Investments

12 Months Ended

Dec. 31, 2011

Investment [Abstract]

Investments

5 - Investments

The amortized cost and estimated fair values of fixed maturities and equity securities at December 31, 2011 and 2010 are as follows:

	2011
Held to Maturity	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	1,000,000	$	53,990	$	—	$	1,053,990
Obligations of states and political subdivisions		56,965,959		2,857,005		—		59,822,964
Corporate securities		249,850		2,756		—		252,606
Residential mortgage-backed securities		273,810		18,986		9		292,787
Totals	$	58,489,619	$	2,932,737	$	9	$	61,422,347
	2011
Available for Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	59,431,789	$	1,545,768	$	—	$	60,977,557
Obligations of states and political subdivisions		372,663,210		26,252,161		38,789		398,876,582
Corporate securities		62,836,703		1,805,109		528,163		64,113,649
Residential mortgage-backed securities		119,367,152		3,306,932		43,694		122,630,390
Fixed maturities		614,298,854		32,909,970		610,646		646,598,178
Equity securities		7,238,803		606,440		407,705		7,437,538
Totals	$	621,537,657	$	33,516,410	$	1,018,351	$	654,035,716

	2010
Held to Maturity	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	1,000,000	$	84,320	$	—	$	1,084,320
Obligations of states and political subdivisions		59,852,427		2,893,921		—		62,746,348
Corporate securities		3,246,980		25,027		—		3,272,007
Residential mortgage-backed securities		667,022		39,042		18		706,046
Totals	$	64,766,429	$	3,042,310	$	18	$	67,808,721
	2010
Available for Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	57,283,889	$	484,282	$	452,352	$	57,315,819
Obligations of states and political subdivisions		388,091,036		6,838,193		5,300,094		389,629,135
Corporate securities		67,518,441		649,969		1,073,486		67,094,924
Residential mortgage-backed securities		88,409,620		1,850,670		453,967		89,806,323
Fixed maturities		601,302,986		9,823,114		7,279,899		603,846,201
Equity securities		2,503,565		7,693,231		35,182		10,161,614
Totals	$	603,806,551	$	17,516,345	$	7,315,081	$	614,007,815

At December 31, 2011, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $372.2 million and an amortized cost of $348.4 million. Our holdings also included special revenue bonds with an aggregate fair value of $86.5 million and an amortized cost of $81.0 million. With respect to both categories, we held no securities of any issuer that comprised more than 10% of the category at December 31, 2011. Education bonds and water and sewer utility bonds represented 59% and 17%, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, 2011. Many of the issuers of the special revenue bonds we held at December 31, 2011 have the authority to impose ad valorem taxes. In that respect, many of the special revenue bonds we held were similar to general obligation bonds.

At December 31, 2010, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $366.7 million and an amortized cost of $362.5 million. Our holdings also included special revenue bonds with an aggregate fair value of $85.7 million and an amortized cost of $85.5 million. With respect to both categories, we held no securities of any issuer that comprised more than 10% of the category at December 31, 2010. Education bonds and water and sewer utility bonds represented 53% and 11%, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, 2010. Many of the issuers of the special revenue bonds we held at December 31, 2010 have the authority to impose ad valorem taxes. In that respect, many of the special revenue bonds we held were similar to general obligation bonds.

We set forth below the amortized cost and estimated fair value of fixed maturities at December 31, 2011 by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Estimated Fair Value
Held to maturity
Due in one year or less	$	749,850	$	753,246
Due after one year through five years		33,359,535		34,879,334
Due after five years through ten years		24,106,424		25,496,980
Due after ten years		—		—
Residential mortgage-backed securities		273,810		292,787
Total held to maturity	$	58,489,619	$	61,422,347
Available for sale
Due in one year or less	$	15,265,671	$	15,431,492
Due after one year through five years		64,964,688		66,372,443
Due after five years through ten years		155,488,232		164,416,999
Due after ten years		259,213,111		277,746,854
Residential mortgage-backed securities		119,367,152		122,630,390
Total available for sale	$	614,298,854	$	646,598,178

The amortized cost of fixed maturities on deposit with various regulatory authorities at December 31, 2011 and 2010 amounted to $10,629,319 and $10,181,518, respectively.

