of products to a given market and to expand Donegal Insurance Group’s ability to service an entire personal lines or commercial lines account. Distinctions within the products of Donegal Mutual and our insurance subsidiaries generally relate to specific risk profiles targeted within similar classes of business, such as preferred tier products compared to standard tier products, but we do not allocate all of the standard risk gradients to one company. Therefore, the underwriting profitability of the business the individual companies write directly will vary. However, because the pool homogenizes the risk characteristics of the predominant percentage of the business Donegal Mutual and Atlantic States write directly and each

company shares the underwriting results according to each company’s participation percentage, each company realizes its

percentage share of the underwriting results of the pool.

Our insurance subsidiaries’ unpaid liability for losses and loss expenses by major line of business at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 consisted of the following:


	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(in thousands)				(in thousands)
Commercial lines:
Automobile	$	120,902	$	106,734	$	134,407	$	126,224
Workers’ compensation		112,322		109,512		111,853		109,060
Commercial multi-peril		97,587		85,937		104,063		102,424
Other		9,398		5,207		10,195		9,115

Total commercial lines		340,209		307,390		360,518		346,823

Personal lines:
Automobile		137,897		144,788		129,689		132,191
Homeowners		22,886		18,374		20,999		23,494
Other		4,842		4,846		5,208		4,398

Total personal lines		165,625		168,008		155,896		160,083

Total commercial and personal lines		505,834		475,398		516,414		506,906
Plus reinsurance recoverable		358,700		339,267		371,798		362,768

Total liability for unpaid losses and loss expenses	$	864,534	$	814,665	$	888,212	$	869,674

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

~~most likely scenario.~~ The following table sets forth the estimated effect on our insurance subsidiaries’ unpaid loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables we considered in establishing the loss and loss expense reserves of our insurance subsidiaries:


Percentage Change in Loss and Loss Expense Reserves Net of Reinsurance	Percentage Change in Loss and Loss Expense Reserves Net of Reinsurance		Adjusted Loss and Loss Expense Reserves Net of Reinsurance at September 30, 2019		Percentage Change in Stockholders’ Equity at September 30, 2019(1)			Adjusted Loss and Loss Expense Reserves Net of Reinsurance at December 31, 2018		Percentage Change in Stockholders’ Equity at December 31, 2018(1)				Adjusted Loss and Loss Expense Reserves Net of Reinsurance at March 31, 2020		Percentage Change in Stockholders’ Equity at March 31, 2020(1)			Adjusted Loss and Loss Expense Reserves Net of Reinsurance at December 31, 2019		Percentage Change in Stockholders’ Equity at December 31, 2019(1)
(dollars in thousands)	(dollars in thousands)												(dollars in thousands)
	(10.0	)%	$	455,251		9.0	%	$	427,858		9.4	%
	(7.5	)		467,896		6.8			439,743		7.1
	(5.0	)		480,542		4.5			451,628		4.7
	(2.5	)		493,188		2.3			463,513		2.4
	Base			505,834		—			475,398		—
	2.5			518,480		(2.3	)		487,283		(2.4	)
	5.0			531,126		(4.5	)		499,168		(4.7	)
	7.5			543,772		(6.8	)		511,053		(7.1	)
	10.0			556,417		(9.0	)		522,938		(9.4	)
(10.0)%														$	464,773		8.9	%	$	456,215		8.9	%
(7.5)															477,683		6.7			468,888		6.7
(5.0)															490,593		4.4			481,561		4.4
(2.5)															503,504		2.2			494,233		2.2
Base															516,414		—			506,906		—
2.5															529,324		(2.2	)		519,579		(2.2	)
5.0															542,235		(4.4	)		532,251		(4.4	)
7.5															555,145		(6.7	)		544,924		(6.7	)
10.0															568,055		(8.9	)		557,597		(8.9	)

(1)	Net of income tax effect.

Non-GAAP Information

We prepare our consolidated financial statements on the basis of GAAP. Our insurance subsidiaries also prepare financial statements based on statutory accounting principles state insurance regulators prescribe or permit (“SAP”). SAP financial measures are considerednon-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 ofnon-GAAP financial measures may differ from similar measures other companies use, so investors should exercise caution when comparing ournon-GAAP financial measures to thenon-GAAP financial measures other companies use.

Because our insurance subsidiaries do not prepare GAAP financial statements, we evaluate the performance of our personal lines and commercial lines segments utilizing SAP financial measures that reflect the growth trends and underwriting results of our insurance subsidiaries. The SAP financial measures we utilize are net premiums written and statutory combined ratio.

