Transactions with Affiliates

12 Months Ended

Dec. 31, 2011

Transactions with Affiliates [Abstract]

Transactions with Affiliates

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 subsidiary, and Donegal Mutual have a pooling agreement under which both companies contribute all of their direct written business to the pool and receive an allocated percentage of their combined underwriting results, excluding certain reinsurance Donegal Mutual assumes from our insurance subsidiaries. From July 1, 2000 through February 29, 2008, Atlantic States had a 70% share of the results of the pool, and Donegal Mutual had a 30% share of the results of the pool. Effective March 1, 2008, Donegal Mutual and Atlantic States amended the pooling agreement to increase Atlantic States’ share of the pooled business to 80%. 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 2011, 2010 and 2009:

	2011		2010		2009
Premiums earned	$	118,812,725	$	105,376,068	$	96,502,445
Losses and loss expenses		97,130,846		81,203,625		68,248,082
Prepaid reinsurance premiums		64,214,378		57,783,435		52,199,831
Liability for losses and loss expenses		77,312,645		65,028,781		55,396,390

The following amounts represent reinsurance Atlantic States assumed from the pool during 2011, 2010 and 2009:

	2011		2010		2009
Premiums earned	$	266,687,610	$	238,308,846	$	223,223,583
Losses and loss expenses		206,907,170		160,256,348		138,058,878
Unearned premiums		141,880,039		125,322,884		117,044,000
Liability for losses and loss expenses		156,941,512		134,580,026		131,247,578

Donegal Mutual and Southern have a quota-share reinsurance agreement whereby Southern assumes 100% of the premiums and losses related to personal lines products Donegal Mutual offers in Virginia through the use of its automated policy quoting and issuance system. Donegal Mutual and Le Mars have a quota-share reinsurance agreement whereby Le Mars assumes 100% of the premiums and losses related to certain products Donegal Mutual offers in certain Midwest states, which provide the availability of complementary products to Le Mars’ commercial accounts. The following amounts represent reinsurance Southern and Le Mars assumed from Donegal Mutual pursuant to the quota-share reinsurance agreements during 2011, 2010 and 2009:

	2011		2010		2009
Premiums earned	$	17,757,409	$	14,516,901	$	12,856,983
Losses and loss expenses		14,983,405		12,600,094		10,987,391
Unearned premiums		10,225,922		8,124,069		6,998,285
Liability for losses and loss expenses		7,770,053		7,316,879		4,868,486

Donegal Mutual and MICO have a quota-share reinsurance agreement whereby Donegal Mutual assumes 25% of the premiums and losses related to the business of MICO. Donegal Mutual and Peninsula have a quota-share reinsurance agreement whereby Donegal Mutual assumes 100% of the premiums and losses related to the workers’ compensation product line of Peninsula in certain states. The business Donegal Mutual assumes becomes part of the pooling agreement between Donegal Mutual and Atlantic States.

The following amounts represent reinsurance ceded to Donegal Mutual pursuant to these quota-share reinsurance agreements during 2011, 2010 and 2009:

	2011		2010		2009
Premiums earned	$	22,123,229	$	4,516,313	$	2,515,075
Losses and loss expenses		16,038,590		3,463,112		2,342,895
Prepaid reinsurance premiums		14,181,338		4,590,424		1,855,076
Liability for losses and loss expenses		11,868,641		4,006,231		1,980,626

Atlantic States, Southern and Le Mars each have a catastrophe reinsurance agreement with Donegal Mutual that provides coverage under any one catastrophic occurrence above a set retention ($2,000,000, $1,500,000 and $500,000 for Atlantic States, Southern and Le Mars, respectively) up to $5,000,000, with a combined retention of $3,000,000 for a catastrophe involving a combination of these subsidiaries. Our insurance subsidiaries recover losses in excess of $5,000,000 for any one catastrophe occurrence under catastrophe reinsurance agreements with unaffiliated reinsurers. Donegal Mutual and Southern have an excess of loss reinsurance agreement in which Donegal Mutual assumes up to $350,000 of losses in excess of $400,000. In 2009, Donegal Mutual and Sheboygan had an excess of loss reinsurance agreement in which Donegal Mutual assumed up to $50,000 of losses in excess of $150,000.

The following amounts represent reinsurance that our insurance subsidiaries ceded to Donegal Mutual pursuant to these reinsurance agreements during 2011, 2010 and 2009:

	2011		2010		2009
Premiums earned	$	12,953,452	$	8,110,268	$	8,315,347
Losses and loss expenses		20,770,637		6,649,775		9,742,303
Liability for losses and loss expenses		3,980,024		3,441,447		3,268,129

The following amounts represent the effect of affiliated reinsurance transactions on net premiums our insurance subsidiaries earned during 2011, 2010 and 2009:

	2011			2010			2009
Assumed	$	284,445,019		$	252,825,747		$	236,080,566
Ceded		(153,889,406	)		(118,002,649	)		(107,332,867	)
Net	$	130,555,613		$	134,823,098		$	128,747,699

The following amounts represent the effect of affiliated reinsurance transactions on net losses and loss expenses our insurance subsidiaries incurred during 2011, 2010 and 2009:

	2011			2010			2009
Assumed	$	221,890,575		$	172,856,442		$	149,046,269
Ceded		(133,940,073	)		(91,316,512	)		(80,333,280	)
Net	$	87,950,502		$	81,539,930		$	68,712,989

b. Expense Sharing

Donegal Mutual provides facilities, management and other services to us 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 their personnel costs and bear their proportionate share of information services costs based on their percentage of the total written premiums of the Donegal Insurance Group. Charges for these services totalled $64,711,860, $63,982,793 and $60,175,789 for 2011, 2010 and 2009, respectively.

c. Lease Agreement

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

d. Legal Services

Donald H. Nikolaus, our President and one of our directors, is a partner in the law firm of Nikolaus & Hohenadel. Such firm has served as our general counsel since 1986, principally in connection with the defense of claims litigation arising in Lancaster, Dauphin and York counties of Pennsylvania. We pay such firm its customary fees for such services.

e. Union Community Bank

At December 31, 2011 and 2010, we had $10,907,454 and $11,851,757, respectively, in checking accounts with UCB, a wholly owned subsidiary of DFSC. We earned $1,019, $1,575 and $3,260 in interest on these accounts during 2011, 2010 and 2009, respectively.