10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2012

OR

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

For the transition period from                      to                     

Commission file number 0-15341

DONEGAL GROUP INC.

(Exact name of registrant as specified in its charter)

Delaware	23-2424711
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
1195 River Road, Marietta, Pennsylvania	17547
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code: (888) 877-0600

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

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

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act:    Yes  ¨.    No  x.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.    Yes  ¨.    No  x.

Indicate by check mark whether the 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  x.    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x.    No  ¨.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements we incorporate by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” or “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company.    Yes  ¨.    No  x.

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $176,019,297.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 20,050,649 shares of Class A common stock and 5,576,775 shares of Class B common stock outstanding on March 1, 2013.

Documents Incorporated by Reference

The registrant incorporates by reference portions of the registrant’s definitive proxy statement relating to registrant’s annual meeting of stockholders to be held April 18, 2013 into Part III of this report.

DONEGAL GROUP INC.

INDEX TO FORM 10-K REPORT

		Page
PART I
Item 1.	Business		1
Item 1A.	Risk Factors		22
Item 1B.	Unresolved Staff Comments		32
Item 2.	Properties		32
Item 3.	Legal Proceedings		32
Item 4.	Reserved		32
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		34
Item 6.	Selected Financial Data		37
Item 7.	Management’s Discussion and Analysis of Results of Operations and Financial Condition		38
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		54
Item 8.	Financial Statements and Supplementary Data		56
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		95
Item 9A.	Controls and Procedures		95
Item 9B.	Other Information		95
PART III
Item 10.	Directors, Executive Officers and Corporate Governance of the Registrant		97
Item 11.	Executive Compensation		97
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		97
Item 13.	Certain Relationships and Related Transactions and Director Independence		97
Item 14.	Principal Accountant Fees and Services		97
PART IV
Item 15.	Exhibits and Financial Statement Schedules		98

(i)

PART I

Item 1. Business.

Introduction

Donegal Group Inc., or DGI, is an insurance holding company whose insurance subsidiaries offer personal and commercial lines of property and casualty insurance to businesses and individuals in 22 Mid-Atlantic, Midwestern, New England and Southern states. As used herein, the terms “we,” “us” and “our” refer to Donegal Group Inc. and its subsidiaries.

Donegal Mutual Insurance Company, or Donegal Mutual, organized us as an insurance holding company on August 26, 1986. At December 31, 2012, Donegal Mutual held approximately 39% of our outstanding Class A common stock and approximately 76% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately 66% of the aggregate voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock. Our insurance subsidiaries and Donegal Mutual have interrelated operations due to a pooling agreement and other intercompany agreements and transactions we describe in Note 3 of the Notes to Consolidated Financial Statements. While maintaining the separate corporate existence of each company, our insurance subsidiaries and Donegal Mutual 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.

We have been an effective consolidator of smaller “main street” property and casualty insurance companies, and we expect to continue to acquire other insurance companies to expand our business in a given region or to commence operations in a new region. Since 1995, we have completed six acquisitions of property and casualty insurance companies or began to participate in their business through Donegal Mutual’s entry into quota-share reinsurance with them.

Our insurance subsidiaries and Donegal Mutual provide their policyholders with a selection of insurance products at competitive rates, while pursuing profitability by adhering to a strict underwriting discipline. Our insurance subsidiaries derive a substantial portion of their insurance business from smaller to mid-sized regional communities. We believe this focus provides our insurance subsidiaries with competitive advantages in terms of local market knowledge, marketing, underwriting, claims servicing and policyholder service. At the same time, we believe our insurance subsidiaries have cost advantages over many smaller regional insurers that result from economies of scale they realize through centralized accounting, administrative, data processing, investment and other services.

We believe we have a substantial opportunity, as a well-capitalized regional insurance holding company with a solid business strategy, to grow profitably and compete effectively with national property and casualty insurers. Our downstream holding company structure, with Donegal Mutual as our controlling stockholder, has proven its effectiveness and success over the past 27 years of our existence. Over that time frame, we have grown significantly in terms of revenue and financial strength, and the Donegal Insurance Group has developed an excellent reputation as a regional group of property and casualty insurers.

We own 48.2% of Donegal Financial Services Corporation, or DFSC. DFSC is a grandfathered unitary savings and loan holding company that owns all of the outstanding capital stock of Union Community Bank FSB, a federal savings bank, or UCB. UCB has 13 banking offices, all of which are located in Lancaster County, Pennsylvania. Donegal Mutual owns the remaining 51.8% of DFSC. For further information regarding DFSC, we refer to “Business - Donegal Financial Services Corporation” in this Form 10-K Annual Report.

We have four segments: our investment function, our personal lines of insurance, our commercial lines of insurance and our investment in DFSC. We set forth financial information about these segments in Note 20 of the Notes to Consolidated Financial Statements. 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.

Available Information

You may obtain our Annual Reports on Form 10-K, including this Form 10-K Annual Report, our quarterly reports on Form 10-Q, our current reports on Form 8-K, our proxy statement and our other filings pursuant to the Securities Exchange Act of 1934, or the Exchange Act, without charge by viewing our website at www.donegalgroup.com. You may also view our Code of Business Conduct and Ethics and the charters of our executive committee, our audit committee, our compensation committee and our nominating committee on our website. Upon request to our corporate secretary, we will also provide printed copies of any of these documents to you without charge. We have provided the address of our website solely for the information of investors. We do not intend the reference to our website address to be an active link or to otherwise incorporate the contents of our website into this Form 10-K Annual Report.

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History and Organizational Structure

In the mid-1980s, Donegal Mutual recognized its need, as a mutual insurance company, to develop additional sources of capital and surplus to remain competitive and to have the capacity to expand its business and assure its long-term viability. Donegal Mutual determined to implement a downstream holding company structure as one of its strategic responses. Accordingly, in 1986, Donegal Mutual formed us as a downstream holding company. Initially, Donegal Mutual owned all of our outstanding capital stock. We in turn formed Atlantic States Insurance Company, or Atlantic States, as our wholly owned subsidiary. We subsequently effected a public offering to provide the surplus necessary to support the business Atlantic States began to receive on October 1, 1986 as its share under a proportional reinsurance agreement, or pooling agreement, between Donegal Mutual and Atlantic States that became effective on that date. Under this pooling agreement, Donegal Mutual and Atlantic States pool and then share proportionately substantially all of their respective premiums, losses and expenses.

As the capital of Atlantic States has increased, its underwriting capacity has increased proportionately. Therefore, as we originally planned in the mid-1980s, Atlantic States has successfully raised the capital necessary to support the growth of its direct business as well as to accept increases in its allocation of business from the underwriting pool. The allocation to Atlantic States from the pool has increased from an initial allocation of 35% in 1986 to an 80% allocation since March 1, 2008. The size of the underwriting pool has increased substantially since its inception. The business Atlantic States derives from the pool represents the predominant percentage of our total revenues. We do not anticipate any further changes in the pooling agreement between Atlantic States and Donegal Mutual in the foreseeable future, including any change in the percentage participation of Atlantic States in the underwriting pool. Our insurance subsidiaries other than Atlantic States do not participate in the pooling agreement. We refer to Note 3 of the Notes to Consolidated Financial Statements for more information regarding the pooling agreement.

Since Donegal Mutual established our downstream holding company structure in 1986, Donegal Mutual and our insurance subsidiaries have conducted business together while retaining their separate legal and corporate existences. As such, Donegal Mutual and our insurance subsidiaries share the same business philosophies, the same management, the same employees, the same facilities and we offer the same types of insurance products. 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 Donegal Mutual and our insurance subsidiaries offer are generally complementary, which permits 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 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 versus standard tier products. Although the underwriting profitability of the business the individual companies write directly will vary, the underwriting pool homogenizes the risk characteristics of all business Donegal Mutual and Atlantic States write directly. Donegal Mutual and Atlantic States share the underwriting results of the pool in proportion to their respective participation in the pool.

In addition to Atlantic States, our insurance subsidiaries include Southern Insurance Company of Virginia, or Southern, Le Mars Insurance Company, or Le Mars, The Peninsula Insurance Company and its wholly owned subsidiary, Peninsula Indemnity Company, or collectively, the Peninsula Group, Sheboygan Falls Insurance Company, or Sheboygan, and Michigan Insurance Company, or MICO. We also benefit from Donegal Mutual’s 100% quota-share reinsurance agreement with Southern Mutual Insurance Company, or Southern Mutual, and Donegal Mutual’s placement of its assumed business from Southern Mutual into the pooling agreement.

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The following chart summarizes our organizational structure. The chart depicts all of our property and casualty insurance subsidiaries, Southern Mutual and our interest in DFSC:

(1) Because of the different relative voting power of our Class A common stock and Class B common stock, our public stockholders hold approximately 34.1% of the aggregate voting power of our Class A common stock and Class B common stock and Donegal Mutual holds approximately 65.9% of the aggregate voting power of our Class A common stock and Class B common stock.

Relationship with Donegal Mutual

Donegal Mutual provides facilities, personnel 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 Donegal Mutual and Atlantic States in the underwriting pool. Our insurance subsidiaries other than Atlantic States reimburse Donegal Mutual for their respective personnel costs and bear their proportionate share of information services costs based on their respective percentage of the total written premiums of the Donegal Insurance Group. Charges for these services totaled $78.8 million, $64.7 million and $64.0 million for 2012, 2011 and 2010, respectively.

Our insurance subsidiaries have various reinsurance arrangements with Donegal Mutual. These agreements include:

• an excess of loss reinsurance agreement with Southern;

• catastrophe reinsurance agreements with Atlantic States, Le Mars and Southern;

• a quota-share reinsurance agreement with Le Mars;

• a quota-share reinsurance agreement with Peninsula; and

• a quota-share reinsurance agreement with MICO.

The intent of the excess of loss and catastrophe reinsurance agreements is to lessen the effects of a single large loss, or an accumulation of smaller losses arising from one event, to levels that are appropriate given each subsidiary’s size, underwriting profile and surplus position.

The intent of the quota-share reinsurance agreement with Le Mars is to transfer to Le Mars 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 intent of the quota-share reinsurance agreement with Peninsula is to transfer to Donegal Mutual 100% of the premiums and losses related to the workers’ compensation product line of Peninsula in certain states, which provides the availability of an additional workers’ compensation tier to Donegal Mutual’s commercial accounts. Donegal Mutual places its assumed business from Peninsula into the underwriting pool.

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The intent of the quota-share reinsurance agreement with MICO is to transfer to Donegal Mutual 25% of the premiums and losses related to MICO’s business. Donegal Mutual places its assumed business from MICO into the underwriting pool.

Effective November 1, 2012 Donegal Mutual and Southern terminated their quota-share reinsurance agreement on a run-off basis. The intent of the quota-share reinsurance agreement with Southern was to transfer to Southern 100% of the premiums and losses related to certain personal lines products Donegal Mutual offered in Virginia through the use of its automated policy quoting and issuance system.

We and Donegal Mutual have maintained a coordinating committee since our formation in 1986. The coordinating committee 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 establish and maintain a process for an annual evaluation of the transactions between Donegal Mutual, our insurance subsidiaries and us. The coordinating committee considers the fairness of each intercompany transaction to Donegal Mutual and its policyholders and to us and our stockholders.

A new agreement or any change to a previously approved agreement must receive coordinating committee approval. The coordinating committee approval process for a new agreement between Donegal Mutual and us or one of our insurance subsidiaries or a change in such an agreement is as follows:

• both of our members on the coordinating committee must determine that the new agreement or the change in an existing agreement is fair and equitable to us and in the best interests of our stockholders;

• both of Donegal Mutual’s members on the coordinating committee must determine that the new agreement or the change in an existing agreement is fair and equitable to Donegal Mutual and in the best interests of its policyholders;

• the new agreement or the change in an existing agreement must be approved by our board of directors; and

• the new agreement or the change in an existing agreement must be approved by Donegal Mutual’s board of directors.

The coordinating committee also meets annually to review each existing agreement between Donegal Mutual and us or our insurance subsidiaries, including all reinsurance agreements between Donegal Mutual and our insurance subsidiaries. The purpose of this annual review is to examine the results of the agreements over the past year and, in the case of reinsurance agreements, over a five-year period and to determine if the results of the existing agreements remain fair and equitable to us and our stockholders and fair and equitable to Donegal Mutual and its policyholders or if Donegal Mutual and we should mutually agree to certain adjustments. In the case of these reinsurance agreements, the annual adjustments typically relate to the reinsurance premiums, losses and reinstatement premiums. These agreements are ongoing in nature and will continue in effect throughout 2013 in the ordinary course of business.

Our members on the coordinating committee, as of the date of this Form 10-K Annual Report, are Robert S. Bolinger and John J. Lyons. Donegal Mutual’s members on the coordinating committee as of such date are Dennis J. Bixenman and John E. Hiestand. We refer to our proxy statement for our annual meeting of stockholders on April 18, 2013 for further information about the members of the coordinating committee.

We believe our relationships with Donegal Mutual offer us and our insurance subsidiaries a number of competitive advantages, including the following:

• enabling our stable management, the consistent underwriting discipline of our insurance subsidiaries, external growth, long-term profitability and financial strength;

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• creating operational and expense synergies from the combination of resources and integrated operations of Donegal Mutual and our insurance subsidiaries;

• enhancing our opportunities to expand by acquisition because of the ability of Donegal Mutual to affiliate with and acquire control of other mutual insurance companies and, thereafter, demutualize them and combine them with us;

• producing more stable and uniform underwriting results for our insurance subsidiaries over extended periods of time than we could achieve without our relationship with Donegal Mutual;

• providing opportunities for growth because of the ability of Donegal Mutual to enter into reinsurance agreements with other mutual insurance companies and place the business it assumes into the pooling agreement; and

• providing Atlantic States with a significantly larger underwriting capacity because of the underwriting pool Donegal Mutual and Atlantic States have maintained since 1986.

In the latter portion of the fourth quarter of 2012 and the first quarter of 2013, the board of directors of Donegal Mutual undertook a review of the relationships of Donegal Mutual and DGI and determined that continuing the current relationships and the current corporate structure of Donegal Mutual and DGI is in the best interests of Donegal Mutual and its various constituencies.

Business Strategy

Our strategy is designed to allow our insurance subsidiaries to achieve their longstanding goal of outperforming the United States property and casualty insurance industry in terms of profitability and service, thereby providing value to the policyholders of our insurance subsidiaries and, ultimately, providing value to our stockholders. The annual net premiums earned of our insurance subsidiaries have increased from $265.8 million in 2004 to $475.0 million in 2012, a compound annual growth rate of 7.5%. Over the same time period, our insurance subsidiaries have generally achieved a combined ratio more favorable than that of the United States property and casualty insurance industry as a whole.

The combined ratio of our insurance subsidiaries and that of the United States property and casualty insurance industry as computed using United States generally accepted accounting principles, or GAAP, and statutory accounting principles, or SAP, for the years 2008 through 2012 are shown in the following table:

	2012			2011			2010			2009			2008
Our GAAP combined ratio (1)		101.6	%		110.6	%		104.7	%		102.2	%		97.2	%
Our SAP combined ratio		99.8			107.9			102.9			101.1			95.1
Industry SAP combined ratio (2)		106.2			107.5			101.0			101.2			104.7

(1) Our GAAP combined ratio for 2011 was adversely affected by the accounting related to the acquisition of MICO. We refer to Note 4 of the Notes to Consolidated Financial Statements for more information regarding our acquisition of MICO.

(2) As reported or projected by A.M. Best Company.

We and Donegal Mutual believe we can continue to expand our insurance operations over time through organic growth and acquisitions of, or affiliations with, other insurance companies. We and Donegal Mutual have enhanced the performance of companies we have acquired, while leveraging the acquired companies’ core strengths and local market knowledge to expand their operations. Our insurance subsidiaries and Donegal Mutual also seek to increase their premium base by making quality independent agency appointments, enhancing their competitive position within each agency, introducing new and enhanced insurance products and developing and maintaining automated systems to improve their service and efficiency.

We and Donegal Mutual translate these initiatives into our book value growth in a number of ways, including the following:

• Maintaining a conservative underwriting culture and pricing discipline to sustain our record of underwriting profitability;

• Continuing our investment in technology to achieve operating efficiencies that lower expenses and enhance the service we provide to agencies and policyholders; and

• Maintaining a conservative investment approach.

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A detailed review of our business strategies follows:

• Achieving underwriting profitability.

Our insurance subsidiaries focus on achieving a combined ratio of less than 100%. Our insurance subsidiaries did not achieve that objective in 2011 and 2010 because of adverse weather, declining economic activity and a soft insurance market in our marketing areas in those years, but we remain committed to achieving consistent underwriting profitability. The accounting for the acquisition of MICO also adversely affected our combined ratio in 2011. We believe that underwriting profitability is a fundamental component of our long-term financial strength because it allows our insurance subsidiaries to generate profits without relying exclusively on their investment income. Our insurance subsidiaries seek to enhance their underwriting results by:

• carefully selecting the product lines they underwrite;

• carefully selecting the individual risks they underwrite;

• minimizing their individual exposure to catastrophe-prone areas; and

• evaluating their claims history on a regular basis to ensure the adequacy of their underwriting guidelines and product pricing.

Our insurance subsidiaries have no material exposures to asbestos and environmental liabilities. Our insurance subsidiaries seek to provide more than one policy to a given personal lines or commercial lines customer because this “account selling” strategy diversifies their risk and has historically improved their underwriting results. Finally, our insurance subsidiaries use reinsurance to manage their exposure and limit their maximum net loss from large single risks or risks in concentrated areas. Our insurance subsidiaries believe these practices are key factors in their ability to maintain a combined ratio that has been generally more favorable than the combined ratio of the United States property and casualty insurance industry.

• Pursuing profitable growth by organic expansion within the traditional operating territories of our insurance subsidiaries through developing and maintaining quality agency representation.

We believe that continued expansion of our insurance subsidiaries within their existing markets will be a key source of their continued premium growth and that maintaining an effective and growing network of independent agencies is integral to their expansion. Our insurance subsidiaries seek to be among the top three insurers within each of the independent agencies for the lines of business our insurance subsidiaries write by providing a consistent, competitive and stable market for their products. We believe that the consistency of their product offerings enables our insurance subsidiaries to compete effectively for agents with other insurers whose product offerings fluctuate based on industry conditions. Our insurance subsidiaries offer a competitive compensation program to their independent agents that rewards them for producing profitable growth for our insurance subsidiaries. Our insurance subsidiaries provide their independent agents with ongoing support to enable them to better attract and service customers, including:

• fully automated underwriting and policy issuance systems for both personal, commercial and farm lines of insurance;

• training programs;

• marketing support;

• availability of a service center that provides comprehensive service for our personal lines policyholders; and

• field visitations by marketing and underwriting personnel and senior management of our insurance subsidiaries.

Our insurance subsidiaries appoint independent agencies with a strong underwriting and growth track record. We believe that our insurance subsidiaries, by carefully selecting, motivating and supporting their independent agencies, will drive continued long-term growth.

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• Acquiring property and casualty insurance companies to augment the organic growth of our insurance subsidiaries in existing markets and to expand into new geographic regions.

We have been an effective consolidator of smaller “main street” property and casualty insurance companies, and we expect to continue to acquire other insurance companies to expand our business in a given region or to commence operations in a new region.