Net Premiums Written

We define net premiums written as the amount of full-term premiums our insurance subsidiaries record for policies effective within a given period less premiums our insurance subsidiaries cede to reinsurers. Net premiums earned is the most comparable GAAP financial measure to net premiums written. Net premiums earned represent the sum of the amount of net premiums written and the change in net unearned premiums during a given period. Our insurance subsidiaries earn premiums and recognize them as revenue over the terms of their policies, which are one year or less in duration. Therefore, increases or decreases in net premiums earned generally reflect increases or decreases in net premiums written in the preceding12-month period compared to the comparable period one year earlier.

The following table provides a reconciliation of our net premiums earned to our net premiums written for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:


	Three Months Ended September 30,						Nine Months Ended September 30,				Three Months Ended March 31,
	2019			2018			2019		2018		2020		2019
Net premiums earned	$	189,821		$	187,662		$	566,658	$	555,140	$	187,253	$	188,073
Change in net unearned premiums		(5,951	)		(3,144	)		14,930		20,583		10,984		11,842

Net premiums written	$	183,870		$	184,518		$	581,588	$	575,723	$	198,237	$	199,915

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 othernon-operating income or expense. A combined ratio of less than 100% generally indicates underwriting profitability.

The statutory combined ratio is anon-GAAP financial measure that is based upon amounts determined under SAP. We calculate our statutory combined ratio as the sum of:

the statutory loss ratio, which is the ratio of calendar-year net incurred losses and loss expenses to net premiums earned;

the statutory expense ratio, which is the ratio of expenses incurred for net commissions, premium taxes and underwriting expenses to net premiums written; and

the statutory dividend ratio, which is the ratio of dividends to holders of workers’ compensation policies to net premiums earned.

The calculation of our statutory combined ratio differs from the calculation of our GAAP combined ratio. In calculating our GAAP combined ratio, we do not deduct installment payment fees from incurred expenses, and we base the expense ratio on net premiums earned instead of net premiums written. Differences between our GAAP loss ratio and our statutory loss ratio result from anticipating salvage and subrogation recoveries for our GAAP loss ratio but not for our statutory loss ratio.

Combined Ratios

The following table presents comparative details with respect to our GAAP and statutory combined ratios for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
GAAP Combined Ratios (Total Lines)
Loss ratio(non-weather)		61.6	%		63.7	%		60.8	%		68.5	%		58.9	%		60.4	%
Loss ratio (weather-related)		7.3			11.3			7.2			9.5			3.7			5.1
Expense ratio		30.5			29.6			31.5			31.3			33.4			32.6
Dividend ratio		1.2			0.6			1.2			0.6			1.0			1.2

Combined ratio		100.6	%		105.2	%		100.7	%		109.9	%		97.0	%		99.3	%

Statutory Combined Ratios
Commercial lines:
Automobile		113.9	%		114.6	%		114.3	%		133.7	%		117.4	%		116.5	%
Workers’ compensation		85.4			83.6			82.0			86.6			90.1			88.8
Commercial multi-peril		98.7			96.0			94.4			101.2			89.1			90.9
Other		76.6			94.2			79.3			64.9			64.2			65.2
Total commercial lines		97.9			97.6			95.8			104.5			96.0			96.4
Personal lines:
Automobile		103.3			115.8			103.9			114.5			100.0			101.3
Homeowners		109.4			110.3			106.0			112.0			90.7			95.4
Other		73.6			63.5			77.7			94.9			66.5			70.3
Total personal lines		103.9			111.5			103.3			113.0			94.7			97.8
Total commercial and personal lines		100.8			105.2			99.5			109.0			95.4			97.1

Results of Operations - Three Months Ended ~~September 30, 2019~~March 31, 2020 Compared to Three Months Ended ~~September 30, 2018~~March 31, 2019

Net Premiums Earned. Our insurance subsidiaries’ net premiums earned for the ~~third quarter~~first three months of ~~2019~~2020 were ~~$189.8~~$187.3 million, ~~an increase~~a decrease of ~~$2.1 million,~~$820,464, or ~~1.2%~~0.4%, compared to ~~$187.7~~$188.1 million for the ~~third quarter~~first three months of ~~2018,~~2019, primarily reflecting ~~increases~~decreases in net premiums written during ~~2019~~2020 and ~~2018.~~2019.

