Transactions with Affiliates

12 Months Ended

Dec. 31, 2022

Transactions with Affiliates [Abstract]

3 - Transactions with Affiliates

Our insurance subsidiaries conduct business and have various agreements with Donegal Mutual that we describe in the following subparagraphs:

a. Reinsurance Pooling and Other Reinsurance Arrangements

Atlantic States, our largest insurance subsidiary, and Donegal Mutual have a pooling agreement under which both companies contribute substantially all of their direct written business to the pool and receive an allocated percentage of the pooled underwriting results, excluding certain reinsurance Donegal Mutual assumes from our insurance subsidiaries. Beginning with policies effective in 2021, Donegal Mutual began to place the business of the Mountain States Insurance Group into the underwriting pool. In addition, Donegal Mutual has a 100% quota-share reinsurance agreement with Southern Mutual Insurance Company, or Southern Mutual, and Donegal Mutual places its assumed business from Southern Mutual into the underwriting pool. 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. The intent of the pooling agreement is to produce more uniform and stable underwriting results from year to year for each pool participant than they would experience individually and to spread the risk of loss between the participants based on each participant’s relative amount of surplus and relative access to capital. Each participant in the pool has at its disposal the capacity of the entire pool, rather than being limited to policy exposures of a size commensurate with its own capital and surplus.

The following amounts represent reinsurance Atlantic States ceded to the pool during 2022, 2021 and 2020:

	2022		2021		2020
Premiums earned	$	314,321,443	$	305,729,418	$	266,400,636
Losses and loss expenses		202,228,589		222,737,225		181,205,743
Prepaid reinsurance premiums		154,472,615		152,323,262		146,387,565
Liability for losses and loss expenses		277,641,902		274,033,812		232,540,607

The following amounts represent reinsurance Atlantic States assumed from the pool during 2022, 2021 and 2020:

	2022		2021		2020
Premiums earned	$	578,216,706	$	573,891,394	$	514,172,448
Losses and loss expenses		395,794,813		383,455,320		309,315,497
Unearned premiums		280,031,908		289,976,879		262,004,199
Liability for losses and loss expenses		496,849,769		455,564,733		377,530,215

Donegal Mutual and MICO had a quota-share reinsurance agreement under which Donegal Mutual assumed 25% of the premiums and losses related to the business of MICO for policies effective through December 31, 2021. Donegal Mutual and MICO terminated this reinsurance agreement on a run-off basis effective January 1, 2022. Donegal Mutual and Peninsula had a quota-share reinsurance agreement under which Donegal Mutual assumed 100% of the premiums and losses related to the workers’ compensation product line of Peninsula in certain states for policies effective through December 31, 2021. Donegal Mutual and Peninsula terminated this reinsurance agreement on a run-off basis effective January 1, 2022. Donegal Mutual places its assumed business from MICO and Peninsula into the underwriting pool.

The following amounts represent reinsurance ceded to Donegal Mutual pursuant to these quota-share reinsurance agreements during 2022, 2021 and 2020:

	2022		2021		2020
Premiums earned	$	17,989,939	$	37,996,474	$	39,315,398
Losses and loss expenses		5,194,974		20,037,608		15,471,037
Prepaid reinsurance premiums		—		18,548,821		17,155,909
Liability for losses and loss expenses		22,642,908		36,659,853		35,306,627

Each of our insurance subsidiaries had a catastrophe reinsurance agreement with Donegal Mutual that provided coverage under any one catastrophic occurrence above a set retention of $2,000,000, with a combined retention of $5,000,000 for a catastrophe involving a combination of our insurance subsidiaries, up to the amount Donegal Mutual and our insurance subsidiaries retained under catastrophe reinsurance agreements with unaffiliated reinsurers.