Since 1995, we have completed six acquisitions of property and casualty insurance companies or participated in their business through Donegal Mutual’s entry into quota-share reinsurance agreements with them. We intend to continue our growth by pursuing affiliations and acquisitions that meet our criteria. Our primary criteria include:

• Location in regions where our insurance subsidiaries are currently conducting business or that offer an attractive opportunity to conduct profitable business;

• A mix of business similar to the mix of business of our insurance subsidiaries;

• Premium volume up to $100.0 million; and

• Fair and reasonable transaction terms.

We believe that our interrelationship with Donegal Mutual assists us in pursuing affiliations with and subsequent acquisitions of, mutual insurance companies because, through Donegal Mutual, we understand the concerns and issues that mutual insurance companies face. In particular, Donegal Mutual has had success affiliating with underperforming mutual insurance companies, and we have either acquired them following their conversion to a stock company or benefited from their underwriting results as a result of Donegal Mutual’s entry into a 100% quota-share reinsurance agreement with them and placement of its assumed business into the pooling agreement. We have utilized our strengths and financial position to improve the operations of those underperforming insurance companies significantly. We evaluate a number of areas for operational synergies when considering acquisitions, including product underwriting, expenses, the cost of reinsurance and technology.

We and Donegal Mutual have the ability to employ a number of acquisition and affiliation methods. Our prior acquisitions and affiliations have taken one of the following forms:

• purchase of all of the outstanding stock of a stock insurance company;

• purchase of a book of business;

• quota-share reinsurance transaction; or

• two-step acquisition of a mutual insurance company in which:

• as the first step, Donegal Mutual purchases a surplus note from the mutual insurance company, Donegal Mutual enters into a services agreement with the mutual insurance company and Donegal Mutual’s designees become a majority of the members of the board of directors of the mutual insurance company; and

• as the second step, the mutual insurance company enters into a quota-share reinsurance agreement with Donegal Mutual or demutualizes, or converts, into a stock insurance company. Upon the demutualization or conversion, we purchase the surplus note from Donegal Mutual and exchange it for all of the stock of the stock insurance company resulting from the demutualization or conversion.

We believe that our ability to make direct acquisitions of stock insurance companies and to make indirect acquisitions of mutual insurance companies through a sponsored conversion or a quota-share reinsurance agreement provides us with flexibility that is a competitive advantage in seeking acquisitions. We also believe we have demonstrated our ability to acquire control of an underperforming insurance company, re-underwrite its book of business, reduce its cost structure and return it to sustained profitability.

While Donegal Mutual and we generally engage in preliminary discussions with potential direct or indirect acquisition candidates on an almost continuous basis and are so engaged at the date of this Form 10-K Report, neither Donegal Mutual nor we make any public disclosure regarding a proposed acquisition until Donegal Mutual or we have entered into a definitive acquisition agreement.

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The following table highlights our history of insurance company acquisitions and affiliations since 1988:

Company Name	State of Domicile	Year Control Acquired	Method of Acquisition/Affiliation
Southern Mutual Insurance Company and now Southern Insurance Company of Virginia	Virginia	1984	Surplus note investment by Donegal Mutual in 1984; demutualization in 1988; acquisition of stock by us in 1988.
Pioneer Mutual Insurance Company and then Pioneer Insurance Company (1)(2)	Ohio	1992	Surplus note investment by Donegal Mutual in 1992; demutualization in 1993; acquisition of stock by us in 1997.
Delaware Mutual Insurance Company and then Delaware Atlantic Insurance Company (1)(2)	Delaware	1993	Surplus note investment by Donegal Mutual in 1993; demutualization in 1994; acquisition of stock by us in 1995.
Pioneer Mutual Insurance Company and then Pioneer Insurance Company (1)(2)	New York	1995	Surplus note investment by Donegal Mutual in 1995; demutualization in 1998; acquisition of stock by us in 2001.
Southern Heritage Insurance Company (2)	Georgia	1998	Purchase of stock by us in 1998.
Le Mars Mutual Insurance Company of Iowa and now Le Mars Insurance Company (1)	Iowa	2002	Surplus note investment by Donegal Mutual in 2002; demutualization in 2004; acquisition of stock by us in 2004.
Peninsula Insurance Group	Maryland	2004	Purchase of stock by us in 2004.
Sheboygan Falls Mutual Insurance Company and now Sheboygan Falls Insurance Company (1)	Wisconsin	2007	Contribution note investment by Donegal Mutual in 2007; demutualization in 2008; acquisition of stock by us in 2008.
Southern Mutual Insurance Company (3)	Georgia	2009	Surplus note investment by Donegal Mutual and quota-share reinsurance in 2009.
Michigan Insurance Company	Michigan	2010	Purchase of stock by us and surplus note investment by Donegal Mutual in 2010.

(1) Each of these acquisitions initially took the form of an affiliation with Donegal Mutual. Donegal Mutual provided surplus note financing to the insurance company, and, in connection therewith, sufficient designees of Donegal Mutual were appointed so as to constitute a majority of the members of the board of directors of the insurance company. Donegal Mutual and the insurance company simultaneously entered into a services agreement whereby Donegal Mutual provided services to improve the operations of the insurance company. Once the insurance company’s results of operations improved, Donegal Mutual sponsored the demutualization of the insurance company. Upon the consummation of the demutualization, Donegal Mutual acquired all of the capital stock of the newly demutualized insurance company. The consideration Donegal Mutual used was the conversion of the surplus note. We then purchased the insurance company from Donegal Mutual and made an additional cash contribution to assure compliance with minimum capital and surplus requirements and to provide adequate surplus to support the insurance company’s planned premium growth.

(2) To reduce administrative and compliance costs and expenses, these subsidiaries subsequently merged into one of our existing insurance subsidiaries.

(3) Control acquired by Donegal Mutual.

• Providing responsive and friendly customer and agent service to enable our insurance subsidiaries to attract new policyholders and retain existing policyholders.

We believe that excellent policyholder service is important in attracting new policyholders and retaining existing policyholders. Our insurance subsidiaries work closely with their independent agents to provide a consistently responsive level of claims service, underwriting and customer support. Our insurance subsidiaries seek to respond expeditiously and effectively to address customer and independent agent inquiries in a number of ways, including:

• Availability of a customer call center for claims reporting;

• Availability of a secure website for access to policy information and documents, payment processing and other features;

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• Quick replies to information requests and policy submissions; and

• Prompt responses to and processing of claims.

Our insurance subsidiaries periodically conduct policyholder surveys to evaluate the effectiveness of their service to policyholders. The management of our insurance subsidiaries meets frequently with the personnel of the independent insurance agents our insurance subsidiaries appoint to seek service improvement recommendations, react to service issues and better understand local market conditions.

• Maintaining premium rate adequacy to enhance the underwriting results of our insurance subsidiaries, while maintaining their existing book of business and preserving their ability to write new business.

Our insurance subsidiaries seek discipline in their pricing by effecting rate increases to maintain or improve their underwriting profitability without unduly affecting their customer retention. In addition to appropriate pricing, our insurance subsidiaries seek to ensure that their premium rates are adequate relative to the amount of risk they insure. Our insurance subsidiaries review loss trends on a periodic basis to identify changes in the frequency and severity of their claims and to assess the adequacy of their rates and underwriting standards. Our insurance subsidiaries also carefully monitor and audit the information they use to price their policies for the purpose of enabling them to receive an adequate level of premiums for their risk. For example, our insurance subsidiaries inspect substantially all commercial lines risks and a substantial number of personal lines property risks before they commit to insure them to determine the adequacy of the insured amount to the value of the insured property, assess property conditions and identify any liability exposures. Our insurance subsidiaries audit the payroll data of their workers’ compensation customers to verify that the assumptions used to price a particular policy were accurate. By implementing appropriate rate increases and understanding the risks our insurance subsidiaries agree to insure, they are generally able to achieve their strategy of achieving consistent underwriting profitability.

• Focusing on expense controls and utilization of technology to increase the operating efficiency of our insurance subsidiaries.

Our insurance subsidiaries maintain stringent expense controls under direct supervision of their senior management. We centralize many processing and administrative activities of our insurance subsidiaries to realize operating synergies and better control expenses. Our insurance subsidiaries utilize technology to automate much of their underwriting and to facilitate agency and policyholder communications on an efficient and cost-effective basis. We operate on a paperless basis. As a result of our focus on expense control, our insurance subsidiaries have reduced their expense ratio from 36.6% in 1999 to 31.2% in 2012. Our insurance subsidiaries have also increased their annual premium per employee, a measure of efficiency that our insurance subsidiaries use to evaluate their operations, from approximately $470,000 in 1999 to approximately $908,000 in 2012.

Our insurance subsidiaries maintain technology comparable to that of the largest of their competitors. “Ease of doing business” is an increasingly important component of an insurer’s value to an independent agency. Our insurance subsidiaries provide a fully automated personal lines underwriting and policy issuance system called “WritePro^®.” WritePro^® is a web-based user interface that substantially eases data entry and facilitates the quoting and issuance of policies for the independent agents of our insurance subsidiaries. Our insurance subsidiaries also provide a similar commercial business system called “WriteBiz^®.” WriteBiz^® is a web-based user interface that provides the independent agents of our insurance subsidiaries with an online ability to quote and issue commercial automobile, workers’ compensation, business owners and tradesman policies automatically. WriteFarm^® is a web-based user interface that provides the independent agents of our insurance subsidiaries with an online ability to quote and issue farm policies automatically. As a result, applications of the independent agents for our insurance subsidiaries can become policies without further re-entry of information. These systems also interface with the policy management systems of the independent agents of our insurance subsidiaries.

• Maintaining a conservative investment approach.

Return on invested assets is an important element of the financial results of our insurance subsidiaries. The investment strategy of our insurance subsidiaries is to generate an appropriate amount of after-tax income on invested assets while minimizing credit risk through investments in high-quality securities. As a result, our insurance subsidiaries seek to invest a high percentage of their assets in diversified, highly rated and marketable fixed-maturity instruments. The fixed-maturity portfolios of our insurance subsidiaries consist of both taxable and tax-exempt securities. Our insurance subsidiaries maintain a portion of their portfolios in short-term securities to provide liquidity for the payment of claims and operation of their respective businesses. Our insurance subsidiaries maintain a negligible percentage (1.1% at December 31, 2012) of their portfolios in equity securities.

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Competition

The property and casualty insurance industry is highly competitive on the basis of both price and service. Numerous companies compete for business in the geographic areas where our insurance subsidiaries operate. Many of these other insurance companies are substantially larger and have greater financial resources than those of our insurance subsidiaries. In addition, because our insurance subsidiaries and Donegal Mutual market their respective insurance products exclusively through independent insurance agencies, most of which represent more than one insurance company, our insurance subsidiaries face competition within agencies, as well as competition to retain qualified independent agents.

Products and Underwriting

We report the results of our insurance operations in two segments: personal lines of insurance and commercial lines of insurance. The personal lines our insurance subsidiaries write consist primarily of private passenger automobile and homeowners insurance. The commercial lines our insurance subsidiaries write consist primarily of commercial automobile, commercial multi-peril and workers’ compensation insurance. We describe these lines of insurance in greater detail below:

Personal

• Private passenger automobile — policies that provide protection against liability for bodily injury and property damage arising from automobile accidents and protection against loss from damage to automobiles owned by the insured.

• Homeowners — policies that provide coverage for damage to residences and their contents from a broad range of perils, including fire, lightning, windstorm and theft. These policies also cover liability of the insured arising from injury to other persons or their property while on the insured’s property and under other specified conditions.

Commercial

• Commercial automobile — policies that provide protection against liability for bodily injury and property damage arising from automobile accidents and protection against loss from damage to automobiles owned by the insured.

• Commercial multi-peril — policies that provide protection to businesses against many perils, usually combining liability and physical damage coverages.

• Workers’ compensation — policies employers purchase to provide benefits to employees for injuries sustained during employment. The workers’ compensation laws of each state determine the extent of the coverage we provide.

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The following table sets forth the net premiums written of our insurance subsidiaries by line of insurance for the periods indicated:

	Year Ended December 31,
	2012					2011					2010
(dollars in thousands)	Amount		%			Amount		%			Amount		%
Net Premiums Written:
Personal lines:
Automobile	$	195,132		39.3	%	$	186,677		41.1	%	$	171,497		43.8	%
Homeowners		97,120		19.6			89,405		19.7			83,415		21.3
Other		16,319		3.3			14,983		3.3			13,135		3.4
Total personal lines		308,571		62.2			291,065		64.1			268,047		68.5
Commercial lines:
Automobile		51,261		10.3			46,168		10.2			37,094		9.5
Workers’ compensation		65,390		13.2			51,849		11.4			34,920		8.9
Commercial multi-peril		64,476		13.0			57,988		12.8			47,411		12.1
Other		6,749		1.3			6,981		1.5			4,050		1.0
Total commercial lines		187,876		37.8			162,986		35.9			123,475		31.5
Total business	$	496,447		100.0	%	$	454,051		100.0	%	$	391,522		100.0	%

The personal lines and commercial lines underwriting departments of our insurance subsidiaries evaluate and select those risks that they believe will enable our insurance subsidiaries to achieve an underwriting profit. The underwriting departments have significant interaction with the independent agents regarding the underwriting philosophy and the underwriting guidelines of our insurance subsidiaries. Our underwriting personnel also assist the research and development department in the development of quality products at competitive prices to promote growth and profitability.

In order to achieve underwriting profitability on a consistent basis, our insurance subsidiaries:

• assess and select quality standard and preferred risks;

• adhere to disciplined underwriting and re-underwriting guidelines;

• inspect substantially all commercial lines risks and a substantial number of personal lines property risks; and

• utilize various types of risk management and loss control services.

Our insurance subsidiaries also review their existing policies and accounts to determine whether those risks continue to meet their underwriting guidelines. If a given policy or account no longer meets those underwriting guidelines, our insurance subsidiaries will take appropriate action regarding that policy or account, including raising premium rates or non-renewing the policy to the extent applicable law permits.

As part of the effort of our insurance subsidiaries to maintain acceptable underwriting results, they conduct annual reviews of agencies that have failed to meet their underwriting profitability criteria. The review process includes an analysis of the underwriting and re-underwriting practices of the agency, the completeness and accuracy of the applications the agency has submitted, the adequacy of the training of the agency’s staff and the agency’s record of adherence to the underwriting guidelines and service standards of our insurance subsidiaries. Based on the results of this review process, the marketing and underwriting personnel of our insurance subsidiaries develop, together with the agency, a plan to improve its underwriting profitability. Our insurance subsidiaries monitor the agency’s compliance with the plan, and take other measures as required in the judgment of our insurance subsidiaries, including the termination to the extent applicable law permits of agencies that are unable to achieve acceptable underwriting profitability.

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Distribution

Our insurance subsidiaries market their products primarily in the Mid-Atlantic, Midwestern, New England and Southern regions through approximately 2,500 independent insurance agencies. At December 31, 2012, the Donegal Insurance Group actively wrote business in 22 states (Alabama, Delaware, Georgia, Indiana, Iowa, Maine, Maryland, Michigan, Nebraska, New Hampshire, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Vermont, Virginia, West Virginia and Wisconsin). We believe the relationships of our insurance subsidiaries with their independent agents are valuable in identifying, obtaining and retaining profitable business. Our insurance subsidiaries maintain a stringent agency selection procedure that emphasizes appointing agencies with proven marketing strategies for the development of profitable business, and our insurance subsidiaries only appoint agencies with a strong underwriting history and potential growth capabilities. Our insurance subsidiaries also regularly evaluate the independent agencies that represent them based on their profitability and performance in relation to the objectives of our insurance subsidiaries. Our insurance subsidiaries seek to be among the top three insurers within each of their agencies for the lines of business they write.

The following table sets forth the percentage of direct premiums our insurance subsidiaries write, including 80% of the direct premiums Donegal Mutual and Atlantic States write, in each of the states where they conducted a significant portion of their business in 2012:

Pennsylvania	37.5	%
Michigan	19.1
Maryland	8.9
Virginia	8.7
Delaware	5.4
Georgia	5.1
Ohio	3.2
Wisconsin	2.6
Iowa	2.5
Tennessee	1.9
Nebraska	1.9
South Dakota	1.0
Ten other states	2.2
Total	100.0	%

Our insurance subsidiaries employ a number of policies and procedures that we believe enable them to attract, retain and motivate their independent agents. The consistency, competitiveness and stability of the product offerings of our insurance subsidiaries assist them in competing effectively for independent agents with other insurers whose product offerings may fluctuate based upon industry conditions. Our insurance subsidiaries have a competitive profit-sharing plan for their independent agents, consistent with applicable state laws and regulations, under which the independent agents may earn additional commissions based upon the volume of premiums produced and the profitability of the business our insurance subsidiaries receive from that agency.

Our insurance subsidiaries encourage their independent agents to focus on “account selling,” or serving all of a particular insured’s property and casualty insurance needs, which our insurance subsidiaries believe generally results in more favorable loss experience than covering a single risk for an individual insured.

Technology

Donegal Mutual owns the majority of the technology systems our insurance subsidiaries use. The technology systems consist primarily of an integrated central processing computer, a series of server-based computer networks and various communications systems that allow the home office of our insurance subsidiaries and their branch offices to utilize the same systems for the processing of business. Donegal Mutual maintains backup facilities and systems at the office of one of our insurance subsidiaries and through a contract with a leading provider of computer disaster recovery sites and tests these backup facilities and systems on a regular basis. Our insurance subsidiaries bear their proportionate share of information services expenses based on their respective percentage of the total net written premiums of the Donegal Insurance Group.

The business strategy of our insurance subsidiaries depends on the use, development and implementation of integrated technology systems. These systems enable our insurance subsidiaries to provide a high level of service to agents and

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policyholders by processing business in a timely and efficient manner, communicating and sharing data with agents, providing a variety of methods for the payment of premiums and allowing for the accumulation and analysis of information for the management of our insurance subsidiaries.

We believe the availability and use of these technology systems has resulted in improved service to agents and policyholders, increased efficiencies in processing the business of our insurance subsidiaries and lower operating costs. Key components of these integrated technology systems are the agency interface system, the WritePro^®, WriteBiz^® and WriteFarm^® systems, a claims processing system and an imaging system. The agency interface system provides our insurance subsidiaries with a high level of data sharing both to and from agents’ systems and also provides agents with an integrated means of processing new business. The WritePro^®, WriteBiz^® and WriteFarm^® systems are fully automated underwriting and policy issuance systems that provide agents with the ability to generate underwritten quotes and automatically issue policies that meet the underwriting guidelines of our insurance subsidiaries with limited or no intervention by their personnel. The claims processing system allows our insurance subsidiaries to process claims efficiently and in an automated environment. The imaging system eliminates the need to handle paper files, while providing greater access to the same information by a variety of personnel. We believe our technology systems compare favorably to those of many national property and casualty insurance carriers in terms of quality and service levels.

Claims

The management of claims is a critical component of the philosophy of our insurance subsidiaries to achieve underwriting profitability on a consistent basis and is fundamental to the successful operations of our insurance subsidiaries and their dedication to excellent service. Our senior claims management oversees the claims processing units of each of our insurance subsidiaries to assure consistency in the claims settlement process. The field office staff of our insurance subsidiaries receives support from home office technical, litigation, material damage, subrogation and medical audit personnel.