Net Premiums Written. Our insurance subsidiaries’ net premiums written for the three months ended ~~September 30, 2019~~March 31, 2020 were ~~$183.9~~$198.2 million, a decrease of ~~$647,897,~~$1.7 million, or ~~0.4%~~0.8%, from the ~~$184.5~~$199.9 million of net premiums written for the ~~third quarter~~first three months of ~~2018.~~2019. Commercial lines net premiums written increased ~~$11.0~~$8.0 million, or ~~13.2%~~7.1%, for the ~~third quarter~~first three months of ~~2019~~2020 compared to the ~~third quarter~~first three months of ~~2018.~~2019. We attribute the increase in commercial lines net premiums written primarily to ~~premium rate increases throughout 2018 and 2019,~~ increased writings of new commercial accounts and ~~lower reinsurance premiums.~~premium rate increases throughout 2019 and 2020. Personal lines net premiums written decreased ~~$11.7~~$9.7 million, or ~~11.6%~~11.2%, for the ~~third quarter~~first three months of ~~2019~~2020 compared to the ~~third quarter~~first three months of ~~2018.~~2019. We attribute the decrease in personal lines net premiums written primarily to net attrition as a result of underwriting measures our insurance subsidiaries have implemented to slow new policy growth and to increase pricing on renewal policies, ~~as well as the previously announcednon-renewal~~ ~~of unprofitable personal lines business in seven states that began in February 2019,~~ partially offset by premium rate increases our insurance subsidiaries have ~~implemented over the past five quarters and lower reinsurance premiums.~~implemented.

Investment Income. Our net investment income increased to $7.4 million for the ~~third quarter~~first three months of ~~2019,~~2020, compared to ~~$6.6~~$7.0 million for the ~~third quarter~~first three months of ~~2018.~~2019. We attribute the increase primarily to an increase in average invested assets.

Net Investment (Losses) Gains. Net investment losses for the ~~third quarter~~first three months of ~~2019~~2020 were ~~$369,041,~~$10.7 million, compared to net investment gains of ~~$3.5~~$18.1 million for the ~~third quarter~~first three months of ~~2018.~~2019. The net investment losses for the ~~third quarter~~first three months of ~~2019~~2020 resulted primarily from unrealized losses within our equity securities ~~portfolio.~~portfolio due to a sharp decline in equity markets at March 31, 2020. The net investment gains for the ~~third quarter~~first three months of ~~2018 resulted primarily~~2019 included $12.7 million from the sale of DFSC and $6.0 million related to unrealized gains within our equity securities ~~portfolio.~~portfolio and a limited partnership that invests in equity securities. We did not recognize any impairment losses in our investment portfolio during the ~~third quarter~~first three months of ~~2019~~2020 or ~~2018.~~2019.

Losses and Loss Expenses. Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned was 62.6% for the ~~third quarter~~first three months of ~~2019 was 68.9%,~~2020, a decrease from our insurance subsidiaries’ loss ratio of ~~75.0%~~65.5% for the ~~third quarter~~first three months of ~~2018.~~2019. Weather-related losses of ~~$13.9~~$6.9 million for the ~~third quarter~~first three months of ~~2019,~~2020, or ~~7.3~~3.7 percentage points of the loss ratio, decreased from ~~$21.2~~$9.7 million, ~~for the third quarter of 2018,~~ or ~~11.3~~5.1 percentage points of the loss ~~ratio.~~ratio, for the first three months of 2019. Weather-related loss activity for the first quarter of 2020 was lower than our previous five-year average of $10.7 million for first-quarter weather-related losses. On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was ~~65.2%~~62.7% for the ~~third quarter~~first three months of ~~2019,~~2020, compared to ~~67.5%~~63.8% for the ~~third quarter~~first three months of ~~2018,~~2019, primarily due to ~~decreases~~a decrease in the commercial ~~automobile and workers’ compensation~~multiple-peril loss ~~ratios.~~ratio. The personal lines statutory loss ratio of our insurance subsidiaries decreased to ~~73.4%~~63.2% for the ~~third quarter~~first three months of ~~2019,~~2020, compared to ~~81.8%~~66.5% for the ~~third quarter~~first three months of ~~2018.~~2019. We attribute this decrease primarily to ~~a decrease~~decreases in the homeowners and personal automobile loss ~~ratio.~~ratios. Our insurance subsidiaries experienced favorable loss reserve development of approximately ~~$1.0~~$4.3 million and $4.0 million during the ~~third quarter~~first three months of ~~2019. Our insurance subsidiaries experienced adverse loss reserve development of $2.7 million during the third quarter of 2018.~~2020 and 2019, respectively.