Investments in affiliates consisted of the following at December 31, 2011 and 2010:

	2011		2010
DFSC	$	31,857,246	$	8,526,577
Other		465,000		465,000
Total	$	32,322,246	$	8,991,577

We account for investments in our affiliates using the equity method of accounting. Under this method, we record our investment at cost, with adjustments for our share of our affiliates’ earnings and losses as well as changes in our affiliates’ equity due to unrealized gains and losses. Our investments in affiliates include our 48.2% ownership interest in DFSC. In May 2011, DFSC merged with UNNF, with DFSC as the surviving company in the merger. Under the merger agreement, Province Bank FSB, which DFSC owned, and Union National Community Bank, which UNNF owned, also merged and began doing business as UCB. Donegal Mutual contributed $22.1 million and we contributed $20.6 million to DFSC as additional capital to facilitate the mergers. We, Donegal Mutual and DFSC have entered into a capital maintenance agreement with UCB, whereby we, Donegal Mutual and DFSC have agreed to make such capital contributions to UCB in the combined aggregate maximum amount that would not exceed $20.0 million as may be necessary from time to time to ensure that UCB has sufficient capital as demonstrated by UCB’s maintenance of certain capital ratios. At December 31, 2011, UCB had capital ratios substantially above the minimum requirements under the capital maintenance agreement.

We include our share of DFSC’s net income in our results of operations. We have compiled the following summary financial information for DFSC at December 31, 2011 and 2010 from the financial statements of DFSC.

	December 31,
	2011		2010
Balance sheets:
Total assets	$	532,938,460	$	99,118,459
Total liabilities	$	466,940,425	$	81,510,324
Stockholders’ equity		65,998,035		17,608,135
Total liabilities and stockholders’ equity	$	532,938,460	$	99,118,459

	Year Ended December 31,
	2011		2010			2009
Income statements:
Net income (loss)	$	4,196,054	$	(556,528	)	$	1,001,118

Other comprehensive income (loss) in our statements of comprehensive income includes net unrealized gains (losses) of $479,401, ($32,129) and $93,647 for 2011, 2010 and 2009, respectively, representing our share of DFSC’s unrealized investment gains or losses.

Other investment in affiliates represents our investment in statutory trusts that hold our subordinated debentures that we discuss in Note 10 - Borrowings.

We derive net investment income, consisting primarily of interest and dividends, from the following sources:

	2011			2010			2009
Fixed maturities	$	25,044,316		$	23,995,220		$	24,458,118
Equity securities		162,934			42,869			69,287
Short-term investments		57,296			91,665			199,735
Other		48,588			46,095			47,514
Investment income		25,313,134			24,175,849			24,774,654
Investment expenses		(4,454,955	)		(4,226,135	)		(4,144,071	)
Net investment income	$	20,858,179		$	19,949,714		$	20,630,583

We present below gross realized gains and losses from investments and the change in the difference between fair value and cost of investments:

	2011			2010			2009
Gross realized gains:
Fixed maturities	$	4,959,707		$	4,136,455		$	2,654,648
Equity securities		8,760,511			1,791,585			2,179,331
		13,720,218			5,928,040			4,833,979
Gross realized losses:
Fixed maturities		163,316			533,918			102,143
Equity securities		1,275,635			998,402			252,278
		1,438,951			1,532,320			354,421
Net realized gains	$	12,281,267		$	4,395,720		$	4,479,558
Change in difference between fair value and cost of investments:
Fixed maturities	$	29,646,545		$	(11,571,194	)	$	18,779,926
Equity securities		(7,459,314	)		1,547,487			3,154,823
Totals	$	22,187,231		$	(10,023,707	)	$	21,934,749

We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at December 31, 2011 as follows:

	Less than 12 months				12 months or longer
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	—	$	—	$	—
Obligations of states and political subdivisions		1,638,135		17,390		540,062		21,400
Corporate securities		10,101,753		528,164		—		—
Residential mortgage-backed securities		7,411,682		43,692		626		9
Equity securities		4,083,863		407,705		—		—
Totals	$	23,235,433	$	996,951	$	540,688	$	21,409

We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at December 31, 2010 as follows:

	Less than 12 months				12 months or longer
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	23,901,400	$	452,352	$	—	$	—
Obligations of states and political subdivisions		171,609,617		5,208,910		1,406,325		91,184
Corporate securities		44,101,089		1,061,972		490,970		11,514
Residential mortgage-backed securities		35,930,054		453,967		750		18
Equity securities		313,888		35,182		—		—
Totals	$	275,856,048	$	7,212,383	$	1,898,045	$	102,716

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 write down the investment to its fair value, and we reflect the amount of the write-down as a realized loss in our results of operations when we consider the decline in value of an individual investment to be other than temporary. We individually monitor all investments for other-than-temporary declines in value. Generally, we assume there has been an other-than-temporary decline in value if an individual equity security has depreciated in value by more than 20% of original cost and has been in such an unrealized loss position for more than six months. We held 12 equity securities that were in an unrealized loss position at December 31, 2011. Based upon our analysis of general market conditions and underlying factors impacting these equity securities, we considered these declines in value to be temporary. 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 an 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. 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, company or geographic events that have negatively impacted the value of a security and rating agency downgrades. We held 21 debt securities that were in an unrealized loss position at December 31, 2011. 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 did not recognize any impairment losses in 2011, 2010 or 2009. We had no sales or transfers from the held to maturity portfolio in 2011, 2010 or 2009. We have no derivative instruments or hedging activities.