The claims departments of our insurance subsidiaries rigorously manage claims to assure that they settle legitimate claims quickly and fairly and that they identify questionable claims for defense. In the majority of cases, the personnel of our insurance subsidiaries, who have significant experience in the property and casualty insurance industry and know the service philosophy of our insurance subsidiaries, adjust claims. Our insurance subsidiaries provide various means of claims reporting on a 24-hours a day, seven-days a week basis, including toll-free numbers and electronic reporting through our website. Our insurance subsidiaries strive to respond to notifications of claims promptly, generally within the day reported. Our insurance subsidiaries believe that, by responding promptly to claims, they provide quality customer service and minimize the ultimate cost of the claims. Our insurance subsidiaries engage independent adjusters as needed to handle claims in areas in which the volume of claims is not sufficient to justify the hiring of internal claims adjusters by our insurance subsidiaries. Our insurance subsidiaries also employ private adjusters and investigators, structural experts and various outside legal counsel to supplement their internal staff and to assist in the investigation of claims. Our insurance subsidiaries have a special investigative unit staffed by former law enforcement officers that attempts to identify and prevent fraud and abuse and to control questionable claims.

The management of the claims departments of our insurance subsidiaries develops and implements policies and procedures for the establishment of adequate claim reserves. Our insurance subsidiaries employ an actuarial staff that regularly reviews their reserves for incurred but not reported claims. The management and staff of the claims departments resolve policy coverage issues, manage and process reinsurance recoveries and handle salvage and subrogation matters. The litigation and personal injury sections of our insurance subsidiaries manage all claims litigation. Branch office claims above certain thresholds require home office review and settlement authorization. Our insurance subsidiaries provide their claims adjusters reserving and settlement authority based upon their experience and demonstrated abilities. Larger or more complicated claims require consultation and approval of senior department management.

Liabilities for Losses and Loss Expenses

Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with respect to incurred policyholder claims based on facts and circumstances then known. 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 and 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 of liability. We reflect any adjustments to our insurance subsidiaries’ liabilities for losses and loss expenses in our operating results in the period in which our insurance subsidiaries record the changes in 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

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settling all losses, including investigation and litigation costs. Our insurance subsidiaries base the amount of their liability for reported losses primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss their 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 closely monitor their liabilities 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.

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 as to our insurance subsidiaries’ internal operations. For example, our insurance subsidiaries have experienced a decrease in claims frequency on workers’ compensation claims during the past several years while claims severity has gradually increased. These trend changes give rise to greater uncertainty as to the pattern of future loss settlements on workers’ compensation 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 legal decisions 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 the 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 attempt to make appropriate adjustments for such changes in their reserves. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at December 31, 2012. For every 1% change in our insurance subsidiaries’ loss and loss expense reserves, net of reinsurance recoverable, the effect on our pre-tax results of operations would be approximately $2.5 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, since 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 estimates have exceeded their actual liabilities. Changes in our insurance subsidiaries’ estimate of their liability for losses and loss expenses generally reflect actual payments and the evaluation of information received since the prior reporting date. Our insurance subsidiaries recognized an increase (decrease) in their liability for losses and loss expenses of prior years of $7.6 million, ($168,460) and ($2.9) million in 2012, 2011 and 2010, respectively. Our insurance subsidiaries made no significant changes in their reserving philosophy, key reserving assumptions or claims management personnel, and there have been no significant offsetting changes in estimates that increased or decreased their loss and loss expense reserves in those years. The 2012 development represented 3.1% of the December 31, 2011 net carried reserves and resulted primarily from higher-than-expected severity in the private passenger automobile liability and workers’ compensation lines of business in accident year 2011. The 2011 development represented an immaterial amount of our December 31, 2010 net carried reserves. The 2010 development represented 1.6% of our December 31, 2009 net carried reserves and resulted primarily from less-than-expected severity in the private passenger automobile liability and homeowners lines of business in accident years prior to 2009.

Excluding the impact of catastrophic weather events, our insurance subsidiaries have noted stable amounts in the number of claims incurred and slight downward trends in 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 as the property and casualty insurance industry has experienced increased litigation trends and economic conditions that have extended the estimated length of disabilities and contributed to increased medical loss costs and a general slowing of settlement rates in litigated claims. Our insurance subsidiaries could be required 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 at December 31, 2012.

Differences between liabilities reported in our financial statements prepared on a GAAP basis and our insurance subsidiaries’ financial statements prepared on a SAP basis result from anticipating salvage and subrogation recoveries for GAAP but not for SAP. These differences amounted to $12.0 million, $11.2 million and $10.0 million at December 31, 2012, 2011 and 2010, respectively.

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The following table sets forth a reconciliation of the beginning and ending GAAP net liability of our insurance subsidiaries for unpaid losses and loss expenses for the periods indicated:

	Year Ended December 31,
(in thousands)	2012		2011			2010
Gross liability for unpaid losses and loss expenses at beginning of year	$	442,408	$	383,319		$	263,599
Less reinsurance recoverable		199,393		165,422			83,337
Net liability for unpaid losses and loss expenses at beginning of year		243,015		217,897			180,262
Acquisition of MICO		—		—			26,960
Provision for net losses and loss expenses for claims incurred in the current year		325,276		340,671			277,194
Change in provision for estimated net losses and loss expenses for claims incurred in prior years		7,596		(168	)		(2,885	)
Total incurred		332,872		340,503			274,309
Net losses and loss payments for claims incurred during:
The current year		205,876		219,183			179,069
Prior years		119,074		96,202			84,565
Total paid		324,950		315,385			263,634
Net liability for unpaid losses and loss expenses at end of year		250,936		243,015			217,897
Plus reinsurance recoverable		207,891		199,393			165,422
Gross liability for unpaid losses and loss expenses at end of year	$	458,827	$	442,408		$	383,319

The following table sets forth the development of the liability for net unpaid losses and loss expenses of our insurance subsidiaries from 2002 to 2012. Loss data in the table includes business Atlantic States received from the underwriting pool.

“Net liability at end of year for unpaid losses and loss expenses” sets forth the estimated liability for net unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of net losses and loss expenses for claims arising in the current and all prior years that are unpaid at the balance sheet date, including losses incurred but not reported.

The “Net liability re-estimated as of” portion of the table shows the re-estimated amount of the previously recorded liability based on experience for each succeeding year. The estimate increases or decreases as payments are made and more information becomes known about the severity of the remaining unpaid claims. For example, the 2005 liability has developed a redundancy after seven years because we expect the re-estimated net losses and loss expenses to be $21.8 million less than the estimated liability we initially established in 2005 of $173.0 million.

The “Cumulative (excess) deficiency” shows the cumulative excess or deficiency at December 31, 2012 of the liability estimate shown on the top line of the corresponding column. An excess in liability means that the liability established in prior years exceeded the amount of actual payments and currently re-estimated unpaid liability remaining. A deficiency in liability means that the liability established in prior years was less than the amount of actual payments and currently re-estimated remaining unpaid liability.

The “Cumulative amount of liability paid through” portion of the table shows the cumulative net losses and loss expense payments made in succeeding years for net losses incurred prior to the balance sheet date. For example, the 2005 column indicates that at December 31, 2012 payments equal to $145.5 million of the currently re-estimated ultimate liability for net losses and loss expenses of $151.2 million had been made.

Amounts shown in the 2004 column of the table include information for Le Mars and the Peninsula Group for all accident years prior to 2004. Amounts shown in the 2008 column of the table include information for Sheboygan for all accident years prior to 2008. Amounts shown in the 2010 column of the table include information for MICO for the month of December 2010.

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	Year Ended December 31,
(in thousands)	2002			2003			2004			2005			2006			2007		2008		2009			2010			2011		2012
Net liability at end of year for unpaid losses and loss expenses	$	131,108		$	138,896		$	171,431		$	173,009		$	163,312		$	150,152	$	161,307	$	180,262		$	217,896		$	243,015	$	250,936
Net liability re-estimated as of:
One year later		130,658			136,434			162,049			159,393			153,299			152,836		171,130		177,377			217,728			250,611
Two years later		128,562			130,030			152,292			153,894			150,934			154,435		167,446		177,741			217,355
Three years later		124,707			123,399			148,612			151,792			150,078			152,315		166,756		178,403
Four years later		119,817			120,917			147,280			150,183			148,745			151,120		166,852
Five years later		118,445			119,968			145,874			150,087			148,407			151,287
Six years later		118,605			119,731			146,101			150,555			149,031
Seven years later		118,905			120,425			146,739			151,161
Eight years later		119,635			120,768			147,597
Nine years later		119,887			121,505
Ten years later		120,812
Cumulative (excess) deficiency		(10,296	)		(17,391	)		(23,834	)		(21,848	)		(14,281	)		1,135		5,545		(1,859	)		(541	)		7,596
Cumulative amount of liability paid through:
One year later	$	46,268		$	51,965		$	67,229		$	71,718		$	72,499		$	71,950	$	79,592	$	84,565		$	96,201		$	119,074
Two years later		74,693			81,183			102,658			107,599			104,890			105,576		116,035		123,204			148,140
Three years later		93,288			99,910			123,236			125,926			121,711			124,659		136,837		147,165
Four years later		105,143			109,964			133,844			133,805			132,698			135,392		148,243
Five years later		111,523			113,684			136,377			139,935			138,878			140,280
Six years later		114,145			114,499			139,847			143,309			141,752
Seven years later		114,641			116,727			142,016			145,492
Eight years later		116,663			118,169			143,894
Nine years later		117,998			119,123
Ten years later		118,843

	Year Ended December 31,
	2004			2005			2006			2007		2008		2009			2010			2011		2012
	(in thousands)
Gross liability at end of year	$	267,190		$	265,730		$	259,022		$	226,432	$	239,809	$	263,599		$	383,317		$	442,408	$	458,827
Reinsurance recoverable		95,759			92,721			95,710			76,280		78,502		83,337			165,421			199,393		207,891
Net liability at end of year		171,431			173,009			163,312			150,152		161,307		180,262			217,896			243,015		250,936
Gross re-estimated liability		242,342			242,556			239,216			228,764		249,455		198,898			359,452			448,807
re-estimated recoverable		94,745			91,395			90,185			77,477		82,603		20,495			142,097			198,196
Net re-estimated liability		147,597			151,161			149,031			151,287		166,852		178,403			217,355			250,611
Gross cumulative deficiency (excess)		(24,848	)		(23,174	)		(19,806	)		2,332		9,646		(64,701	)		(23,865	)		6,400

Third-Party Reinsurance

Our insurance subsidiaries and Donegal Mutual purchase certain third-party reinsurance on a combined basis. Le Mars, the Peninsula Group, Sheboygan and MICO also have separate reinsurance programs that provide certain coverage that is commensurate with their relative size and exposures. Our insurance subsidiaries use several different reinsurers, all of which, consistent with the requirements of our insurance subsidiaries and Donegal Mutual, have an A.M. Best rating of A- (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 an A- (Excellent) rating from A.M. Best.

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The external reinsurance our insurance subsidiaries and Donegal Mutual purchase includes:

• “excess of loss reinsurance,” under which their losses are automatically reinsured, through a series of contracts, over a set retention (generally $1,000,000 for 2012 and $750,000 for 2011); and

• “catastrophic reinsurance,” under which they recover, through a series of contracts, 90% to 100% of an accumulation of many losses resulting from a single event, including natural disasters, over a set retention (generally $5.0 million for 2012 and 2011).

The amount of coverage each of these types of reinsurance provides depends upon the amount, nature, size and location of the risk being reinsured.

For property insurance, our insurance subsidiaries have excess of loss treaties that provide for coverage of $4.0 million per loss over a set retention of $1.0 million. For liability insurance, our insurance subsidiaries have excess of loss treaties that provide for coverage of $39.0 million per occurrence over a set retention of $1.0 million. For workers’ compensation insurance, our insurance subsidiaries have excess of loss treaties that provide for coverage of $9.0 million on any one life over a set retention of $1.0 million.

Our insurance subsidiaries and Donegal Mutual maintain external property catastrophe coverage through a series of layered treaties up to aggregate losses of $145.0 million for any single event over their respective set retentions. Our insurance subsidiaries and Donegal Mutual participated in 10% of the first $10.0 million of an accumulation of losses from any single event over $5.0 million in 2012.

Our insurance subsidiaries and Donegal Mutual also purchase facultative reinsurance to cover exposures from property and casualty losses that exceed the limits provided by their respective treaty reinsurance.

MICO maintains a quota-share reinsurance agreement with third-party reinsurers to reduce its net exposures. Effective from December 1, 2010 to December 31, 2011, the quota-share reinsurance percentage was 50%. Effective January 1, 2012, MICO reduced the quota-share reinsurance percentage from 50% to 40%. Effective January 1, 2013, MICO reduced the quota-share reinsurance percentage from 40% to 30%.

Investments

At December 31, 2012, 99.0% of all debt securities our insurance subsidiaries held had an investment-grade rating. The investment portfolios of our insurance subsidiaries did not contain any mortgage loans or any non-performing assets at December 31, 2012.

The following table shows the composition of the debt securities (at carrying value) in the investment portfolios of our insurance subsidiaries, excluding short-term investments, by rating at December 31, 2012:

(dollars in thousands)	December 31, 2012
Rating(1)	Amount		Percent
U.S. Treasury and U.S. agency securities(2)	$	201,358		27.3	%
Aaa or AAA		53,203		7.2
Aa or AA		379,372		51.5
A		89,338		12.1
BBB		13,339		1.9
Total	$	736,610		100.0	%

(1) Ratings assigned by Moody’s Investors Services, Inc. or Standard & Poor’s Corporation.

(2) Includes residential mortgage-backed securities of $129.0 million.

Our insurance subsidiaries invest in both taxable and tax-exempt securities as part of their strategy to maximize after-tax income. This strategy considers, among other factors, the alternative minimum tax. Tax-exempt securities made up approximately 59.8%, 63.8% and 67.2% of the debt securities in the combined investment portfolios of our insurance subsidiaries at December 31, 2012, 2011 and 2010, respectively.

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The following table shows the classification of our investments and the investments of our insurance subsidiaries (at carrying value) at December 31, 2012, 2011 and 2010:

	December 31,
	2012					2011					2010
(dollars in thousands)	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
Fixed maturities(1):
Held to maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	1,000		0.1	%	$	1,000		0.1	%	$	1,000		0.1	%
Obligations of states and political subdivisions		40,909		5.1			56,966		7.3			59,852		8.2
Corporate securities		—		—			250		—			3,247		0.5
Residential mortgage-backed securities		191		—			274		—			667		0.1
Total held to maturity		42,100		5.2			58,490		7.4			64,766		8.9
Available for sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies		71,311		8.8			60,978		7.8			57,316		7.9
Obligations of states and political subdivisions		416,987		51.7			398,877		50.8			389,629		53.5
Corporate securities		77,356		9.6			64,113		8.2			67,095		9.2
Residential mortgage-backed securities		128,856		16.0			122,630		15.6			89,807		12.3
Total available for sale		694,510		86.1			646,598		82.4			603,847		82.9
Total fixed maturities		736,610		91.3			705,088		89.8			668,613		91.8
Equity securities(2)		8,757		1.1			7,438		1.0			10,161		1.4
Investments in affiliates(3)		37,236		4.6			32,322		4.1			8,992		1.2
Short-term investments(4)		23,826		3.0			40,461		5.1			40,776		5.6
Total investments	$	806,429		100.0	%	$	785,309		100.0	%	$	728,542		100.0	%

(1) We refer to Notes 1 and 5 to our Consolidated Financial Statements. We value those fixed maturities we classify as held to maturity at amortized cost; we value those fixed maturities we classify as available for sale at fair value. The total fair value of fixed maturities we classified as held to maturity was $43.7 million at December 31, 2012, $61.4 million at December 31, 2011 and $67.8 million at December 31, 2010. The amortized cost of fixed maturities we classified as available for sale was $655.2 million at December 31, 2012, $614.3 million at December 31, 2011 and $601.3 million at December 31, 2010.

(2) We value equity securities at fair value. Total cost of equity securities was $8.7 million at December 31, 2012, $7.2 million at December 31, 2011 and $2.5 million at December 31, 2010.

(3) We value investments in affiliates at cost, adjusted for our share of earnings and losses of our affiliates as well as changes in equity of our affiliates due to unrealized gains and losses.

(4) We value short-term investments at cost, which approximates fair value.

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The following table sets forth the maturities (at carrying value) in the fixed maturity and short-term investment portfolios of our insurance subsidiaries at December 31, 2012, 2011 and 2010:

	December 31,
	2012					2011					2010
(dollars in thousands)	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
Due in(1):
One year or less	$	10,004		1.4	%	$	16,181		2.3	%	$	12,968		1.9	%
Over one year through three years		31,176		4.2			27,912		4.0			54,028		8.1
Over three years through five years		64,839		8.8			71,820		10.2			66,720		10.0
Over five years through ten years		201,953		27.4			188,523		26.7			201,523		30.1
Over ten years through fifteen years		191,179		26.0			172,956		24.5			147,512		22.1
Over fifteen years		108,412		14.7			104,792		14.9			95,389		14.3
Residential mortgage-backed securities		129,047		17.5			122,904		17.4			90,473		13.5
	$	736,610		100.0	%	$	705,088		100.0	%	$	668,613		100.0	%

(1) Based on stated maturity dates with no prepayment assumptions. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

As shown above, our insurance subsidiaries held investments in residential mortgage-backed securities having a carrying value of $129.0 million at December 31, 2012. The mortgage-backed securities consist primarily of investments in governmental agency balloon pools with stated maturities between one and 24 years. The stated maturities of these investments limit the exposure of our insurance subsidiaries to extension risk in the event that interest rates rise and prepayments decline. Our insurance subsidiaries perform an analysis of the underlying loans when evaluating a residential mortgage-backed security for purchase, and they select those securities that they believe will provide a return that properly reflects the prepayment risk associated with the underlying loans.

The following table sets forth the investment results of our insurance subsidiaries for the years ended December 31, 2012, 2011 and 2010:

	Year Ended December 31,
(dollars in thousands)	2012			2011			2010
Invested assets(1)	$	795,869		$	756,925		$	697,689
Investment income(2)		20,169			20,858			19,950
Average yield		2.5	%		2.8	%		2.9	%
Average tax-equivalent yield		3.5			3.8			4.0

(1) Average of the aggregate invested amounts at the beginning and end of the period.

(2) Investment income is net of investment expenses and does not include realized investment gains or losses or provision for income taxes.

A.M. Best Rating

Donegal Mutual and our insurance subsidiaries have an A.M. Best rating of A (Excellent), based upon the respective current financial condition and historical statutory results of operations of Donegal Mutual and our insurance subsidiaries. We believe that the A.M. Best rating of Donegal Mutual and our insurance subsidiaries is an important factor in their marketing of the products to their agents and customers. A.M. Best’s ratings are industry ratings based on a comparative analysis of the financial condition and operating performance of insurance companies. A.M. Best’s classifications are A++ and A+ (Superior), A and A- (Excellent), B++ and B+ (Good), B and B- (Fair), C++ and C+ (Marginal), C and C- (Weak), D (Poor) and E (Under Regulatory Supervision), F (Liquidation) and S (Suspended). A.M. Best bases its ratings upon factors relevant to the payment of claims of policyholders and are not directed toward the protection of investors in insurance companies. According to A.M. Best, the “Excellent” rating that the Donegal Insurance Group maintains is assigned to those companies that, in A.M. Best’s opinion, have an excellent ability to meet their ongoing obligations to policyholders.