Underwriting Expenses. The expense ratio for an insurance company is the ratio of policy acquisition costs and other underwriting expenses to premiums earned. The expense ratio of our insurance subsidiaries was ~~30.5%~~33.4% for the ~~third quarter~~first three months of ~~2019,~~2020, compared to ~~29.6%~~32.6% for the ~~third quarter~~first three months of ~~2018.~~2019. We attribute the increase to higher underwriting-based incentive costs and increased technology system-related expenses for the ~~third quarter~~first three months of ~~2019~~2020 compared to the ~~third quarter~~first three months of ~~2018.~~

~~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 increase in dividends incurred for the third quarter of 2019 compared to the third quarter of 2018 to growth and profitability of the workers’ compensation line of business over the respective periods to which the dividends applied. We also partially attribute the increase to growth in workers’ compensation writings in Wisconsin, a state in which our insurance subsidiaries and their competitors pay a higher rate of dividends compared to other states and where such dividends are not dependent on the profitability of a given policy.2019.

Combined Ratio. The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of policyholder dividends incurred to premiums earned. Our insurance subsidiaries’ combined ratios were ~~100.6%~~97.0% and 105.2% for the third quarters ended September 30, 2019 and 2018, respectively. We attribute the decrease in the combined ratio to a decrease in the loss ratio for the third quarter of 2019 compared to the third quarter of 2018.

~~Interest Expense.~~ Our interest expense for the third quarter of 2019 was $443,179, compared to $651,768 for the third quarter of 2018.We attribute the decrease to lower average borrowings under our lines of credit during the third quarter of 2019 compared to the third quarter of 2018, partially offset by a~~pre-payment~~ ~~penalty of $176,000 related to Atlantic States’ early repayment of a cash advance with the FHLB of Pittsburgh.~~

~~Income Taxes.~~ We recorded income tax expense of $1.1 million for the third quarter of 2019, representing an effective tax rate of 17.7%. We recorded an income tax benefit of $70,630for the third quarter of 2018 based upon an estimated carryback of our taxable loss in 2018 to prior tax years. The income tax expense and effective tax rate for the third quarter of 2019 represented an estimate based on our projected annual taxable income.

~~Net Income and Income Per Share.~~ Our net income for the third quarter of 2019 was $5.2 million, or $.18per share of Class A common stock on a diluted basis and $.16 per share of Class B common stock, compared to $1.2 million, or $.04 per share of Class A common stock and $.04 per share of Class B common stock, for the third quarter of 2018. We had 23.0 million and 22.7 million Class A shares outstanding at September 30, 2019 and 2018, respectively. We had 5.6 million Class B shares outstanding at the end of both periods.

~~Results of Operations - Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018~~

~~Net Premiums Earned.~~ ~~Our insurance subsidiaries’ net premiums earned~~99.3% for the first ~~nine~~three months ~~of 2019 were $566.7 million, an increase of $11.6 million, or 2.1%, compared to $555.1 million for the first nine months of 2018, reflecting increases in net premiums written during 2019 and 2018.~~

~~Net Premiums Written.~~ Our insurance subsidiaries’ net premiums written for the first nine months of 2019 were $581.6 million, an increase of $5.9 million, or 1.0%, from the $575.7 million of net premiums written for the first nine months of 2018. Commercial lines net premiums written increased $36.2 million, or 13.1%, for the first nine months of 2019 compared to the first nine months of 2018. We attribute the increase in commercial lines primarily to premium rate increases throughout 2018ended March 31, 2020 and 2019, increased writings of new commercial accounts and lower reinsurance premiums. Personal lines net premiums written decreased $30.3 million, or 10.1%, for the first nine months of 2019 compared to the first nine months of 2018. We attribute the decrease in personal lines primarily to net attrition as a result of underwriting measures our insurance subsidiaries have implemented to slow new policy growth and to increase pricing on renewal policies, as well as the previously announced~~non-renewal~~ of unprofitable personal lines business in seven states that began in February 2019, partially offset by premium rate increases our insurance subsidiaries have implemented over the past five quarters and lower reinsurance premiums.

~~Investment Income.~~ Our net investment income increased to $21.7 million for the first nine months of 2019, compared to $19.3 million for the first nine months of 2018. We attribute the increase primarily to an increase in average invested assets.

~~Net Investment Gains.~~ Net investment gains for the first nine months of 2019 were $19.3 million, compared to $4.1 million for the first nine months of 2018. The net investment gains for the first nine months of 2019 included $12.7 million from the sale of DFSC and $5.5 million related to unrealized gains within our equity securities portfolio. The net investment gains for the first nine months of 2018 resulted primarily from unrealized gains within our equity securities portfolio. We did not recognize any impairment losses in our investment portfolio during the first nine months of 2019 or 2018.