The following amounts represent reinsurance that our insurance subsidiaries ceded to Donegal Mutual pursuant to these reinsurance agreements during 2022, 2021 and 2020:

	2022		2021		2020
Premiums earned	$	13,800,018	$	17,574,161	$	15,595,138
Losses and loss expenses		10,517,709		9,309,624		25,259,527
Liability for losses and loss expenses		1,271,006		1,658,057		3,812,339

The following amounts represent the effect of affiliated reinsurance transactions on net premiums our insurance subsidiaries earned during 2022, 2021 and 2020:

	2022			2021			2020
Assumed	$	578,216,706		$	573,891,394		$	514,172,448
Ceded		(346,111,400	)		(361,300,053	)		(321,311,172	)
Net	$	232,105,306		$	212,591,341		$	192,861,276

The following amounts represent the effect of affiliated reinsurance transactions on net losses and loss expenses our insurance subsidiaries incurred during 2022, 2021 and 2020:

	2022			2021			2020
Assumed	$	395,790,312		$	383,452,056		$	309,311,098
Ceded		(217,941,272	)		(252,084,457	)		(221,936,307	)
Net	$	177,849,040		$	131,367,599		$	87,374,791

b. Expense Sharing

Donegal Mutual provides facilities, management and other services to us and our insurance subsidiaries. In addition, Donegal Mutual purchases and maintains the information technology systems that support the business of Donegal Mutual and our insurance subsidiaries. Donegal Mutual allocates certain related expenses to Atlantic States in relation to the relative participation of Atlantic States and Donegal Mutual in the pooling agreement. Our insurance subsidiaries other than Atlantic States reimburse Donegal Mutual for allocated costs of services Donegal Mutual provides on their behalf based on their proportion of the total direct premiums written of the Donegal Insurance Group and other metrics. Donegal Mutual allocates costs related to its development and maintenance of information technology systems over the estimated useful life of those systems (generally five years) and charges a proportionate share of those costs to our insurance subsidiaries based on their percentage of the total net premiums written of the Donegal Insurance Group. Allocated expenses from Donegal Mutual for services it provided to our insurance subsidiaries totaled $199,177,393, $186,568,897 and $153,941,121 for 2022, 2021 and 2020, respectively. To enhance process efficiencies, Donegal Mutual paid certain expenses directly in 2022 and 2021 that our insurance subsidiaries paid directly in 2020, resulting in higher allocations of expenses from Donegal Mutual to our insurance subsidiaries and lower direct expense payments by our insurance subsidiaries in 2022 and 2021 compared to 2020.

Donegal Mutual is currently in the midst of a multi-year effort to modernize certain of its key technology infrastructure and application systems. Donegal Mutual placed the first and second releases of new systems into service in 2020 and 2021, respectively. Donegal Mutual allocated $7.6 million, $5.1 million and $2.8 million of related costs to our insurance subsidiaries in 2022, 2021 and 2020, respectively. Donegal Mutual will allocate to our insurance subsidiaries their proportionate share of the remaining $25.7 million of its costs for the first and second releases over the next four years. Donegal Mutual incurred an additional $18.1 million of deferred costs related to releases under development that were not yet ready for their intended use at December 31, 2022.

Our management believes that the allocation methods Donegal Mutual utilizes are reasonable. In addition, Donegal Mutual and we maintain a coordinating committee that consists of two members of our board of directors, neither of whom is a member of Donegal Mutual’s board of directors, and two members of Donegal Mutual’s board of directors, neither of whom is a member of our board of directors. The purpose of the coordinating committee is to maintain a process for an ongoing evaluation of the fairness of the terms of all transactions between Donegal Mutual and our insurance subsidiaries.

We include in our consolidated balance sheet the net amount of intercompany balances due to or from Donegal Mutual. During 2021, Donegal Mutual and our insurance subsidiaries aligned the timing of monthly settlements of various intercompany balances, including affiliated reinsurance transactions, expenses Donegal Mutual allocates to our insurance subsidiaries, premiums Donegal Mutual collects on behalf of our insurance subsidiaries, and losses and loss expenses Donegal Mutual pays on behalf of our insurance subsidiaries.

c. Lease Agreement

We lease office equipment with terms ranging from 3 to 10 years to Donegal Mutual under a lease agreement dated January 1, 2011.