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Regulation

The supervision and regulation of insurance companies consists primarily of the laws and regulations of the various states in which the insurance companies transact business, with the primary regulatory authority being the insurance regulatory authorities in the state of domicile of the insurance company. Such supervision and regulation relate to numerous aspects of an insurance company’s business and financial condition. The primary purpose of such supervision and regulation is the protection of policyholders. The authority of the state insurance departments includes the establishment of standards of solvency that insurers must meet and maintain, the licensing of insurers and insurance agents to do business, the nature of, and limitations on, investments, premium rates for property and casualty insurance, the provisions that insurers must make for current losses and future liabilities, the deposit of securities for the benefit of policyholders, the approval of policy forms, notice requirements for the cancellation of policies and the approval of certain changes in control. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies.

In addition to state-imposed insurance laws and regulations, the National Association of Insurance Commissioners, or the NAIC, has established a risk-based capital system, or RBC, for assessing the adequacy of statutory capital and surplus that augments the states’ current fixed dollar minimum capital requirements for insurance companies. At December 31, 2012, our insurance subsidiaries and Donegal Mutual each exceeded the minimum levels of statutory capital the RBC rules require by a substantial margin.

Generally, every state has guaranty fund laws under which insurers licensed to do business in that state can be assessed on the basis of premiums written by the insurer in that state in order to fund policyholder liabilities of insolvent insurance companies. Under these laws in general, an insurer is subject to assessment, depending upon its market share of a given line of business, to assist in the payment of policyholder claims against insolvent insurers. Our insurance subsidiaries and Donegal Mutual have made accruals for their portion of assessments related to such insolvencies based upon the most current information furnished by the guaranty associations.

We are part of an insurance holding company system of which Donegal Mutual is the ultimate controlling person. All of the states in which our insurance companies and Donegal Mutual maintain a domicile have legislation that regulates insurance holding company systems. Each insurance company in the insurance holding company system must register with the insurance supervisory agency of its state of domicile and furnish information concerning the operations of companies within the insurance holding company system that may materially affect the operations, management or financial condition of the insurers within the system. Pursuant to these laws, the respective insurance departments in which our subsidiaries and Donegal Mutual maintain a domicile may examine our insurance subsidiaries or Donegal Mutual at any time, require disclosure of material transactions by the holding company with another member of the insurance holding company system and require prior notice or prior approval of certain transactions, such as “extraordinary dividends” from the insurance subsidiaries to the holding company. We have insurance subsidiaries domiciled in Iowa, Maryland, Michigan, Pennsylvania, Virginia and Wisconsin.

The Pennsylvania Insurance Holding Companies Act, which generally applies to Donegal Mutual, us and our insurance subsidiaries, requires that all transactions within an insurance holding company system to which an insurer is a party must be fair and reasonable and that any charges or fees for services performed must be reasonable. Any management agreement, service agreement, cost sharing arrangement and material reinsurance agreement must be filed with the Pennsylvania Insurance Department, or the Department, and is subject to the Department’s review. We have filed the pooling agreement between Donegal Mutual and Atlantic States that established the underwriting pool and all material reinsurance agreements between Donegal Mutual and our insurance subsidiaries with the Department.

Approval of the applicable insurance commissioner is also required prior to consummation of transactions affecting the control of an insurer. In virtually all states, including Iowa, Maryland, Michigan, Pennsylvania, Virginia and Wisconsin, where our insurance subsidiaries are domiciled, the acquisition of 10% or more of the outstanding capital stock of an insurer or its holding company or the intent to acquire such an interest creates a rebuttable presumption of a change in control. Pursuant to an order issued in April 2003, the Department approved Donegal Mutual’s ownership of up to 70% of our outstanding Class A common stock and up to 100% of our outstanding Class B common stock.

Our insurance subsidiaries have the legal obligation under state insurance laws to participate in involuntary insurance programs for automobile insurance, as well as other property and casualty insurance lines, in the states in which they conduct business. These programs include joint underwriting associations, assigned risk plans, fair access to insurance requirements plans, reinsurance facilities, windstorm plans and tornado plans. Legislation establishing these programs requires all companies that write lines covered by these programs to provide coverage, either directly or through reinsurance, for insureds who are unable to obtain insurance in the voluntary market. The legislation creating these programs usually allocates a pro rata portion of risks attributable to such insureds to each company on the basis of the direct premiums it has written in that state or the number of automobiles it insures in that state. Generally, state law requires participation in these programs as a condition to obtaining a certificate of authority. Our loss ratio on insurance we write under these involuntary programs has traditionally been significantly greater than our loss ratio on insurance we voluntarily write in those states.

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Regulatory requirements, including RBC requirements, may impact our insurance subsidiaries’ ability to pay dividends. The amount of statutory capital and surplus necessary for our insurance subsidiaries to satisfy regulatory requirements, including RBC requirements, was not significant in relation to our insurance subsidiaries’ statutory capital and surplus at December 31, 2012. Generally, the maximum amount that an insurance subsidiary may pay to us during any year after notice to, but without prior approval of, the insurance commissioner of its domiciliary state is limited to a stated percentage of that subsidiary’s statutory capital and surplus at December 31 of the preceding fiscal year or the net income of that subsidiary for its preceding fiscal year. Our insurance subsidiaries paid dividends to us of $7.0 million, $16.0 million and $12.0 million in 2012, 2011 and 2010, respectively. At December 31, 2012, the amount of dividends our insurance subsidiaries could pay to us during 2013, without the prior approval of their domiciliary insurance commissioners, is shown in the following table.

Name of Insurance Subsidiary	Ordinary Dividend Amount
Atlantic States	$	18,046,566
Southern		—
Le Mars		2,680,314
Peninsula Group		4,247,109
Sheboygan		—
MICO		4,244,320
Total	$	29,218,309

Donegal Mutual Insurance Company

Donegal Mutual organized as a mutual fire insurance company in Pennsylvania in 1889. At December 31, 2012, Donegal Mutual had admitted assets of $350.7 million and policyholders’ surplus of $187.7 million. At December 31, 2012, Donegal Mutual had total liabilities of $162.9 million, including reserves for net losses and loss expenses of $46.2 million and unearned premiums of $39.3 million. Donegal Mutual’s investment portfolio of $215.7 million at December 31, 2012 consisted primarily of investment-grade bonds of $16.9 million, its investment in DFSC’s common stock and its investment in our common stock. At December 31, 2012, Donegal Mutual owned 7,755,953 shares, or approximately 39%, of our Class A common stock, which Donegal Mutual carried on its books at $98.6 million, and 4,217,039 shares, or approximately 76%, of our Class B common stock, which Donegal Mutual carried on its books at $53.6 million. We present Donegal Mutual’s financial information in accordance with SAP as required by the NAIC Accounting Practices and Procedures Manual. Donegal Mutual does not, nor is it required to, prepare financial statements in accordance with GAAP.

Donegal Financial Services Corporation

In 2000, we and Donegal Mutual formed DFSC as a unitary thrift holding company and its wholly owned subsidiary, Province Bank FSB, as a federal savings bank. In May 2011, DFSC merged with Union National Financial Corporation, or UNNF, with DFSC as the surviving company in the merger. Under the merger agreement, Province Bank FSB and Union National Community Bank, which UNNF owned, also merged to form UCB. UCB is a federal savings bank with 13 branch offices in Lancaster County, Pennsylvania, and approximately $510.0 million in assets at December 31, 2012.

Because Donegal Mutual and we together own all of the outstanding capital stock of DFSC, the Board of Governors of the Federal Reserve System, or the FRB, regulates Donegal Mutual, DFSC and us as grandfathered savings and loan holding companies. As a result, Donegal Mutual, DFSC and we are subject to regulation by the FRB under the holding company provisions of the federal Home Owners’ Loan Act, or HOLA. However, if any of Donegal Mutual, DFSC or we were to lose this grandfathered status, they or we would become a bank holding company regulated by the FRB under the Bank Holding Company Act. UCB, as a federally chartered and insured stock savings bank, is subject to regulation and supervision by the Office of the Comptroller of the Currency and by the Federal Deposit Insurance Corporation. The primary purpose of the federal statutory and regulatory supervision of financial institutions is to protect depositors, the financial institutions and the financial system as a whole rather than the stockholders of financial institutions or their holding companies. UCB is currently in the process of converting from a federally-chartered stock savings bank to a Pennsylvania-chartered stock savings bank.

Sections 23A and 23B of the Federal Reserve Act impose quantitative and qualitative restrictions on transactions between a savings association and its “affiliates.” Affiliates of a savings association include, among other entities, the savings

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association’s holding company and non-banking companies under common control with the savings association such as Donegal Mutual and us. These restrictions on transactions with affiliates apply to transactions between DFSC and UCB, on the one hand, and Donegal Mutual and us and our insurance subsidiaries, on the other hand. These restrictions also apply to transactions among DFSC, UCB and Donegal Mutual. Because DFSC directly controls UCB and Donegal Mutual and we indirectly control UCB, DFSC, Donegal Mutual and we are subject to the Change in Bank Control Act.

Cautionary Statement Regarding Forward-Looking Statements

This Form 10-K Annual Report and the documents we incorporate by reference in this Form 10-K Annual Report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include certain discussions relating to underwriting, premium and investment income volumes, business strategies, reserves, profitability and business relationships and our other business activities during 2012 and beyond. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “objective,” “project,” “predict,” “potential,” “goal” and similar expressions. These forward-looking statements reflect our current views about future events, our current assumptions and are subject to known and unknown risks and uncertainties that may cause our results, performance or achievements to differ materially from those we anticipate or imply by our forward-looking statements. We cannot control or predict many of the factors that could determine our future financial conditions or results of operations. Such factors may include those we describe under “Risk Factors.” The forward-looking statements contained in this annual report reflect our views and assumptions only as of the date of this Form 10-K Report. Except as required by law, we do not intend to update, and we assume no responsibility for updating, any forward-looking statements we have made. We qualify all of our forward-looking statements by these cautionary statements.

Item 1A. Risk Factors.

Risk Factors

Risks Relating to Us and Our Business

Donegal Mutual is our controlling stockholder. Donegal Mutual and its directors and executive officers have potential conflicts of interest between the best interests of our stockholders and the best interests of the policyholders of Donegal Mutual.

Donegal Mutual controls the election of all of the members of our board of directors. Six of the 11 members of our board of directors are also directors of Donegal Mutual. Donegal Mutual and we share the same executive officers. These common directors and executive officers have a fiduciary duty to our stockholders and also have a fiduciary duty to the policyholders of Donegal Mutual. Among the potential conflicts of interest that could arise from these separate fiduciary duties are the following:

• We and Donegal Mutual periodically review the percentage participation of Atlantic States and Donegal Mutual in the underwriting pool that Donegal Mutual and Atlantic States have maintained since 1986;

• Our insurance subsidiaries and Donegal Mutual annually review and then establish the terms of certain reinsurance agreements between them with the objective, over the long-term, of having an approximately equal balance between payments and recoveries;

• We and Donegal Mutual periodically allocate certain shared expenses among ourselves and our insurance subsidiaries in accordance with various inter-company expense-sharing agreements; and

• Our insurance subsidiaries may enter into other transactions or contractual relationships with Donegal Mutual, including, for example, our purchases from time to time from Donegal Mutual of the surplus note of a mutual insurance company that will convert into a stock insurance company and ultimately become one of our wholly owned subsidiaries.

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Donegal Mutual has sufficient voting power to determine the outcome of all matters submitted to our stockholders for approval.

Each share of our Class A common stock has one-tenth of a vote per share and votes as a single class with our Class B common stock, which has one vote per share, except for matters that would uniquely affect the rights of holders of our Class A common stock or our Class B common stock. Donegal Mutual has the right to vote approximately 66% of the aggregate voting power of our Class A common stock and our Class B common stock and has sufficient voting control to:

• elect all of the members of our board of directors, who determine our management and policies; and

• control the outcome of any corporate transaction or other matter submitted to a vote of our stockholders for approval, including mergers or other acquisition proposals and the sale of all or substantially all of our assets, in each case regardless of how all of our other stockholders other than Donegal Mutual vote their shares.

The interests of Donegal Mutual in maintaining this greater than majority control of us may have an adverse effect on the price of our Class A common stock and the price of our Class B common stock because of the absence of any potential “takeover” premium and may be inconsistent with the interests of our stockholders other than Donegal Mutual.

Donegal Mutual’s voting control, certain provisions of our certificate of incorporation and by-laws and certain provisions of Delaware law make it remote that anyone could acquire control of us unless Donegal Mutual were in favor of the acquisition of control.

Donegal Mutual’s voting control, certain anti-takeover provisions in our certificate of incorporation and by-laws and certain provisions of the Delaware General Corporation Law, or the DGCL, could delay or prevent the removal of members of our board of directors and could make a merger, tender offer or proxy contest involving us more expensive as well as unlikely to succeed, even if such events were in the best interests of our stockholders other than Donegal Mutual. These factors could also discourage a third party from attempting to acquire control of us. In particular, our certificate of incorporation and by-laws include the following anti-takeover provisions:

• our board of directors is classified into three classes, so that our stockholders elect only one-third of the members of our board of directors each year;

• our stockholders may remove our directors only for cause;

• our stockholders may not take stockholder action except at an annual or special meeting of our stockholders;

• the request of stockholders holding at least 20% of the aggregate voting power of our Class A common stock and our Class B common stock is required to call a special meeting of our stockholders;

• our by-laws require that stockholders provide advance notice to us to nominate candidates for election to our board of directors or to propose any other item of stockholder business at a stockholders’ meeting;

• we do not permit cumulative voting rights in the election of our directors;

• our certificate of incorporation does not provide for preemptive rights in connection with any issuance of securities by us; and

• our board of directors may issue, without stockholder approval unless otherwise required by law, preferred stock with such terms as our board of directors may determine.

We have authorized preferred stock that we could issue without stockholder approval to make it more difficult for a third party to acquire us.

We have 2.0 million authorized shares of preferred stock that we could issue in one or more series without further stockholder approval, unless the DGCL or the NASDAQ Global Select Market otherwise requires, and upon such terms and conditions, and having such rights, privileges and preferences, as our board of directors may determine our potential issuance of preferred stock and that may make it difficult for a third party to acquire control of us.

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Because we are an insurance holding company, no person can acquire or seek to acquire a 10% or greater interest in us without first obtaining approval of the insurance commissioners of the states of domicile of our insurance subsidiaries.

We own insurance subsidiaries domiciled in the states of Iowa, Maryland, Michigan, Pennsylvania, Virginia and Wisconsin, and Donegal Mutual controls an insurance company domiciled in Georgia. The insurance laws of each of these states provide that no person can acquire or seek to acquire a 10% or greater interest in us without first filing specified information with the insurance commissioner of that state and obtaining the prior approval of the proposed acquisition of a 10% or greater interest in us by the state insurance commissioner based on statutory standards designed to protect the safety and soundness of the insurance holding company and its subsidiary.

Because we are a grandfathered unitary savings and loan holding company, no person can acquire or seek to acquire more than a 10% interest in either class of our common stock without first obtaining approval of, or an exemption from, the Board of Governors of the Federal Reserve System.

We own 48.2% of the outstanding stock of DFSC, which owns all of the outstanding stock of UCB. As a result of our ownership interest in DFSC, we are a grandfathered unitary savings and loan holding company regulated under HOLA by the FRB. No person may lawfully acquire more than 10% of any class of voting security of a unitary savings and loan holding company registered under the Exchange Act without first filing specified information with the FRB and obtaining the FRB’s prior approval of the proposed acquisition or an exemption from the FRB.

Our insurance subsidiaries currently conduct business in a limited number of states, with a concentration of business in Pennsylvania, Michigan, Maryland and Virginia. Any single catastrophe occurrence or other condition affecting losses in these states could adversely affect the results of operations of our insurance subsidiaries.

Our insurance subsidiaries conduct business in 22 states located primarily in the Mid-Atlantic, Midwestern, New England and Southern states. A substantial portion of their business consists of private passenger and commercial automobile, homeowners and workers’ compensation insurance in Pennsylvania, Michigan, Maryland and Virginia. While our insurance subsidiaries and Donegal Mutual actively manage our respective exposure to catastrophes through their underwriting process and the purchase of reinsurance, a single catastrophic occurrence, destructive weather pattern, general economic trend, terrorist attack, regulatory development or other condition affecting one or more of the states in which our insurance subsidiaries conduct substantial business could materially adversely affect their business, financial condition and results of operations. Common catastrophic events include hurricanes, earthquakes, tornadoes, wind and hail storms, fires, explosions and severe winter storms.

If the independent agents who market the products of our insurance subsidiaries do not maintain their current levels of premium writing with us, fail to comply with established underwriting guidelines of our insurance subsidiaries or otherwise inappropriately market the products of our insurance subsidiaries, the business, financial condition and results of operations of our insurance subsidiaries could be adversely affected.

Our insurance subsidiaries market their insurance products solely through a network of approximately 2,500 independent insurance agencies. This agency distribution system is one of the most important components of the competitive profile of our insurance subsidiaries. As a result, our insurance subsidiaries depend to a material extent upon their independent agents, each of whom has the authority to bind our insurance subsidiaries to insurance coverage. To the extent that such independent agents’ marketing efforts fail to result in the maintenance of their current levels of volume and quality or they bind our insurance subsidiaries to unacceptable insurance risks, fail to comply with the established underwriting guidelines of our insurance subsidiaries or otherwise inappropriately market the products of our insurance subsidiaries, the business, financial condition and results of operations of our insurance subsidiaries could suffer.

The business of our insurance subsidiaries may not continue to grow and may be materially adversely affected if they cannot retain existing, and attract new, independent agents or if insurance consumers increase their use of insurance marketing systems other than independent agents.

Our ability to retain existing, and to attract new, independent agents is essential to the continued growth of the business of our insurance subsidiaries. If independent agents find it easier to do business with the competitors of our insurance subsidiaries, our insurance subsidiaries could find it difficult to retain their existing business or to attract new business. While our insurance subsidiaries believe they maintain good relationships with the independent agents they have appointed, our insurance subsidiaries cannot be certain that these independent agents will continue to sell the products of our insurance subsidiaries to the consumers these independent agents represent. Some of the factors that could adversely affect the ability of our insurance subsidiaries to retain existing, and attract new, independent agents include:

• the significant competition among insurance companies to attract independent agents;

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• the labor-intensive and time-consuming process of selecting new independent agents;

• the insistence of our insurance subsidiaries that independent agents adhere to consistent underwriting standards; and

• the ability of our insurance subsidiaries to pay competitive and attractive commissions, bonuses and other incentives to independent agents.

While our insurance subsidiaries sell insurance to policyholders solely through their network of independent agencies, many competitors of our insurance subsidiaries sell insurance through a variety of delivery methods, including independent agencies, captive agencies, the Internet and direct sales. To the extent that current and potential policyholders change their marketing system preference, the business, financial condition and results of operations of our insurance subsidiaries may be adversely affected.

We are dependent on dividends from our insurance subsidiaries for the payment of our operating expenses, our debt service and dividends to our stockholders; however, there are regulatory restrictions and business considerations that regulate the amount of dividends our insurance subsidiaries may pay to us.