~~Losses and Loss Expenses.~~ Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, for the first nine months of 2019 was 68.0%, a decrease from our insurance subsidiaries’ loss ratio of 78.0% for the first nine months of 2018. Weather-related losses of $40.6 million for the first nine months of 2019, or 7.2 percentage points of the loss ratio, decreased from $52.5 million for the first nine months of 2018, or 9.5 percentage points of the loss ratio. On a statutory basis, our insurance subsidiaries’ commercial lines loss ratio was 63.2% for the first nine months of 2019, compared to 74.1% for the first nine months of 2018, primarily due to decreases in the commercial automobile, workers’ compensation and commercial multiple-peril loss ratios. The personal lines statutory loss ratio of our insurance subsidiaries decreased to 72.7% for the first nine months of 2019, compared to 81.8% for the first nine months of 2018. We attribute this decrease primarily to decreases in the personal automobile and homeowners loss ratios. Our insurance subsidiaries experienced favorable loss reserve development of approximately $7.9 million during the first nine months of 2019. Our insurance subsidiaries experienced adverse loss reserve development of approximately $28.9 million during the first nine months of 2018.

~~Underwriting Expenses.~~ The expense ratio for an insurance company is the ratio of policy acquisition costs and other underwriting expenses to premiums earned. The expense ratio of our insurance subsidiaries was 31.5% for the first nine months of 2019, compared to 31.3% for the first nine months of 2018.

~~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 increase in dividends incurred for the first nine months of 2019 compared to the first nine months of 2018 to growth and profitability of the workers’ compensation line of business over the respective periods to which the dividends applied. We also partially attribute the increase to growth in workers’ compensation writings in Wisconsin, a state in which our insurance subsidiaries and their competitors pay a higher rate of dividends compared to other states and where such dividends are not dependent on the profitability of a given policy.

~~Combined Ratio.~~ The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of policyholder dividends incurred to premiums earned. Our insurance subsidiaries’ combined ratios were 100.7% and 109.9% for the first nine months of 2019 and 2018, respectively. We attribute the decrease in the combined ratio to a decrease in the loss ratio for the first ~~nine~~three months of ~~2019~~2020 compared to the first ~~nine~~three months of ~~2018.~~2019.

Interest Expense. Our interest expense for the first ~~nine~~three months of ~~2019~~2020 was ~~$1.3 million,~~$224,330, compared to ~~$1.7 million~~$565,292 for the first ~~nine~~three months of ~~2018.We~~2019.We attribute the decrease primarily to lower average interest rates for borrowings under our lines of credit during the first ~~nine~~three months of ~~2019~~2020 compared to the first ~~nine~~three months of ~~2018.~~2019.

Income Taxes. We recorded an income tax benefit of $1.2 million for the first three months of 2020, which primarily reflected a $1.6 million income tax benefit during the first quarter of 2020 related to the anticipated carryback of 2018 net operating losses to past tax years with higher statutory income tax rates than are currently in effect, as allowed under the Coronavirus Aid, Relief and Economic Security Act that was enacted in March 2020. We recorded income tax expense of ~~$5.7~~$3.8 million for the first ~~nine~~three months of 2019, representing an effective tax rate of ~~14.7%~~14.2%. ~~We recorded an income tax benefit of $10.8 millionfor the first nine months of 2018 based upon an estimated carryback of our taxable loss in 2018 to prior tax years.~~ The income tax expense and effective tax rate for the first ~~nine~~three months of 2019 represented an estimate based on our projected annual taxable income. The estimate for the first nine months of 2019 included income tax expense associated with the gain we realized on the sale of DFSC, which was partially offset by an accounting tax benefit with respect to a tax deduction that applies to a portion of the dividend we received from DFSC prior to the closing of the sale.

Net Income ~~(Loss)~~ and Income ~~(Loss)~~ Per Share. Our net income for the first ~~nine~~three months of ~~2019~~2020 was ~~$33.0~~$3.7 million, or ~~$1.17per~~$.13per share of Class A common stock ~~on a diluted basis~~ and ~~$1.06~~$.12 per share of Class B common stock, compared to ~~a net loss of $17.8~~$23.0 million, or ~~$.64~~$.82 per share of Class A common stock and ~~$.59~~$.75 per share of Class B common stock, for the first ~~nine~~three months of ~~2018.~~2019. We had ~~23.0~~23.3 million and ~~22.7~~22.9 million Class A shares outstanding at ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. We had 5.6 million Class B shares outstanding at the end of both periods.