As a holding company, we rely primarily on dividends from our insurance subsidiaries as a source of funds to meet our corporate obligations and to pay dividends to our stockholders. The amount of dividends our insurance subsidiaries can pay to us is subject to regulatory restrictions and depends on the amount of surplus our insurance subsidiaries maintain. From time to time, the NAIC and various state insurance regulators consider modifying the method of determining the amount of dividends that an insurance company may pay without prior regulatory approval. The maximum amount of ordinary dividends that our insurance subsidiaries can pay to us in 2013 without prior regulatory approval is approximately $29.2 million. Other business and regulatory considerations, such as the impact of dividends on surplus that could affect the ratings of our insurance subsidiaries, competitive conditions, RBC requirements, the investment results of our insurance subsidiaries and the amount of premiums that our insurance subsidiaries write could also adversely impact the ability of our insurance subsidiaries to pay dividends to us.

If A.M. Best downgrades the rating it has assigned to Donegal Mutual or any of our insurance subsidiaries, it would adversely affect their competitive position.

Industry ratings are a factor in establishing and maintaining the competitive position of insurance companies. A.M. Best, an industry-accepted source of insurance company financial strength ratings, rates Donegal Mutual and our insurance subsidiaries. A.M. Best ratings provide an independent opinion of an insurance company’s financial health and its ability to meet its obligations to its policyholders. We believe that the financial strength rating of A.M. Best is material to the operations of Donegal Mutual and our insurance subsidiaries. Currently, Donegal Mutual and our insurance subsidiaries each have an A (Excellent) rating from A.M. Best. If A.M. Best were to downgrade the rating of Donegal Mutual or any of our insurance subsidiaries, it would adversely affect the competitive position of Donegal Mutual and our insurance subsidiaries and make it more difficult for them to market their products and retain their existing policyholders.

Our strategy to grow in part through acquisitions of smaller insurance companies exposes us to risks that could adversely affect our results of operations and financial condition.

The affiliation with and acquisition of smaller, and often undercapitalized insurance companies involves risks that could adversely affect our results of operations and financial condition. The risks associated with these affiliations and acquisitions include:

• the potential inadequacy of reserves for loss and loss expenses;

• the need to supplement management with additional experienced personnel;

• conditions imposed by regulatory agencies that make the realization of cost-savings through integration of operations more difficult;

• a need for additional capital that was not anticipated at the time of the acquisition; and

• the use of more of our management’s time than we originally anticipated.

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If we cannot obtain sufficient capital to fund the organic growth of our insurance subsidiaries and to make acquisitions, we may not be able to expand our business.

Our strategy is to expand our business through the organic growth of our insurance subsidiaries and through our strategic acquisitions of regional insurance companies. Our insurance subsidiaries will require additional capital in the future to support this strategy. If we cannot obtain sufficient capital on satisfactory terms and conditions, we may not be able to expand the business of our insurance subsidiaries or to make future acquisitions. Our ability to obtain additional financing will depend on a number of factors, many of which are beyond our control. For example, we may not be able to obtain additional debt or equity financing because we or our insurance subsidiaries may already have substantial debt at the time, because we or our insurance subsidiaries do not have sufficient cash flow to service or repay our existing or additional debt or because financial institutions are not making financing available. In addition, any equity capital we obtain in the future could be dilutive to our existing stockholders.

Many of the competitors of our insurance subsidiaries have greater financial strength than our insurance subsidiaries, and these competitors may be able to offer their products at lower prices than our insurance subsidiaries can afford to offer their products.

The property and casualty insurance industry is intensely competitive. Competition can be based on many factors, including:

• the perceived financial strength of the insurer;

• premium rates;

• policy terms and conditions;

• policyholder service;

• reputation; and

• experience.

Our insurance subsidiaries compete with many regional and national property and casualty insurance companies, including direct sellers of insurance products, insurers having their own agency organizations and other insurers represented by independent agents. Many of these insurers have greater capital than our insurance subsidiaries, have substantially greater financial, technical and operating resources and have equal or higher ratings from A.M. Best than our insurance subsidiaries. In addition, our competition may become increasingly better capitalized in the future as the property and casualty insurance industry continues to consolidate.

The greater capitalization of many of the competitors of our insurance subsidiaries enables them to operate with lower profit margins and, therefore, allows them to market their products more aggressively, to take advantage more quickly of new marketing opportunities and to offer lower premium rates. Our insurance subsidiaries may not be able to maintain their current competitive position in the markets in which they operate if their competitors offer prices for their products that are lower than the prices our insurance subsidiaries are prepared to offer. Moreover, if these competitors lower the price of their products and our insurance subsidiaries meet their pricing, the profit margins and revenues of our insurance subsidiaries may decrease and their ratios of claims and expenses to premiums may increase. All of these factors could materially adversely affect the financial condition and results of operations of our insurance subsidiaries.

Because the investment portfolios of our insurance subsidiaries consist primarily of fixed-income securities, their investment income and the fair value of their investment portfolios could decrease as a result of a number of factors.

Our insurance subsidiaries invest the premiums they receive from their policyholders and maintain investment portfolios that consist primarily of fixed-income securities. The management of these investment portfolios is an important component of the profitability of our insurance subsidiaries and a significant portion of the operating income of our insurance subsidiaries generate derives from the income they receive on their invested assets. A number of factors may affect the quality and/or yield of their portfolios, including the general economic and business environment, government monetary policy, changes in the credit quality of the issuers of the fixed-income securities our insurance subsidiaries own, changes in market conditions and regulatory changes. The fixed-income securities our insurance subsidiaries own consist primarily of securities issued by domestic entities that are backed either by the credit or collateral of the underlying issuer. Factors such as an economic downturn, disruption in the credit market or the availability of credit, a regulatory change pertaining to a particular issuer’s industry, a significant deterioration in the cash flows of the issuer or a change in the issuer’s marketplace may adversely affect the ability of our insurance subsidiaries to collect principal and interest from the issuer.

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The investments of our insurance subsidiaries are also subject to risk resulting from interest rate fluctuations. Increasing interest rates or a widening in the spread between interest rates available on U.S. Treasury securities and corporate debt or asset-backed securities, for example, will typically have an adverse impact on the market values of fixed-rate securities. If interest rates remain at historically low levels, our insurance subsidiaries will generally have a lower overall rate of return on investments of cash their operations generate. In addition, in the event of the call or maturity of investments in a low interest rate environment, our insurance subsidiaries may not be able to reinvest the proceeds in securities with comparable interest rates. Changes in interest rates may reduce both the profitability and the return on the invested capital of our insurance subsidiaries.

We and our insurance subsidiaries depend on key personnel. The loss of any member of our executive management or the senior management of our insurance subsidiaries could negatively affect the continuation of our business strategies and achievement of our growth objectives.

The loss of, or failure to attract, key personnel could significantly impede the financial plans, growth, marketing and other objectives of us and our insurance subsidiaries. The continued success of our insurance subsidiaries depends to a substantial extent on the ability and experience of their senior management. Our insurance subsidiaries and we believe that our future success is dependent on our ability to attract and retain additional skilled and qualified personnel and to expand, train and manage our employees. We and our insurance subsidiaries may be unable to do so because of the intense competition for experienced personnel in the insurance industry. We and our insurance subsidiaries have two to five year automatically renewing employment agreements with our senior officers, including all of our named executive officers.

The reinsurance agreements on which our insurance subsidiaries rely do not relieve our insurance subsidiaries from their primary liability to their policyholders, and our insurance subsidiaries face a risk of non-payment from their reinsurers as well as the non-availability of reinsurance in the future.

Our insurance subsidiaries rely on reinsurance agreements to limit their maximum net loss from large single catastrophic risks or excess of loss risks in areas where our insurance subsidiaries may have a concentration of policyholders. Reinsurance also enables our insurance subsidiaries to increase their capacity to write insurance because it has the effect of leveraging the surplus of our insurance subsidiaries. Although the reinsurance our insurance subsidiaries maintain provides that the reinsurer is liable to them for any reinsured losses, the reinsurance does not relieve our insurance subsidiaries from their primary liability to their policyholders if the reinsurer fails to pay our insurance subsidiaries. To the extent that a reinsurer is unable to pay losses for which it is liable to our insurance subsidiaries, our insurance subsidiaries remain liable for such losses. At December 31, 2012, our insurance subsidiaries had approximately $108.1 million of reinsurance receivables from third-party reinsurers relating to paid and unpaid losses. Any insolvency or inability of these reinsurers to make timely payments to our insurance subsidiaries under the terms of their reinsurance agreements would adversely affect the results of operations of our insurance subsidiaries.

Michigan law requires MICO to provide unlimited lifetime medical benefits under the personal injury protection, or PIP, coverage of the personal automobile and commercial automobile policies it writes in the State of Michigan. Michigan law also requires MICO to be a member of the Michigan Catastrophic Claims Association, or MCCA, in order to write automobile insurance. The MCCA receives funding through assessments that its members collect from policyholders in the state and provides reinsurance for PIP claims that exceed a set retention. At December 31, 2012, MICO had approximately $34.4 million of reinsurance receivables from MCCA relating to paid and unpaid losses. The MCCA has generated significant operating deficits in recent years. Although we currently consider the risk to be remote, should the MCCA be unable to fulfill its payment obligations to MICO in the future, MICO’s financial condition and results of operations could be adversely affected.

In addition, our insurance subsidiaries face a risk of the non-availability of reinsurance or an increase in reinsurance costs that could adversely affect their ability to write business or their results of operations. Market conditions beyond the control of our insurance subsidiaries, such as the amount of surplus in the reinsurance market and the frequency and severity of natural and man-made catastrophes, affect both the availability and the cost of the reinsurance our insurance subsidiaries purchase. If our insurance subsidiaries cannot maintain their current level of reinsurance or purchase new reinsurance protection in amounts that our insurance subsidiaries consider sufficient, our insurance subsidiaries would either have to accept an increase in their net risk retention or reduce their insurance writings, which would adversely affect them.

Our equity investment in DFSC subjects us to certain risks inherent to community banking organizations.

Our equity in the earnings of DFSC primarily reflects the underlying profitability of UCB. UCB is subject to a number of risks, which include, but are not limited to, the following:

• variations in interest rates that may negatively affect UCB’s financial performance;

• inherent risks associated with UCB’s lending activities;

• a significant decline in general economic conditions in the specific markets in which UCB operates;

• the potential adverse impact of extensive federal and state regulation and supervision;

• potential declines in the value of UCB’s investments that are considered other than temporary;

• competition for loans and deposits with numerous regional and national banks and other financial institutions; and

• UCB’s inability to attract and retain qualified key personnel.

Risks Relating to the Property and Casualty Insurance Industry

Industry trends, such as increased litigation against the insurance industry and individual insurers, the willingness of courts to expand covered causes of loss, rising jury awards, escalating medical costs and increasing loss severity may contribute to increased costs and to the deterioration of the reserves of our insurance subsidiaries.

Loss severity in the property and casualty insurance industry has increased in recent years, principally driven by larger court judgments and increasing medical costs. In addition, many classes of complainants have brought legal actions and proceedings that tend to increase the size of judgments. The propensity of policyholders and third-party claimants to litigate and the willingness of courts to expand causes of loss and the size of awards to eliminate exclusions and to increase coverage limits may make the loss reserves of our insurance subsidiaries inadequate for current and future losses.

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Loss or significant restriction of the use of credit scoring in the pricing and underwriting of the personal lines insurance products by our insurance subsidiaries could adversely affect their future profitability.

Our insurance subsidiaries use credit scoring as a factor in making risk selection and pricing decisions where allowed by state law for personal lines insurance products. Recently, some consumer groups and regulators have questioned whether the use of credit scoring unfairly discriminates against people with low incomes, minority groups and the elderly. These consumer groups and regulators often call for the prohibition or restriction on the use of credit scoring in underwriting and pricing. Laws or regulations enacted in a number of states that significantly curtail the use of credit scoring in the underwriting process could reduce the future profitability of our insurance subsidiaries.

Changes in applicable insurance laws or regulations or changes in the way regulators administer those laws or regulations could adversely affect the operating environment of our insurance subsidiaries and increase their exposure to loss or put them at a competitive disadvantage.

Property and casualty insurers are subject to extensive supervision in their domiciliary states and in the states in which they do business. This regulatory oversight includes matters relating to:

• licensing and examination;

• approval of premium rates;

• market conduct;

• policy forms;

• limitations on the nature and amount of certain investments;

• claims practices;

• mandated participation in involuntary markets and guaranty funds;

• reserve adequacy;

• insurer solvency;

• transactions between affiliates;

• the amount of dividends that insurers may pay; and

• restrictions on underwriting standards.

Such regulation and supervision are primarily for the benefit and protection of policyholders rather than stockholders. For instance, our insurance subsidiaries are subject to involuntary participation in specified markets in various states in which they operate and the premium rates our insurance subsidiaries may charge do not always correspond with the underlying costs of providing that coverage.

The NAIC and state insurance regulators are re-examining existing laws and regulations, specifically focusing on:

• insurance company investments;

• issues relating to the solvency of insurance companies;

• risk-based capital guidelines;

• restrictions on the terms and conditions included in insurance policies;

• certain methods of accounting;

• reserves for unearned premiums, losses and other purposes;

• the values at which insurance companies may carry investment securities and the definition of other-than-temporary impairment; and

• interpretations of existing laws and the development of new laws.

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Changes in state laws and regulations, as well as changes in the way state regulators view related-party transactions in particular, could change the operating environment of our insurance subsidiaries and have an adverse effect on their business. The state insurance regulatory framework has recently come under increased federal scrunity. Congress is considering proposals that it should create an optional federal charter for insurers. Federal chartering has the potential to create an uneven playing field for insurers by subjecting federally-chartered and state-chartered insurers to different regulatory requirements. Federal chartering also raises the possibility of duplicative or conflicting federal and state requirements. In addition, if federal legislation repeals the partial exemption for the insurance industry from federal antitrust laws, our ability to collect and share loss cost data with the industry could adversely affect the results of operations of our insurance subsidiaries.

Insurance companies are subject to assessments, based on their market share in a given line of business, to assist in the payment of unpaid claims and related costs of insolvent insurance companies. Such assessments could adversely affect the financial condition of our insurance subsidiaries.

Our insurance subsidiaries must pay assessments pursuant to the guaranty fund laws of the various states in which they conduct business. Generally, under these laws, our insurance subsidiaries can be assessed, depending upon the market share of our insurance subsidiaries in a given line of insurance business, to assist in the payment of unpaid claims and related costs of insolvent insurance companies in those states. We cannot predict the number and magnitude of future insurance company failures in the states in which our insurance subsidiaries conduct business, but future assessments could adversely affect the business, financial condition and results of operations of our insurance subsidiaries.

Our insurance subsidiaries must establish premium rates and loss and loss expense reserves from forecasts of the ultimate costs they expect will arise from risks underwritten during the policy period, and the profitability of our insurance subsidiaries could be adversely affected if their premium rates or reserves are insufficient to satisfy their ultimate costs.

One of the distinguishing features of the property and casualty insurance industry is that it prices its products before it knows its costs, since insurers generally establish their premium rates before they know the amount of losses they will incur. Accordingly, our insurance subsidiaries establish premium rates from forecasts of the ultimate costs they expect to arise from risks they have underwritten during the policy period. These premium rates may not be sufficient to cover the ultimate losses incurred. Further, our insurance subsidiaries must establish reserves for losses and loss expenses as balance sheet liabilities based upon estimates involving actuarial and statistical projections at a given time of what our insurance subsidiaries expect their ultimate liability to be. Significant periods of time often elapse from the occurrence of an insured loss to the reporting of the loss and the payment of that loss. It is possible that our insurance subsidiaries’ ultimate liability could exceed these estimates because of the future development of known losses, the existence of losses that have occurred but are currently unreported and larger than historical settlements on pending and unreported claims. The process of estimating reserves is inherently judgmental and can be influenced by a number of factors, including the following:

• trends in claim frequency and severity;

• changes in operations;

• emerging economic and social trends;

• inflation; and

• changes in the regulatory and litigation environments.

If our insurance subsidiaries have insufficient premium rates or reserves, insurance regulatory authorities may require increases to these reserves. An increase in reserves results in an increase in losses and a reduction in net income for the period in which the deficiency in reserves exists. Accordingly, if an increase in reserves is not sufficient, it may adversely impact their business, liquidity, financial condition and results of operations.

The financial results of our insurance subsidiaries depend primarily on their ability to underwrite risks effectively and to charge adequate rates to policyholders.

The financial condition, cash flows and results of operations of our insurance subsidiaries depend on their ability to underwrite and set rates accurately for a full spectrum of risks across a number of lines of insurance. Rate adequacy is necessary to generate sufficient premium to pay losses, loss adjustment expenses and underwriting expenses and to earn a profit.

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The ability to underwrite and set rates effectively is subject to a number of risks and uncertainties, including:

• the availability of sufficient, reliable data;

• the ability to conduct a complete and accurate analysis of available data;

• the ability to recognize in a timely manner changes in trends and to project both the severity and frequency of losses with reasonable accuracy;

• uncertainties generally inherent in estimates and assumptions;

• the ability to project changes in certain operating expense levels with reasonable certainty;

• the development, selection and application of appropriate rating formulae or other pricing methodologies;

• the use of modeling tools to assist with correctly and consistently achieving the intended results in underwriting and pricing;

• the ability to innovate with new pricing strategies and the success of those innovations on implementation;

• the ability to secure regulatory approval of premium rates on an adequate and timely basis;

• the ability to predict policyholder retention accurately;

• unanticipated court decisions, legislation or regulatory action;

• unanticipated changes in our claim settlement practices;

• changes in driving patterns for auto exposures;

• changes in weather patterns for property exposures;

• changes in the medical sector of the economy;

• unanticipated changes in auto repair costs, auto parts prices and used car prices;

• the impact of inflation and other factors on the cost of construction materials and labor;

• the ability to monitor property concentration in catastrophe-prone areas, such as hurricane, earthquake and wind/hail regions; and

• the general state of the economy in the states in which our insurance subsidiaries operate.

Such risks may result in the premium rates of our insurance subsidiaries being based on inadequate or inaccurate data or inappropriate assumptions or methodologies and may cause our estimates of future changes in the frequency or severity of claims to be incorrect. As a result, our insurance subsidiaries could underprice risks, which would negatively affect our margins, or our insurance subsidiaries could overprice risks, which could reduce their volume and competitiveness. In either event, underpricing or overpricing risks could adversely impact our operating results, financial condition and cash flows.

The cyclical nature of the property and casualty insurance industry may reduce the revenues and profit margins of our insurance subsidiaries.

The property and casualty insurance industry is highly cyclical with respect to both individual lines of business and the overall insurance industry. Premium rate levels relate to the availability of insurance coverage, which varies according to the level of surplus available in the insurance industry. The level of surplus in the industry varies with returns on invested capital and regulatory barriers to withdrawal of surplus. Increases in surplus may result in increased price competition among property and casualty insurers. If our insurance subsidiaries find it necessary to reduce premiums or limit premium increases due to these competitive pressures on pricing, our insurance subsidiaries may experience a reduction in their profit margins and revenues, an increase in their ratios of losses and expenses to premiums and, therefore, lower profitability.

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Risks Relating to Our Common Stock

The price of our common stock may be adversely affected by its low trading volume.

Our Class A common stock and our Class B common stock have limited liquidity. Reported average daily trading volume in our Class A common stock and our Class B common stock for the year ended December 31, 2012 was approximately 22,293 shares and approximately 184 shares, respectively. This limited liquidity could subject our shares of Class A common stock and our shares of Class B common stock to greater price volatility.