Liquidity and Capital Resources

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

Our operations have historically generated sufficient net positive cash flow to fund our commitments and add to our investment portfolio, thereby increasing future investment returns and enhancing our liquidity. The impact of the pooling agreement between Donegal Mutual and Atlantic States has historically been cash-flow positive because of the consistent underwriting profitability of the pool. Donegal Mutual and Atlantic States settle their respective obligations to each other under the pool monthly, thereby resulting in cash flows substantially similar to the cash flows that would result from each company writing the business directly. We have not experienced any unusual variations in the timing of claim payments associated with the loss reserves of our insurance subsidiaries. We maintain significant liquidity in our investment portfolio in the form of readily marketable fixed maturities, equity securities and short-term investments. We structure our fixed-maturity investment portfolio following a “laddering” approach, so that projected cash flows from investment income and principal maturities are evenly distributed from a timing perspective, thereby providing an additional measure of liquidity to meet our obligations should an unexpected variation occur in the future. Our operating activities provided net cash flows in the first ~~nine~~three months of 2020 and 2019 ~~and 2018~~ of ~~$48.4~~$10.8 million and ~~$59.9~~$11.5 million, respectively.

At ~~September 30, 2019,~~March 31, 2020, we had no outstanding borrowings under our line of credit with M&T and had the ability to borrow up to $30.0 million at interest rates equal to M&T’s current prime rate or the then current LIBOR rate plus 2.25%~~.At September 30, 2019,~~. At March 31, 2020, Atlantic States had ~~$35.0~~$85.0 million in outstanding advances with the FHLB of ~~Pittsburgh. The~~Pittsburgh, consisting of a $35.0 million advance that carries a fixed interest rate ~~on these advances was~~of 1.74% ~~at September 30, 2019.~~and a $50.0 million advance that carries a fixed interest rate of 0.83%. In March 2020, Atlantic States Insurance Company issued $50.0 million of debt to the FHLB of Pittsburgh in exchange for a cash advance in the same amount. Atlantic States obtained this contingent liquidity funding in light of uncertainty surrounding the economic impact of theCOVID-19 pandemic.

The following table shows our expected payments for significant contractual obligations at ~~September 30, 2019:~~March 31, 2020:

   Total    Less than 1 year    1-3 years    4-5 years    After 5 years
   (in thousands)
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


	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
	(in thousands)
Net liability for unpaid losses and loss expenses of our insurance subsidiaries	$	516,414	$	230,595	$	247,762	$	18,623	$	19,434
Subordinated debentures		5,000		—		—		—		5,000
Borrowings under lines of credit		85,000		50,000		—		35,000		—

Total contractual obligations	$	606,414	$	280,595	$	247,762	$	53,623	$	24,434

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

We discuss in Note 7 – Borrowings our estimate of the timing of the amounts payable for the borrowings under our lines of credit based on their contractual maturities. The borrowings under our lines of credit carry interest rates that we discuss in Note 7 – Borrowings.

We discuss in Note 7 – Borrowings our estimate of the timing of the amounts payable for the subordinated debentures based on their contractual maturity. The subordinated debentures carry an interest rate of 5%, and any repayment of principal or payment of interest on the subordinated debentures requires prior approval of the Michigan Department of Insurance and Financial Services. Our annual interest cost associated with the subordinated debentures is $250,000.

On July 18, 2013, our board of directors authorized a share repurchase program pursuant to which we have the authority to purchase up to 500,000 shares of our Class A common stock at prices prevailing from time to time in the open market subject to the provisions of applicable rules of the SEC and in privately negotiated transactions. We did not purchase any shares of our Class A common stock under this program during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 or ~~2018.~~2019. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through ~~September 30, 2019.~~March 31, 2020.

On ~~October 17, 2019,~~April 15, 2020, our board of directors declared quarterly cash dividends of ~~14.5~~15.0 cents per share of our Class A common stock and ~~12.75cents~~13.25cents per share of our Class B common stock, payable on ~~November~~May 15, ~~2019~~2020 to our stockholders of record as of the close of business on ~~November~~May 1, ~~2019.~~2020. We are not subject to any restrictions on our payment of dividends to our stockholders, although there are state law restrictions on the payment of dividends by our insurance subsidiaries to us. Dividends from our insurance subsidiaries are our principal source of cash for payment of dividends to our stockholders. Our insurance subsidiaries are subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval of their domiciliary insurance regulatory authorities. Our insurance subsidiaries are also subject to risk based capital (“RBC”) requirements that limit their ability to pay dividends to us. Our insurance subsidiaries’ statutory capital and surplus at December 31, ~~2018~~2019 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin. Our insurance subsidiaries ~~paid $4.0 million in~~did not pay any dividends to us during the first ~~nine~~three months of ~~2019.~~2020. Amounts remaining available for distribution to us as dividends from our insurance subsidiaries without prior approval of their domiciliary insurance regulatory authorities in ~~2019~~2020 are ~~$15.4~~$25.9 million from Atlantic States, ~~$4.5~~$5.4 million from Southern, $2.0 million from ~~Le Mars, $1.7 million from~~ Peninsula ~~$1.7 million from Sheboygan~~ and ~~$5.6~~$6.6 million from MICO, or a total of approximately ~~$30.9~~$39.9 million.