Donegal Mutual’s ownership of our stock, anti-takeover provisions of our certificate of incorporation and by-laws and certain state laws make it unlikely anyone could acquire control of us unless Donegal Mutual were in favor of the acquisition of control.

Donegal Mutual’s ownership of our Class A common stock and Class B common stock, certain anti-takeover provisions of our certificate of incorporation and by-laws, certain provisions of Delaware law and the insurance laws and regulations of Iowa, Georgia, Maryland, Michigan, Pennsylvania, Virginia and Wisconsin could delay or prevent the removal of members of our board of directors and could make it more difficult for a merger, tender offer or proxy contest involving us to succeed, even if our stockholders other than Donegal Mutual believed any of such events would be beneficial to them. These factors could also discourage a third party from attempting to acquire control of us. The classification of our board of directors could also have the effect of delaying or preventing a change in our control.

In addition, we have 2,000,000 authorized shares of preferred stock that we could issue in one or more series without stockholder approval, to the extent applicable law permits, and upon such terms and conditions, and having such rights, privileges and preferences, as our board of directors may determine. Our ability to issue preferred stock could make it difficult for a third party to acquire us. We have no current plans to issue any preferred stock.

Moreover, the DGCL contains provisions that prohibit certain business combination transactions under certain circumstances. In addition, state insurance laws and regulations generally prohibit any person from acquiring, or seeking to acquire, a 10% or greater interest in an insurance company without the prior approval of the state insurance commissioner of the state of domicile of the insurer. Because of our indirect control of UCB, HOLA also prohibits the acquisition of a 10% or greater interest in either our Class A common stock or our Class B common stock without the prior approval of the FRB or the granting of an exemption by the FRB.

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Item 1B. Unresolved Staff Comments.

We have no unresolved written comments from the Securities and Exchange Commission (“SEC”) staff regarding our filings under the Exchange Act.

Item 2. Properties.

We and our insurance subsidiaries share administrative headquarters with Donegal Mutual in a building in Marietta, Pennsylvania that Donegal Mutual owns. Donegal Mutual charges us and our insurance subsidiaries for an appropriate portion of the building expenses under an inter-company allocation agreement. The Marietta headquarters has approximately 230,000 square feet of office space. Southern owns a facility of approximately 10,000 square feet in Glen Allen, Virginia. Le Mars owns a facility of approximately 25,500 square feet in Le Mars, Iowa, the Peninsula Group owns a facility of approximately 14,600 square feet in Salisbury, Maryland and Sheboygan owns a facility of approximately 8,800 square feet in Sheboygan Falls, Wisconsin.

Item 3. Legal Proceedings.

Our insurance subsidiaries are parties to routine litigation that arises in the ordinary course of their insurance business. We believe that the resolution of these lawsuits will not have a material adverse effect on the financial condition or results of operations of our insurance subsidiaries.

Item 4. Reserved.

Not applicable.

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Executive Officers of the Company

The following table sets forth information regarding the executive officers of Donegal Mutual and us, each of whom has served with us for more than 10 years:

Name	Age		Position
Donald H. Nikolaus		70	President and Chief Executive Officer of Donegal Mutual since 1981; President and Chief Executive Officer of us since 1986. Chairman of our board of directors since April 2012.
Kevin G. Burke		47	Senior Vice President of Human Resources of Donegal Mutual and us since 2005; Vice President of Human Resources of Donegal Mutual and us from 2001 to 2005; other positions from 2000 to 2001.
Cyril J. Greenya		68	Senior Vice President and Chief Underwriting Officer of Donegal Mutual and us since 2005; Senior Vice President, Underwriting, of Donegal Mutual from 1997 to 2005; other positions from 1986 to 2005.
Jeffrey D. Miller		48	Senior Vice President and Chief Financial Officer of Donegal Mutual and us since 2005; Vice President and Controller of Donegal Mutual and us from 2000 to 2005; other positions from 1995 to 2005.
Robert G. Shenk		59	Senior Vice President, Claims, of Donegal Mutual and us since 1997; other positions from 1986 to 1997.
Daniel J. Wagner		52	Senior Vice President and Treasurer of Donegal Mutual and us since 2005; Vice President and Treasurer of Donegal Mutual and us from 2000 to 2005; other positions from 1993 to 2005.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our Class A common stock and Class B common stock trade on the NASDAQ Global Select Market under the symbols “DGICA” and “DGICB,” respectively. The following table shows the dividends paid per share and the stock price range for both classes of stock for each quarter during 2012 and 2011:

Quarter	High		Low		Cash Dividend Declared Per Share
2012 - Class A
1st	$	16.00	$	12.73	$	—
2nd		15.36		12.87		0.1225
3rd		14.93		12.91		0.1225
4th		14.69		12.25		0.2450
2012 - Class B
1st	$	17.89	$	14.74	$	—
2nd		18.00		16.85		0.1100
3rd		18.22		16.04		0.1100
4th		23.00		16.51		0.2200
2011 - Class A
1st	$	15.51	$	11.48	$	—
2nd		14.01		12.29		0.1200
3rd		13.93		11.22		0.1200
4th		14.94		11.53		0.2400
2011 - Class B
1st	$	18.75	$	15.21	$	—
2nd		19.51		13.91		0.1075
3rd		23.73		14.62		0.1075
4th		17.20		14.97		0.2150

At the close of business on March 1, 2013, we had approximately 1,967 holders of record of our Class A common stock and approximately 364 holders of record of our Class B common stock.

We declared dividends of $0.49 per share on our Class A common stock and $0.44 per share on our Class B common stock in 2012, compared to $0.48 per share on our Class A common stock and $0.43 per share on our Class B common stock in 2011.

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Between October 1, 2012 and December 31, 2012, we and Donegal Mutual purchased shares of our Class A common stock and Class B common stock as set forth in the table below:

Period	(a) Total Number of Shares (or Units Purchased	(b) Average Price Paid per Share (or Unit)	(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans of Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)
Month #1	Class A — —	Class A — $—	Class A — —
October 1-31, 2012	Class B — —	Class B — $—	Class B — —
Month #2	Class A — 32,800	Class A — $13.33	Class A — 32,800		(1)
November 1-30, 2012	Class B — 9,000	Class B — $22.00	Class B — 9,000		(2)
Month #3	Class A — 9,900	Class A — $14.03	Class A — 9,900		(1)
December 1-31, 2012	Class B — —	Class B — $—	Class B — —
Total	Class A — 42,700	Class A — $13.50	Class A — 42,700
	Class B — 9,000	Class B — $22.00	Class B — 9,000

(1) We purchased these shares pursuant to our announcement on February 23, 2009 that we will purchase up to 300,000 shares of our Class A common stock at market prices prevailing from time to time in the open market subject to the provisions of SEC Rule 10b-18 and in privately negotiated transactions. We may purchase up to 28,308 additional shares of our Class A common stock under this stock repurchase program.

(2) Donegal Mutual purchased these shares pursuant to its announcement on August 17, 2004 that it will, at its discretion, purchase shares of our Class A common stock and Class B common stock at market prices prevailing from time to time in the open market subject to the provisions of SEC Rule 10b-18 and in privately negotiated transactions. Such announcement did not stipulate a maximum number of shares that may be purchased under this program.

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Stock Performance Chart.

The following graph provides an indicator of cumulative total stockholder returns on our Class A and Class B common stock for the period beginning on December 31, 2007 and ending on December 31, 2012, compared to the Russell 2000 Index and a peer group comprised of nine property and casualty insurance companies over the same period. The peer group consists of Cincinnati Financial Corp., Eastern Insurance Holdings Inc., EMC Insurance Group Inc., Hanover Insurance, Horace Mann Educators, Selective Insurance Group Inc., State Auto Financial Corp., Tower Group Inc. and United Fire and Casualty Co. The graph shows the change in value of an initial $100 investment on December 31, 2007, assuming reinvestment of all dividends.

	2007		2008		2009		2010		2011		2012
Donegal Group Inc. Class A	$	100.00	$	100.06	$	95.46	$	91.98	$	93.38	$	95.89
Donegal Group Inc. Class B		100.00		95.46		96.28		103.32		98.81		110.96
Russell 2000 Index		100.00		65.20		81.64		102.30		96.72		110.88
Peer Group		100.00		86.45		78.08		93.12		85.68		106.10

Value Line Publishing LLC prepared the foregoing performance graph and data. The performance graph and accompanying data shall not be deemed “filed” as part of this Form 10-K Annual Report for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section and should not be deemed incorporated by reference into any other filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate the performance graph and accompanying data by reference into such filing.

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Item 6. Selected Financial Data.

Year Ended December 31,	2012		2011			2010			2009		2008
Income Statement Data
Premiums earned	$	475,002,222	$	431,470,184		$	378,030,129		$	355,025,477	$	346,575,266
Investment income, net		20,168,919		20,858,179			19,949,714			20,630,583		22,755,784
Realized investment gains (losses)		6,859,439		12,281,267			4,395,720			4,479,558		(2,970,716	)
Total revenues		514,982,585		475,017,619			408,549,446			386,733,407		372,424,227
Income (loss) before income tax (benefit)		27,858,260		(6,739,313	)		9,844,149			20,676,689		32,092,044
Income tax (benefit)		4,765,640		(7,192,266	)		(1,623,030	)		1,846,611		6,550,066
Net income		23,092,620		452,953			11,467,179			18,830,078		25,541,978
Basic earnings per share - Class A		0.92		0.02			0.46			0.76		1.03
Diluted earnings per share - Class A		0.91		0.02			0.46			0.76		1.02
Cash dividends per share - Class A		0.49		0.48			0.46			0.45		0.42
Basic earnings per share - Class B		0.83		0.01			0.41			0.68		0.92
Diluted earnings per share - Class B		0.83		0.01			0.41			0.68		0.92
Cash dividends per share - Class B		0.44		0.43			0.41			0.40		0.37
Balance Sheet Data at Year End
Total investments	$	806,429,032	$	785,308,991		$	728,541,814		$	666,835,186	$	632,135,526
Total assets		1,336,889,187		1,290,793,478			1,174,619,523			935,601,927		880,109,036
Debt obligations		72,465,000		74,965,000			56,082,371			15,465,000		15,465,000
Stockholders’ equity		400,034,094		383,451,592			380,102,810			385,505,699		363,583,865
Book value per share		15.63		15.01			14.86			15.12		14.29

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Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition.

Overview

Donegal Mutual Insurance Company (“Donegal Mutual”) organized us as an insurance holding company on August 26, 1986. See “Business - History and Organizational Structure” for more information. Our insurance subsidiaries, Atlantic States Insurance Company (“Atlantic States”), Southern Insurance Company of Virginia (“Southern”), Le Mars Insurance Company (“Le Mars”), The Peninsula Insurance Company and Peninsula Indemnity Company (collectively, “Peninsula Group”), Sheboygan Falls Insurance Company (“Sheboygan Falls”) and Michigan Insurance Company (“MICO”) write personal and commercial lines of property and casualty coverages exclusively through a network of independent insurance agents in certain Mid-Atlantic, Midwest, New England and Southern states. We acquired MICO on December 1, 2010 and we have included MICO’s results of operations in our consolidated results of operations from that date. 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. We also own 48.2% of the outstanding stock of Donegal Financial Services Corporation (“DFSC”), a grandfathered unitary savings and loan holding company. Donegal Mutual owns the remaining 51.8% of the outstanding stock of DFSC.

At December 31, 2012, Donegal Mutual held approximately 39% of our outstanding Class A common stock and approximately 76% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately 66% of the aggregate voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock.

Donegal Mutual and Atlantic States entered into a proportional reinsurance agreement, or pooling agreement, effective October 1, 1986. Under this pooling agreement, Donegal Mutual and Atlantic States pool and then share proportionately substantially all of their respective premiums, losses and expenses. Atlantic States’ participation in the pool has been 80% since March 1, 2008. The operations of our insurance subsidiaries and Donegal Mutual are interrelated due to the pooling agreement and other factors. While maintaining the separate corporate existence of each company, our insurance subsidiaries and Donegal Mutual 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. See “Business - History and Organizational Structure” for more information regarding the pooling agreement and other transactions with our affiliates.

Our results of operations and financial condition have been impacted by two recent transactions:

• In December 2010, we acquired MICO, which had been a majority owned subsidiary of West Bend Mutual Insurance Company (“West Bend”), for approximately $42.3 million in cash. MICO writes various lines of property and casualty insurance and had direct written premiums of $105.4 million and net written premiums of $27.1 million for the year ended December 31, 2010. Effective on December 1, 2010, MICO entered into a 50% quota-share agreement with third-party reinsurers and a 25% quota-share reinsurance agreement with Donegal Mutual to replace the 75% quota-share reinsurance agreement MICO had maintained with West Bend through November 30, 2010.

• In May 2011, DFSC and Union National Financial Corporation (“UNNF”) merged, 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 Union Community Bank FSB (“UCB”). UCB is a federal savings bank with 13 branch offices in Lancaster County, Pennsylvania, and $509.8 million in assets at December 31, 2012. Donegal Mutual contributed $22.1 million and we contributed $20.6 million to DFSC as additional capital to facilitate the mergers. We use the equity method of accounting for our investment in DFSC. Under the equity method, we record our investment at cost, with adjustments for our share of DFSC’s earnings and losses as well as changes in DFSC’s equity due to DFSC’s unrealized gains and losses.

In February 2009, our board of directors authorized a share repurchase program, pursuant to which we may purchase up to 300,000 shares of our Class A common stock at market prices prevailing from time to time in the open market subject to the provisions of Securities and Exchange Commission Rule 10b-18 and in privately negotiated transactions. We purchased 135,064 and 119,257 shares of our Class A common stock under this program during 2012 and 2011, respectively. At December 31, 2012, we had the authority remaining to purchase 28,308 shares under this program.

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Critical Accounting Policies and Estimates

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

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

Liability for Losses and Loss Expenses

Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with respect to policyholder claims based on facts and circumstances then known. 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 of liability. We reflect any adjustments to our insurance subsidiaries’ liabilities for losses and loss expenses in our operating results in the period in which our insurance subsidiaries make the changes in 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 a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss the policyholder incurred. Our insurance subsidiaries determine the amount of their liability for unreported claims and loss expenses on the basis of historical information by line of insurance. Our insurance subsidiaries account for inflation in the reserving function through analysis of costs and trends and reviews of historical reserving results. Our insurance subsidiaries closely monitor their liabilities 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.

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 as to our insurance subsidiaries’ internal operations. For example, our insurance subsidiaries have experienced a decrease in claims frequency on workers’ compensation claims during the past several years while claims severity has gradually increased. These trend changes give rise to greater uncertainty as to the pattern of future loss settlements on workers’ compensation 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 attempt to make appropriate adjustments for such changes in their reserves. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at December 31, 2012. For every 1% change in our insurance subsidiaries’ estimate for loss and loss expense reserves, net of reinsurance recoverable, the effect on our pre-tax results of operations would be approximately $2.5 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, since 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 estimates of future liabilities have exceeded their actual liabilities. Changes in our insurance subsidiaries’ estimate of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received since the prior reporting date. Our

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insurance subsidiaries recognized an increase (decrease) in their liability for losses and loss expenses of prior years of $7.6 million, ($168,460) and ($2.9) million in 2012, 2011 and 2010, respectively. Our insurance subsidiaries made no significant changes in their reserving philosophy, key reserving assumptions or claims management personnel, and there have been no significant offsetting changes in estimates that increased or decreased their loss and loss expense reserves in those years. The 2012 development represented 3.1% of the December 31, 2011 net carried reserves and resulted primarily from higher-than-expected severity in the private passenger automobile liability and workers’ compensation lines of business in accident years prior to 2012.

Excluding the impact of weather events, our insurance subsidiaries have noted stable amounts in the number of claims incurred and a slight downward trend in 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 as the United States property and casualty insurance industry has experienced increased litigation trends and economic conditions that have extended the estimated length of disabilities and contributed to increased medical loss costs. 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 it to adverse loss development on the business of Donegal Mutual that is included in the pool. However, pooled business represents the predominant percentage of the net underwriting activity of both companies, and Donegal Mutual and Atlantic States proportionately share any adverse risk development of the pooled business. The business in the pool is homogeneous and each company has a pro-rata share of the entire pool. Since substantially all 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 they would experience individually and to spread the risk of loss between the companies. 

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Our insurance subsidiaries’ liability for losses and loss expenses by major line of business at December 31, 2012 and 2011 consisted of the following:

	2012		2011
	(in thousands)
Commercial lines:
Automobile	$	32,012	$	28,164
Workers’ compensation		67,715		60,134
Commercial multi-peril		39,645		38,895
Other		4,142		3,992
Total commercial lines		143,514		131,185
Personal lines:
Automobile		93,966		87,977
Homeowners		11,643		21,125
Other		1,813		2,728
Total personal lines		107,422		111,830
Total commercial and personal lines		250,936		243,015
Plus reinsurance recoverable		207,891		199,393
Total liability for losses and loss expenses	$	458,827	$	442,408

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

Change in Loss and Loss Expense Reserves Net of Reinsurance			Adjusted Loss and Loss Expense Reserves Net of Reinsurance at December 31, 2012		Percentage Change in Equity at December 31, 2012(1)			Adjusted Loss and Loss Expense Reserves Net of Reinsurance at December 31, 2011		Percentage Change in Equity at December 31, 2011(1)
(dollars in thousands)
	-10.0	%	$	225,842		4.1	%	$	218,714		4.1	%
	-7.5			232,116		3.1			224,789		3.1
	-5.0			238,389		2.0			230,864		2.1
	-2.5			244,663		1.0			236,940		1.0
	Base			250,936		—			243,015		—
	2.5			257,209		-1.0			249,090		-1.0
	5.0			263,483		-2.0			255,166		-2.1
	7.5			269,756		-3.1			261,241		-3.1
	10.0			276,030		-4.1			267,317		-4.1

(1) Net of income tax effect.

Our insurance subsidiaries base their reserves for unpaid losses and loss expenses on current trends in loss and loss expense development and reflect their best estimates for future amounts needed to pay losses and loss expenses with respect to incurred events currently known to them plus incurred but not reported (“IBNR”) claims. Our insurance subsidiaries develop their reserve estimates based on an assessment of known facts and circumstances, review of historical loss settlement patterns, estimates of trends in claims severity, frequency, legal and regulatory changes and other assumptions. Our insurance subsidiaries consistently apply actuarial loss reserving techniques and assumptions, which rely on historical information as adjusted to reflect current conditions, including consideration of recent case reserve activity. Our insurance subsidiaries use the most-likely number as determined by their actuaries.

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For the year ended December 31, 2012, the actuaries developed a range from a low of $228.7 million to a high of $275.3 million and with a most-likely number of $250.9 million. The actuaries’ range of estimates for commercial lines in 2012 was $130.9 million to $157.4 million, and they selected the most-likely number of $143.5 million. The actuaries’ range of estimates for personal lines in 2012 was $97.8 million to $117.9 million, and they selected the most-likely number of $107.4 million. For the year ended December 31, 2011, the actuaries developed a range from a low of $227.0 million to a high of $260.2 million and with a most-likely number of $243.0 million. The actuaries’ range of estimates for commercial lines in 2011 was $122.6 million to $140.4 million, and they selected the most-likely number of $131.2 million. The actuaries’ range of estimates for personal lines in 2011 was $104.4 million to $119.8 million, and they selected the most-likely number of $111.8 million.