At ~~September 30, 2019,~~March 31, 2020, we had no material commitments for capital expenditures.

Equity Price Risk

Our portfolio of marketable equity securities, which we carry on our consolidated balance sheets at estimated fair value, has exposure to the risk of loss resulting from an adverse change in prices. We manage this risk by having our investment personnel perform an analysis of prospective investments and regular reviews of our portfolio of equity securities.

Credit Risk

Our portfolio of fixed-maturity securities and, to a lesser extent, our portfolio of short-term investments is subject to credit risk, which we define as the potential loss in market value resulting from adverse changes in the borrower’s ability to repay its debt. We manage this risk by having our investment personnel perform an analysis of prospective investments and regular reviews of our portfolio of fixed-maturity securities. We also limit the percentage and amount of our total investment portfolio that we invest in the securities of any one issuer.

Our insurance subsidiaries provide property and casualty insurance coverages through independent insurance agencies. We bill the majority of this business directly to the insured, although we bill a portion of our commercial business through licensed insurance agents to whom our insurance subsidiaries extend credit in the normal course of business.

Because the pooling agreement does not relieve Atlantic States of primary liability as the originating insurer, Atlantic States is subject to a concentration of credit risk arising from the business it cedes to Donegal Mutual. Our insurance subsidiaries maintain reinsurance agreements with Donegal Mutual and with a number of other major unaffiliated authorized reinsurers.

Impact of Inflation

We establish property and casualty insurance premium rates before we know the amount of unpaid losses and loss expenses or the extent to which inflation may impact such losses and expenses. Consequently, our insurance subsidiaries attempt, in establishing rates, to anticipate the potential impact of inflation.

Item 3.

~~Item 3.~~ Quantitative and Qualitative Disclosures About Market Risk.

Our market risk generally represents the risk of gain or loss that may result from the potential change in the fair value of the securities we hold in our investment portfolio as a result of fluctuations in prices and interest rates and, to a lesser extent, our debt obligations. We manage our interest rate risk by maintaining an appropriate relationship between the average duration of our investment portfolio and the approximate duration of our liabilities, i.e., policy claims of our insurance subsidiaries and our debt obligations.

~~There~~Other than interest rate and pricing fluctuations related theCOVID-19 pandemic, there have been no material changes to our quantitative or qualitative market risk exposure from December 31, ~~2018~~2019 through ~~September 30, 2019.~~March 31, 2020.

Item 4.

~~Item 4.~~ Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules13a-15(e) and15d-15(e) under the Exchange Act). Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, at ~~September 30, 2019,~~March 31, 2020, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information we are required to disclose in the reports that we file or submit under the Exchange Act, and our disclosure controls and procedures were also effective to ensure that information we disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter covered by this Quarterly Report on Form10-Q that has materially affected, or is reasonably likely to affect materially, our internal control over financial reporting.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

We base all statements contained in this Quarterly Report on Form10-Q that are not historic facts on our current expectations. Such statements are forward-looking in nature (as defined in the Private Securities Litigation Reform Act of 1995) and necessarily involve risks and uncertainties. Forward-looking statements we make may be identified by our use of words such as “will,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “seeks,” “estimates” and similar expressions. Our actual results could vary materially from our forward-looking statements. The factors that could cause our actual results to vary materially from the forward-looking statements we have previously made include, but are not limited to, prolonged economic challenges resulting from theCOVID-19 pandemic and related business shutdown, adverse and catastrophic weather events, our ability to maintain profitable operations, the adequacy of the loss and loss expense reserves of our insurance subsidiaries, the availability and successful operation of the information technology systems our insurance subsidiaries utilize, the successful development of new information technology systems to allow our insurance subsidiaries to compete effectively, business and economic conditions in the areas in which we and our insurance subsidiaries operate, interest rates, competition from various insurance and other financial businesses, terrorism, the availability and cost of reinsurance, legal and judicial developments including those related toCOVID-19 business interruption coverage exclusions, adverse litigation and other industry trends that could increase our loss costs, changes in regulatory requirements, changes in our A.M. Best rating, our ability to integrate and manage successfully the companies we may acquire from time to time and the other risks that we describe from time to time in our filings with the SEC. We disclaim any obligation to update such statements or to announce publicly the results of any revisions that we may make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Part II. Other Information

Item 1.