Our insurance subsidiaries seek to enhance their underwriting results by carefully selecting the product lines they underwrite. For personal lines products, our insurance subsidiaries insure standard and preferred risks in private passenger automobile and homeowners lines. For commercial lines products, the commercial risks that our insurance subsidiaries primarily insure are business offices, wholesalers, service providers, contractors, artisans and light manufacturing operations. Our insurance subsidiaries have limited exposure to asbestos and other environmental liabilities. Our insurance subsidiaries write no medical malpractice liability risks. Through the consistent application of this disciplined underwriting philosophy, our insurance subsidiaries have avoided many of the “long-tail” issues other insurance companies have faced. We consider workers’ compensation to be a “long-tail” line of business, in that workers’ compensation claims tend to be settled over a longer time frame than those in our other lines of business.

The following table presents 2012 and 2011 claim count and payment amount information for workers’ compensation. Workers’ compensation losses primarily consist of indemnity and medical costs for injured workers.

	For the Year Ended December 31,
(dollars in thousands)	2012		2011
Number of claims pending, beginning of period		2,430		2,064
Number of claims reported		6,114		5,409
Number of claims settled or dismissed		6,199		5,043
Number of claims pending, end of period		2,345		2,430
Losses paid	$	30,860	$	24,596
Loss expenses paid		6,518		4,602

Investments

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 seven equity securities that were in an unrealized loss position at December 31, 2012. 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 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 46 debt securities that were in an

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unrealized loss position at December 31, 2012. 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 2012, 2011 or 2010.

We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at December 31, 2012 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	$	12,308,333	$	43,951	$	—	$	—
Obligations of states and political subdivisions		22,134,226		606,065		—		—
Corporate securities		12,271,750		79,136		2,958,520		29,573
Residential mortgage-backed securities		22,491,562		66,443		—		—
Equity securities		2,226,050		106,748		—		—
Totals	$	71,431,921	$	902,343	$	2,958,520	$	29,573

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 present our investments in available-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. We generally obtain one price per security. The 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 determine if the estimates we obtain are representative of fair values based upon their 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 monitor the market and are familiar with current trading ranges for similar securities and 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, coupon rates, security type and recent trading activity. Our investment personnel review documentation with respect to the pricing services’ pricing methodology that they obtain periodically to determine if the primary pricing sources, market inputs and pricing frequency for various security types are reasonable. At December 31, 2012 and 2011, we received one estimate per security from one of 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 December 31, 2012 and 2011, we did not identify any discrepancies, and we did not make any adjustments to the estimates the pricing services provided.

We had no sales or transfers from the held to maturity portfolio in 2012, 2011 or 2010.

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Policy Acquisition Costs

We defer our insurance subsidiaries’ policy acquisition costs, consisting primarily of commissions, premium taxes and certain other underwriting costs that vary with and relate directly to the production of business and amortize these costs over the period in which our insurance subsidiaries earn the premiums. The method our insurance subsidiaries follow in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss expenses and certain other costs we expect to incur as our insurance subsidiaries earn the premium.

Management Evaluation of Operating Results

Despite headwinds from economic uncertainty, challenging insurance market conditions and unusually adverse weather conditions that affected our results in recent years, we believe that our focused business strategy, including our insurance subsidiaries’ disciplined underwriting practices, have positioned us well for 2013 and beyond.

The property and casualty insurance industry is highly cyclical, and individual lines of business experience their own cycles within the overall property and casualty insurance industry cycle. Premium rate levels relate to the availability of insurance coverage, which varies according to the level of surplus in the insurance industry and other factors. The level of surplus in the industry varies with returns on capital and regulatory barriers to the withdrawal of surplus. Increases in surplus have generally been accompanied by increased price competition among property and casualty insurers. If our insurance subsidiaries were to find it necessary to reduce premiums or limit premium increases due to competitive pressures on pricing, our insurance subsidiaries could experience a reduction in profit margins and revenues, an increase in ratios of losses and expenses to premiums and, therefore, lower profitability. The cyclicality of the insurance market and its potential impact on our results is difficult to predict with any significant reliability. We evaluate the performance of our commercial lines and personal lines segments primarily based upon the underwriting results of our insurance subsidiaries as determined under statutory accounting practices (“SAP”), which our management uses to measure performance for the total business of our insurance subsidiaries.

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

	Year Ended December 31,
(in thousands)	2012			2011			2010
Net premiums written:
Personal lines:
Automobile	$	195,132		$	186,677		$	171,497
Homeowners		97,120			89,405			83,415
Other		16,319			14,983			13,135
Total personal lines		308,571			291,065			268,047
Commercial lines:
Automobile		51,261			46,168			37,094
Workers’ compensation		65,390			51,849			34,920
Commercial multi-peril		64,476			57,988			47,411
Other		6,749			6,981			4,050
Total commercial lines		187,876			162,986			123,475
Total net premiums written	$	496,447		$	454,051		$	391,522
Components of GAAP combined ratio:
Loss ratio		70.1	%		78.9	%		72.6	%
Expense ratio		31.2			31.4			32.0
Dividend ratio		0.3			0.3			0.1
GAAP combined ratio		101.6	%		110.6	%		104.7	%
Revenues:
Premiums earned:
Personal lines	$	300,272		$	282,498		$	260,900
Commercial lines		174,735			152,247			117,755
SAP premiums earned		475,007			434,745			378,655
GAAP adjustments		(5	)		(3,275	)		(625	)
GAAP premiums earned		475,002			431,470			378,030
Net investment income		20,169			20,858			19,950
Realized investment gains		6,859			12,281			4,396
Equity in earnings (loss) of DFSC		4,533			2,023			(269	)
Other		8,420			8,386			6,442
Total revenues	$	514,983		$	475,018		$	408,549

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	Year Ended December 31,
(in thousands)	2012			2011			2010
Components of net income:
Underwriting income (loss):
Personal lines	$	(18,236	)	$	(40,739	)	$	(22,526	)
Commercial lines		5,251			(6,560	)		2,252
SAP underwriting loss		(12,985	)		(47,299	)		(20,274	)
GAAP adjustments		5,545			1,532			2,458
GAAP underwriting loss		(7,440	)		(45,767	)		(17,816	)
Net investment income		20,169			20,858			19,950
Realized investment gains		6,859			12,281			4,396
Equity in earnings (loss) of DFSC		4,533			2,023			(269	)
Other		3,737			3,866			3,583
Income (loss) before income tax (expense) benefit		27,858			(6,739	)		9,844
Income tax (expense) benefit		(4,765	)		7,192			1,623
Net income	$	23,093		$	453		$	11,467

Statutory Combined Ratios

We evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to using GAAP-based performance measurements, we also utilize certain non-GAAP financial measures that we believe are valuable in managing our business and for comparison to our peers. These non-GAAP measures are underwriting (loss) income, statutory combined ratio and net premiums written. An insurance company’s statutory combined ratio is a standard measure of underwriting profitability. This ratio is the sum of the ratio of calendar-year incurred losses and loss expenses to premiums earned; the ratio of expenses incurred for commissions, premium taxes and underwriting expenses to premiums written and the ratio of dividends to policyholders to premiums earned. The statutory combined ratio does not reflect investment income, federal income taxes or other non-operating income or expense. A ratio of less than 100 percent generally indicates underwriting profitability. The statutory combined ratio differs from the GAAP combined ratio. In calculating the GAAP combined ratio, installment payment fees are not deducted from incurred expenses and the expense ratio is based on premiums earned instead of premiums written. The following table sets forth our insurance subsidiaries’ statutory combined ratios by major line of business for the years ended December 31, 2012, 2011 and 2010:

	Year Ended December 31,
	2012			2011			2010
Commercial lines:
Automobile		94.5	%		105.4	%		90.0	%
Workers’ compensation		98.1			96.0			99.3
Commercial multi-peril		90.5			103.0			96.7
Other		15.0			46.1			42.8
Total commercial lines		91.2			99.0			93.6
Personal lines:
Automobile		108.1			106.9			103.8
Homeowners		100.9			126.3			115.4
Other		89.4			103.6			97.0
Total personal lines		105.0			112.6			107.0
Total commercial and personal lines		99.8			107.9			102.9

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Results of Operations

YEAR ENDED DECEMBER 31, 2012 COMPARED TO YEAR ENDED DECEMBER 31, 2011

Net Premiums Written

Our insurance subsidiaries’ 2012 net premiums written increased 9.3% to $496.4 million, compared to $454.1 million for 2011. We primarily attribute the increase to a change in MICO’s quota-share reinsurance, the impact of premium rate increases and an increase in the writing of commercial lines of insurance. Effective January 1, 2012, MICO reduced its external quota-share reinsurance percentage from 50% to 40%. Commercial lines net premiums written increased $26.7 million, or 16.5%, for 2012 compared to 2011. The increase includes $5.3 million related to the reduction in the amount of premium MICO reinsured in 2012, with the remainder attributable to increased writings of new accounts in the commercial automobile, commercial multi-peril and workers’ compensation lines of business. Personal lines net premiums written increased $15.7 million, or 5.4%, for 2012 compared to 2011. The increase includes $4.6 million resulting from the reduction in the amount of premium MICO reinsured in 2012, with the remainder primarily attributable to premium rate increases our subsidiaries implemented throughout 2011 and 2012 and reduced reinsurance reinstatement premiums.

Net Premiums Earned

Our insurance subsidiaries’ net premiums earned increased to $475.0 million for 2012, an increase of $43.5 million, or 10.1%, over 2011, reflecting increases in net premiums written during 2011 and 2012. Our insurance subsidiaries earn premiums and recognize them as income over the terms of the policies they issue. Such terms are generally one year or less in duration. Therefore, increases or decreases in net premiums earned generally reflect increases or decreases in net premiums written in the preceding twelve-month period compared to the same period one year earlier.

Investment Income

For 2012, our net investment income was $20.2 million, a slight decrease from 2011. An increase in our average invested assets from $756.9 million in 2011 to $795.9 million in 2012 was offset by a decrease in our annualized average rate of return to 2.5% in 2012, compared to 2.8% in 2011.

Installment Payment Fees

Our insurance subsidiaries’ installment fees increased primarily as a result of increases in policy counts during 2012.

Net Realized Investment Gains/Losses

Our net realized investment gains in 2012 and 2011 were $6.9 million and $12.3 million, respectively. The net realized investment gains in 2012 resulted from normal turnover within our investment portfolio. The net realized investment gains for 2011 included $8.0 million in gains that resulted from the previously planned periodic sales of a portion of our holdings of an equity security that we obtained in an initial public offering and for which a selling restriction expired during 2011. We did not recognize any impairment losses during 2012 or 2011.

Equity in Earnings of DFSC

Our equity in the earnings of DFSC in 2012 and 2011 was $4.5 million and $2.0 million, respectively. The increase in DFSC’s earnings reflects the impact of the merger of UNNF and DFSC.

Losses and Loss Expenses

Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 70.1% in 2012, compared to 78.9% in 2011. Our insurance subsidiaries’ commercial lines loss ratio decreased to 65.5% in 2012, compared to 71.8% in 2011. This decrease resulted primarily from the commercial automobile loss ratio decreasing to 63.8% in 2012, compared to 72.4% in 2011, and the commercial multi-peril ratio decreasing to 60.2% in 2012, compared to 74.8% in 2011, as a result of decreased claim severity. The personal lines loss ratio decreased to 72.8% in 2012, compared to 82.8% in 2011, primarily as a result of a decrease in the homeowners loss ratio to 66.1% in 2012, compared to 97.1% in 2011, as a result of a decrease in weather-related claims. Our insurance subsidiaries experienced unfavorable loss reserve development of approximately $7.6 million during 2012 in their reserves for prior accident years, compared to virtually no development for 2011. The change in loss reserve development patterns occurred primarily within our insurance subsidiaries’ workers’ compensation and personal automobile reserves.

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Underwriting Expenses

Our insurance subsidiaries’ expense ratio, which is the ratio of policy acquisition and other underwriting expenses to premiums earned, was 31.2% in 2012, compared to 31.4% in 2011.

Combined Ratio

Our insurance subsidiaries’ combined ratio was 101.6% and 110.6% in 2012 and 2011, respectively. The combined ratio represents the sum of the loss ratio, expense ratio and dividend ratio, which is the ratio of workers’ compensation policy dividends incurred to premiums earned.

Interest Expense

Our interest expense in 2012 was $2.4 million, compared to $2.1 million in 2011. The higher interest expense in 2012 reflected an increase in our borrowings under our line of credit.

Income Taxes

Our income tax expense was $4.8 million in 2012, compared to a tax benefit of $7.2 million in 2011. Our effective tax rate for 2012 was 17.1%.

Net Income and Earnings Per Share

Our net income in 2012 was $23.1 million, or $.91 per share of Class A common stock on a diluted basis and $.83 per share of Class B common stock, compared to $452,953, or $.02 per share of Class A common stock on a diluted basis and $.01 per share of Class B common stock, in 2011. We had 20.0 million Class A shares and 5.6 million Class B shares outstanding for both periods. There are no outstanding securities that dilute our shares of Class B common stock.

Book Value Per Share and Return on Equity

Our stockholders’ equity increased by $16.6 million in 2012. We attribute the increase to our net income of $23.1 million and an increase in our net after-tax unrealized gains within our available-for-sale fixed maturity and equity investment portfolio from $23.5 million at December 31, 2011 to $26.4 million at December 31, 2012. Book value per share increased by 4.1% to $15.63 at December 31, 2012, compared to $15.01 a year earlier. Our return on average equity was 5.9% for 2012, compared to 0.1% for 2011.

YEAR ENDED DECEMBER 31, 2011 COMPARED TO YEAR ENDED DECEMBER 31, 2010

Net Premiums Written

Our insurance subsidiaries’ 2011 net premiums written increased 16.0% to $454.1 million, compared to $391.5 million for 2010. We primarily attribute the increase to $42.8 million of net premiums written related to our acquisition of MICO. Commercial lines net premiums written increased $39.5 million, or 32.0%, for 2011 compared to 2010. The increase included $22.5 million from MICO, with the remainder attributable to increased writings of new accounts in the commercial automobile, commercial multi-peril and workers’ compensation lines of business. Personal lines net premiums written increased $23.1 million, or 8.6%, for 2011 compared to 2010. The increase included $20.3 million from MICO, with the remainder primarily attributable to pricing increases in the personal automobile and homeowners lines of business.

Net Premiums Earned

Our insurance subsidiaries’ net premiums earned increased to $431.5 million for 2011, an increase of $53.5 million, or 14.2%, over 2010, reflecting increases in net premiums written during 2010 and 2011. Our insurance subsidiaries earn premiums and recognize them as income over the terms of the policies they issue. Such terms are generally one year or less in duration. Therefore, increases or decreases in net premiums earned will generally reflect increases or decreases in net premiums written in the preceding twelve-month period compared to the same period one year earlier.

Investment Income

For 2011, our net investment income was $20.9 million, an increase of $1.0 million from 2010. An increase in our average invested assets from $697.7 million in 2010 to $756.9 million in 2011 was offset by a decrease in our annualized average rate of return to 2.8% in 2011, compared to 2.9% in 2010. The increase in our average invested assets reflected the additional invested assets we acquired as part of the MICO transaction.

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Installment Payment Fees

Our insurance subsidiaries’ installment fees increased primarily as a result of our acquisition of MICO and increases in policy counts during 2011.

Net Realized Investment Gains/Losses

Our net realized investment gains in 2011 and 2010 were $12.3 million and $4.4 million, respectively. The net realized investment gains for 2011 included $8.0 million in gains that resulted from the previously planned periodic sales of a portion of our holdings of an equity security that we obtained in an initial public offering and for which a selling restriction expired during 2011. The net realized investment gains in 2010 resulted from normal turnover within our investment portfolio. We did not recognize any impairment losses during 2011 or 2010.

Losses and Loss Expenses

Our insurance subsidiaries’ loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 78.9% in 2011, compared to 72.6% in 2010. Our insurance subsidiaries’ commercial lines loss ratio increased to 71.8% in 2011, compared to 66.6% in 2010. This increase resulted primarily from the commercial automobile loss ratio increasing to 72.4% in 2011, compared to 55.5% in 2010, and the commercial multi-peril ratio increasing to 74.8% in 2011, compared to 67.4% in 2010, as a result of increased claim severity. The personal lines loss ratio increased to 82.8% in 2011, compared to 75.3% in 2010, primarily as a result of an increase in the homeowners loss ratio to 97.1% in 2011, compared to 80.7% in 2010, as a result of an increase in weather-related claims. Our insurance subsidiaries incurred total weather-related losses of $52.6 million for 2011, compared to $33.0 million for 2010 and more than twice our prior five-year average of $23.3 million. Our insurance subsidiaries had virtually no development during 2011 in their reserves for prior accident years, compared to $2.9 million in favorable development for 2010.

Underwriting Expenses

Our insurance subsidiaries’ expense ratio, which is the ratio of policy acquisition and other underwriting expenses to premiums earned, was 31.4% in 2011, compared to 32.0% in 2010.

Combined Ratio

Our insurance subsidiaries’ combined ratio was 110.6% and 104.7% in 2011 and 2010, respectively. The combined ratio represents the sum of the loss ratio, expense ratio and dividend ratio, which is the ratio of workers’ compensation policy dividends incurred to premiums earned.

Interest Expense

Our interest expense in 2011 was $2.1 million, compared to $799,578 in 2010. The higher interest expense in 2011 reflected an increase in our borrowings under our line of credit.

Income Taxes

Our income tax benefit was $7.2 million in 2011, compared to $1.6 million in 2010. We recorded an income tax benefit based upon our loss before income tax and tax-exempt interest income earned for 2011. We carried back a portion of our 2011 net operating loss to the taxable income of prior years and our income tax benefit for 2011 reflected a current tax benefit for the carryback. We expected to apply the remainder of the 2011 net operating loss to taxable income we generate in future periods, and our income tax benefit for 2011 reflected a deferred tax benefit for the carryforward.

Net Income and Earnings Per Share

Our net income in 2011 was $452,953, or $.02 per share of Class A common stock and $.01 per share of Class B common stock, compared to our net income of $11.5 million, or $.46 per share of Class A common stock and $.41 per share of Class B common stock, in 2010. Our Class A shares outstanding did not change at 20.0 million. Our Class B shares outstanding remained at 5.6 million.

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Book Value Per Share and Return on Equity

Our stockholders’ equity increased by $3.3 million in 2011. We attributed the increase to an increase in our net after-tax unrealized gains within our available-for-sale fixed maturity and equity investment portfolio from $8.6 million at December 31, 2010 to $23.5 million at December 31, 2011. Book value per share increased by 1.0% to $15.01 at December 31, 2011, compared to $14.86 a year earlier. Our return on average equity was 0.1% for 2011, compared to 3.0% for 2010.

Financial Condition

Liquidity and Capital Resources

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

We have historically generated sufficient net positive cash flow from our operations to fund our commitments and build our investment portfolio, thereby increasing future investment returns. The pooling agreement with Donegal Mutual historically has been cash flow positive because of the profitability of the underwriting pool. Because we settle the pool monthly, cash flows are substantially similar to cash flows that would result from the underwriting of direct business. We maintain a high degree of liquidity in our investment portfolio in the form of marketable fixed maturities, equity securities and short-term investments. We structure our fixed-maturity investment portfolio following a “laddering” approach so that projected cash flows from investment income and principal maturities are evenly distributed from a timing perspective. This laddering provides an additional measure of liquidity to meet our obligations and the obligations of our insurance subsidiaries should an unexpected variation occur in the future. Net cash flows provided by operating activities in 2012, 2011 and 2010 were $25.0 million, $21.1 million and $22.0 million, respectively.