~~Item 1.~~ Legal Proceedings.

None.

Item 1A.

~~Item 1A.~~ Risk Factors.

Our business, results of operations and financial condition, and, therefore, the value of our Class A common stock and our Class B common stock, are subject to a number of risks. For a description of certain risks, we refer to “Risk Factors” in our ~~2018~~2019 Annual Report on Form10-K that we filed with the SEC on March ~~14, 2019. There~~6, 2020. Other than the information we discuss below, there have been no material changes in the risk factors we disclosed in that Form10-K Report during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

The emergence ofCOVID-19 has impacted the business operations of our insurance subsidiaries, and economic disruption related to the ongoingCOVID-19 pandemic may adversely affect our revenues, profitability, results of operations, cash flows, liquidity and financial condition.

Beginning in March 2020, theCOVID-19 pandemic resulted in significant disruptions in economic activity throughout our operating regions.COVID-19 concerns contributed to substantial declines in equity markets and a sharp decrease in market interest rates. We cannot predict at this time the ultimate impact that the economic and financial disruption related to the ongoingCOVID-19 pandemic or any other future pandemic will have on us. Risks related toCOVID-19 include, but are not limited to, the following:

The business operations of our insurance subsidiaries could be disrupted by the illness of significant numbers of their employees and remedial efforts that would be required upon discovery of exposure toCOVID-19 within their facilities.

The business operations of our insurance subsidiaries are dependent upon technology systems for which regular physical access is required to maintain critical operational capabilities. The business operations of our insurance subsidiaries would be adversely impacted by government mandates requiring closure of facilities where those technology systems are located or restricting physical access to such facilities.

The revenues of our insurance subsidiaries may decrease as a result of reduced demand for their insurance products as the ongoing economic disruption adversely impacts current and potential insurance customers.

Our insurance subsidiaries may incur an increase in their losses and loss expenses in certain lines of business as a result ofCOVID-19 and related economic disruption, and such losses and loss expenses may exceed the reserves our insurance subsidiaries have established or may establish in the future.

Our insurance subsidiaries may incur increased costs related to legal disputes over policy coverages or exclusions and their defense against litigation related toCOVID-19.

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.

Legislative, judicial and regulatory actions may require our insurance subsidiaries to reduce or refund premiums, suspend cancellation of policies fornon-payment of premiums or otherwise grant extended grace periods and time allowances for the payment of premium balances due to them.

Our insurance subsidiaries may not be able to collect premium balances due to them, resulting in reduced operating cash flows and an increase in premium write-offs that would increase their operating expenses.

Our insurance subsidiaries may suffer declines in the market values of their investments as a result of financial market volatility related toCOVID-19 concerns and related economic disruption.

Our insurance subsidiaries may experience declines in investment income as a result of lower interest rates that may be available upon reinvestment of the proceeds of maturing investments.

Economic disruption related toCOVID-19 could result in significant declines in the credit quality of issuers, ratings downgrades or changes in financial market conditions and regulatory changes that might adversely impact the value of the fixed-maturity investments of our insurance subsidiaries own.

Item 2.

~~Item 2.~~ Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

~~Item 3.~~ Defaults upon Senior Securities.

None.

Item 4.

Removed and Reserved.

~~Item 4. Removed and Reserved.~~

Item 5.

~~Item 5.~~ Other Information.

None.

Item 6.

~~Item 6.~~ Exhibits.


Exhibit No.		Description

Exhibit 31.1		Certification of Chief Executive Officer

Exhibit 31.2		Certification of Chief Financial Officer

Exhibit 32.1		Statement of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of Title 18 of the United States Code

Exhibit 32.2		Statement of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of Title 18 of the United States Code

Exhibit 101.INS		XBRL Instance Document

Exhibit 101.SCH		XBRL Taxonomy Extension Schema Document

Exhibit 101.PRE		XBRL Taxonomy Presentation Linkbase Document

Exhibit 101.CAL		XBRL Taxonomy Calculation Linkbase Document

Exhibit 101.LAB		XBRL Taxonomy Label Linkbase Document

Exhibit 101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

Signatures

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


	DONEGAL GROUP INC.

~~November~~May 8, ~~2019~~2020	By:	/s/ Kevin G. Burke
		Kevin G. Burke, President and Chief Executive Officer

~~November~~May 8, ~~2019~~2020	By:	/s/ Jeffrey D. Miller
		Jeffrey D. Miller, Executive Vice President and Chief Financial Officer

3430


FHLB of Pittsburgh stock purchased and owned	$	1,639,200
Collateral pledged, at par (carrying value $37,535,059)		37,635,763
Borrowing capacity currently available		1,428,241

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company