In June 2012, we renewed our existing credit agreement with Manufacturers and Traders Trust Company (“M&T”) relating to a $60.0 million unsecured, revolving line of credit that expires in July 2015. We have the right to request a one-year extension of the credit agreement as of each anniversary date of the agreement. In December 2010 and March 2011, we borrowed $35.0 million and $3.5 million, respectively, in connection with our acquisition of MICO. In May 2011, we borrowed $19.0 million in connection with the merger of UNNF with and into DFSC. At December 31, 2012, we had $52.0 million in outstanding borrowings and had the ability to borrow an additional $8.0 million at an interest rate equal to M&T’s current prime rate or the then current LIBOR rate plus 2.25%, depending on our leverage ratio. The interest rate on our outstanding borrowings is adjustable quarterly. We pay a fee of 0.2% per annum on the loan commitment amount regardless of usage. The credit agreement requires our compliance with certain covenants, which include minimum levels of our net worth, leverage ratio and statutory surplus and the A.M. Best ratings of our insurance subsidiaries. We complied with all requirements of the credit agreement during the year ended December 31, 2012.

MICO has an agreement with the Federal Home Loan Bank (“FHLB”) of Indianapolis. Through its membership, MICO has the ability to issue debt to the FHLB of Indianapolis in exchange for cash advances. There were no outstanding borrowings at December 31, 2012 or 2011.

Atlantic States has an agreement with 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. There were no outstanding borrowings at December 31, 2012 or 2011.

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The following table shows expected payments for our significant contractual obligations at December 31, 2012:

(in thousands)	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Net liability for unpaid losses and loss expenses of our insurance subsidiaries	$	250,936	$	114,528	$	114,116	$	10,095	$	12,197
Subordinated debentures		20,465		15,465		—		—		5,000
Borrowings under line of credit		52,000		—		52,000		—		—
Total contractual obligations	$	323,401	$	129,993	$	166,116	$	10,095	$	17,197

We estimated the timing of the amounts 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 have shown the liability net of reinsurance recoverable on unpaid losses and loss expenses to reflect expected future cash flows related to such liability. Assumed amounts from the underwriting pool with Donegal Mutual represent a substantial portion of our insurance subsidiaries’ gross liability for unpaid losses and loss expenses and ceded amounts to the underwriting pool represent a substantial portion of our insurance subsidiaries’ reinsurance recoverable on unpaid losses and loss expenses. We include cash settlements of Atlantic States’ assumed liability from the pool in our monthly settlements of pooled activity. In these monthly settlements, we net amounts ceded to and assumed from the pool. Although Donegal Mutual and Atlantic States do not anticipate any further 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 for Atlantic States’ proportionate liability for pooled losses occurring in periods prior to the effective date of such change.

We estimated the timing of the amounts for our subordinated debentures based on our principal prepayments in the amount of $15.5 million during 2013 and based on the contractual maturity for the remaining balance. We refer to Note 10 - Borrowings for more information about our subordinated debentures.

We estimated the timing of the amounts for the borrowings under our line of credit based on their contractual maturities as discussed in Note 10 - Borrowings. Our borrowings under our line of credit carry interest rates that vary as discussed in Note 10 - Borrowings. Based upon the interest rates in effect at December 31, 2012, our annual interest cost associated with our borrowings under our line of credit is approximately $1.3 million. For every 1% change in the interest rate associated with our borrowings under our line of credit, the effect on our annual interest cost would be approximately $520,000.

Cash dividends declared to stockholders totaled $12.3 million, $12.0 million and $11.5 million in 2012, 2011 and 2010, respectively. There are no regulatory restrictions on our payment of dividends to our stockholders, although there are state law restrictions on the payment of dividends from our insurance subsidiaries to us. Our insurance subsidiaries are required by law to maintain certain minimum surplus on a statutory basis and are subject to regulations under which their payment of dividends from statutory surplus is restricted and may require prior approval of their domiciliary insurance regulatory authorities. Our insurance subsidiaries are subject to risk-based capital (“RBC”) requirements. The amount of statutory capital and surplus necessary for our insurance subsidiaries to satisfy regulatory requirements, including the RBC requirements, was not significant in relation to our insurance subsidiaries’ statutory capital and surplus at December 31, 2012. In 2012, amounts available for distribution as dividends to us from our insurance subsidiaries without prior approval of their domiciliary insurance regulatory authorities are $18.0 million from Atlantic States, $2.7 million from Le Mars, $4.2 million from MICO, $4.3 million from Peninsula, $0 from Sheboygan and $0 from Southern, or a total of $29.2 million.

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Investments

At December 31, 2012 and 2011, our investment portfolio of primarily investment-grade bonds, common stock, short-term investments and cash totaled $826.2 million and $798.6 million, respectively, representing 61.8% and 61.9%, respectively, of our total assets (see “Business - Investments” for more information).

	December 31,
	2012					2011					2010
(dollars in thousands)	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
Fixed maturities:
Total held to maturity	$	42,100		5.2	%	$	58,490		7.4	%	$	64,766		8.9	%
Total available for sale		694,510		86.1			646,598		82.3			603,846		82.9
Total fixed maturities		736,610		91.3			705,088		89.7			668,612		91.8
Equity securities		8,757		1.1			7,438		1.0			10,162		1.4
Investments in affiliates		37,236		4.6			32,322		4.1			8,992		1.2
Short-term investments		23,826		3.0			40,461		5.2			40,776		5.6
Total investments	$	806,429		100.0	%	$	785,309		100.0	%	$	728,542		100.0	%

The carrying value of our fixed maturity investments represented 91.3% and 89.8% of our total invested assets at December 31, 2012 and 2011, respectively.

Our fixed maturity investments consisted of high-quality marketable bonds, of which 99.0% were rated at investment-grade levels at December 31, 2012 and 2011.

At December 31, 2012, the net unrealized gain on available-for-sale fixed maturity investments, net of deferred taxes, amounted to $25.6 million, compared to $21.3 million at December 31, 2011.

At December 31, 2012, the net unrealized gain on our equity securities, net of deferred taxes, amounted to $61,149, compared to $1.9 million at December 31, 2011.

Impact of Inflation

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

Impact of New Accounting Standards

In October 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must relate directly to the successful acquisition of a new or renewal insurance contract to qualify for deferral. If the application of this guidance would result in the capitalization of acquisition costs that a reporting entity had not previously capitalized, the entity may elect not to capitalize those costs. The updated guidance is effective for periods beginning after December 15, 2011. We adopted this new guidance prospectively in 2012. The amount of acquisition costs we capitalized during 2012 did not change materially from the amount of acquisition costs that we would have capitalized had we applied our previous policy during the period. Our adoption of this new guidance did not have a material impact on our financial position, results of operations or cash flows.

In May 2011, the FASB issued guidance that eliminates the concepts of in-use and in-exchange when measuring the fair value of all financial instruments. The fair value of a financial asset should be measured on a standalone basis and cannot be measured as part of a group. The new guidance requires several new disclosures including the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy and additional disclosures regarding Level 3 assets. This guidance is effective for interim and annual periods beginning on or after December 15, 2011. We adopted this new guidance in 2012. Our adoption of this new guidance did not impact our financial position, results of operations or cash flows.

In June 2011, the FASB issued new guidance related to the presentation of other comprehensive income. The new guidance provides entities with an option to either replace the income statement with a statement of comprehensive income, which would display both the components of net income and comprehensive in a combined statement, or to present a separate statement of comprehensive income immediately following the income statement. The new guidance does not affect the components of other comprehensive income or the calculation of earnings per share. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The new guidance is to be applied retrospectively with early adoption permitted. We adopted this new guidance in 2012. Our adoption of this new guidance did not impact our financial position, results of operations or cash flows.

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In September 2011, the FASB issued new guidance related to evaluating goodwill for impairment. The new guidance provides entities with the option to perform a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the quantitative two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it is not required to perform the quantitative two-step goodwill impairment test. Entities also have the option to bypass the assessment of qualitative factors for any reporting unit in any period and proceed directly to performing the first step of the quantitative two-step goodwill impairment test, as was required prior to the issuance of this new guidance. An entity may begin or resume performing the qualitative assessment in any subsequent period. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We adopted this new guidance in 2011. Our adoption of this new guidance did not impact our financial position, results of operations or cash flows.

In July 2012, the FASB issued guidance related to evaluating indefinite-lived intangible assets for impairment. The new guidance provides entities with the option to perform a qualitative assessment of whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If an entity concludes that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value, it is not required to perform the quantitative impairment test. Entities also have the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. Entities are able to resume performing the qualitative assessment in any subsequent period. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We adopted this new guidance in 2012. Our adoption of this new guidance did not impact our financial position, results of operations or cash flows.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to the impact of interest rate changes, to changes in fair values of investments and to credit risk.

In the normal course of business, we employ established policies and procedures to manage our exposure to changes in interest rates, fluctuations in the fair market value of our debt and equity securities and credit risk. We seek to mitigate these risks by various actions described below.

Interest Rate Risk

Our exposure to market risk for a change in interest rates is concentrated in our investment portfolio. We monitor this exposure through periodic reviews of asset and liability positions. We regularly monitor estimates of cash flows and the impact of interest rate fluctuations relating to the investment portfolio. Generally, we do not hedge our exposure to interest rate risk because we have the capacity to, and do, hold fixed maturity investments to maturity.

Principal cash flows and related weighted-average interest rates by stated maturity dates for financial instruments sensitive to interest rates at December 31, 2012 are as follows:

(in thousands)		Principal Cash Flows		Weighted- Average Interest Rate
Fixed maturity and short-term investments:
	2013	$	33,712		1.37	%
	2014		11,912		4.30
	2015		18,204		3.72
	2016		29,395		4.27
	2017		33,295		3.68
Thereafter			587,583		3.87
Total		$	714,101
Fair value		$	762,072
Debt:
	2013	$	15,465		4.16	%
	2015		52,000		2.46
Thereafter			5,000		5.00
Total		$	72,465
Fair value		$	72,465

Actual cash flows from investments may differ from those stated as a result of calls and prepayments.

Equity Price Risk

Our portfolio of equity securities, which we carry on our consolidated balance sheets at estimated fair value, has exposure to price risk, which is the risk of potential loss in estimated fair value resulting from an adverse change in prices. Our objective is to earn competitive relative returns by investing in a diverse portfolio of high-quality, liquid securities.

Credit Risk

Our objective is to earn competitive returns by investing in a diversified portfolio of securities. Our portfolio of fixed maturity securities and, to a lesser extent, short-term investments is subject to credit risk. We define this risk as the potential loss in fair value resulting from adverse changes in the borrower’s ability to repay the debt. We manage this risk by performing an analysis of prospective investments and through regular reviews of our portfolio by our investment staff. We also limit the amount of our total investment portfolio that we invest in any one security.

Our insurance subsidiaries provide property and liability insurance coverages through independent insurance agencies located throughout their operating areas. Our insurance subsidiaries bill the majority of this business directly to the insured, although our insurance subsidiaries bill a portion of their commercial business through their agents, to whom they extend credit in the normal course of business.

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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 business ceded to Donegal Mutual. Our insurance subsidiaries maintain reinsurance agreements with Donegal Mutual and with a number of other major unaffiliated authorized reinsurers.

Through November 30, 2010, MICO and West Bend were parties to quota-share reinsurance agreements whereby MICO ceded 75% of its business to West Bend. MICO and West Bend terminated the reinsurance agreement in effect at November 30, 2010 on a run-off basis. West Bend’s obligations related to all past reinsurance agreements with MICO remain in effect for all policies effective prior to December 1, 2010. West Bend and MICO entered into a trust agreement on December 1, 2010. Under the terms of the trust agreement, West Bend placed into trust, for the sole benefit of MICO, assets with a fair value equal to the amount of unearned premiums and unpaid losses and loss expenses, reduced by any net premium balances not yet paid by MICO, that West Bend had assumed pursuant to such reinsurance agreements at November 30, 2010. The amount of assets required to be held in trust adjusts monthly based upon the remaining net obligations of West Bend. West Bend may terminate the trust agreement on the earlier of December 1, 2020 or the date when the obligations of West Bend are equal to or less than $5.0 million. As of December 31, 2012, West Bend’s net obligations under the reinsurance agreements were approximately $22.6 million, and the fair value of assets held in trust was approximately $26.3 million.

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Item 8. Financial Statements and Supplementary Data.

Consolidated Balance Sheets	57
Consolidated Statements of Income and Comprehensive Income	58
Consolidated Statements of Stockholders’ Equity	59
Consolidated Statements of Cash Flows	60
Notes to Consolidated Financial Statements	61
Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements	94

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Donegal Group Inc.

Consolidated Balance Sheets

	December 31,
	2012			2011
Assets
Investments
Fixed maturities
Held to maturity, at amortized cost (fair value $43,735,739 and $61,422,347 )		$	42,100,196	$	58,489,619
Available for sale, at fair value (amortized cost $655,173,806 and $614,298,854)	694,509,821				646,598,178
Equity securities, available for sale, at fair value (cost $8,663,183 and $7,238,803)	8,757,258				7,437,538
Investments in affiliates	37,235,530				32,322,246
Short-term investments, at cost, which approximates fair value	23,826,227				40,461,410
Total investments	806,429,032				785,308,991
Cash	19,801,290				13,245,378
Accrued investment income	6,332,085				6,713,038
Premiums receivable	117,196,478				104,715,327
Reinsurance receivable	215,893,322				209,823,907
Deferred policy acquisition costs	40,121,697				36,424,955
Deferred tax asset, net	6,267,536				9,919,720
Prepaid reinsurance premiums	111,156,162				106,450,018
Property and equipment, net	5,953,833				6,154,383
Accounts receivable - securities	—				1,507,500
Federal income taxes recoverable	—				2,661,808
Goodwill	5,625,354				5,625,354
Other intangible assets	958,010				958,010
Other	1,154,388				1,285,089
Total assets		$	1,336,889,187	$	1,290,793,478
Liabilities and Stockholders’ Equity
Liabilities
Losses and loss expenses		$	458,827,395	$	442,407,615
Unearned premiums	363,088,103				336,937,261
Accrued expenses	17,140,832				20,956,549
Reinsurance balances payable	13,941,337				20,039,339
Borrowings under line of credit	52,000,000				54,500,000
Cash dividends declared to stockholders	3,066,532				2,996,076
Subordinated debentures	20,465,000				20,465,000
Federal income taxes payable	583,977				—
Due to affiliate	4,579,437				5,386,391
Drafts payable	863,589				1,548,953
Other	2,298,891				2,104,702
Total liabilities	936,855,093				907,341,886
Stockholders’ Equity
Preferred stock, $1.00 par value, authorized 2,000,000 shares; none issued	—				—
Class A common stock, $.01 par value, authorized 30,000,000 shares, issued 20,941,821 and 20,752,999 shares and outstanding 20,025,199 and 19,971,441 shares	209,419				207,530
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
Additional paid-in capital	176,416,585				170,836,943
Accumulated other comprehensive income	26,394,577				23,533,447
Retained earnings	209,670,214				199,604,700
Treasury stock, at cost	(12,713,193)				(10,787,520	)
Total stockholders’ equity	400,034,094				383,451,592
Total liabilities and stockholders’ equity		$	1,336,889,187	$	1,290,793,478

See accompanying notes to consolidated financial statements.

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Donegal Group Inc.

Consolidated Statements of Income and Comprehensive Income

	Years Ended December 31,
	2012			2011			2010
Statements of Income
Revenues
Net premiums earned (includes affiliated reinsurance of $142,608,940, $130,555,613 and $134,823,098 - see note 3)	$	475,002,222		$	431,470,184		$	378,030,129
Investment income, net of investment expenses		20,168,919			20,858,179			19,949,714
Installment payment fees		7,465,532			7,427,509			5,519,287
Lease income		953,216			957,353			922,937
Net realized investment gains		6,859,439			12,281,267			4,395,720
Equity in earnings (loss) of DFSC		4,533,257			2,023,127			(268,341	)
Total revenues		514,982,585			475,017,619			408,549,446
Expenses
Net losses and loss expenses (includes affiliated reinsurance of $81,219,926, $87,950,502 and $81,539,930 - see note 3)		332,871,584			340,502,777			274,308,858
Amortization of deferred policy acquisition costs		74,314,000			68,571,000			66,354,000
Other underwriting expenses		73,914,514			66,923,764			54,564,500
Policyholder dividends		1,342,582			1,240,079			619,158
Interest		2,358,711			2,126,784			799,578
Other		2,322,934			2,392,528			2,059,203
Total expenses		487,124,325			481,756,932			398,705,297
Income (loss) before income tax expense (benefit)		27,858,260			(6,739,313	)		9,844,149
Income tax expense (benefit)		4,765,640			(7,192,266	)		(1,623,030	)
Net income	$	23,092,620		$	452,953		$	11,467,179
Basic earnings per common share:
Class A common stock	$	0.92		$	0.02		$	0.46
Class B common stock	$	0.83		$	0.01		$	0.41
Diluted earnings per common share:
Class A common stock	$	0.91		$	0.02		$	0.46
Class B common stock	$	0.83		$	0.01		$	0.41
Statements of Comprehensive Income
Net income	$	23,092,620		$	452,953		$	11,467,179
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gain (loss) arising during the period, net of income tax (benefit) of $4,833,143, $12,237,669 and ($1,976,358)		9,171,817			23,077,997			(3,544,783	)
Reclassification adjustment for gains included in net income, net of income tax of $2,332,209, $4,175,631 and $1,494,545		(4,527,230	)		(8,105,636	)		(2,901,175	)
Other comprehensive income (loss)		4,644,587			14,972,361			(6,445,958	)
Comprehensive income	$	27,737,207		$	15,425,314		$	5,021,221

See accompanying notes to consolidated financial statements.

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Donegal Group Inc.

Consolidated Statements of Stockholders’ Equity

	Common Stock								Additional Paid-In Capital		Accumulated Other Comprehensive Income			Retained Earnings			Treasury Stock			Total Stockholders’ Equity
	Class A Shares		Class B Shares		Class A Amount		Class B Amount
Balance, January 1, 2010		20,569,930		5,649,240	$	205,700	$	56,492	$	164,585,214	$	15,007,044		$	214,755,495		$	(9,104,246	)	$	385,505,699
Issuance of common stock (stock compensation plans)		86,597				866				1,198,556											1,199,422
Net income															11,467,179						11,467,179
Cash dividends															(11,477,845	)					(11,477,845	)
Grant of stock options										1,309,734					(1,309,734	)					—
Purchase of treasury stock																		(145,687	)		(145,687	)
Other comprehensive loss												(6,445,958	)								(6,445,958	)
Balance, December 31, 2010		20,656,527		5,649,240	$	206,566	$	56,492	$	167,093,504	$	8,561,086		$	213,435,095		$	(9,249,933	)	$	380,102,810
Issuance of common stock (stock compensation plans)		96,472				964				1,459,579											1,460,543
Net income															452,953						452,953
Cash dividends															(11,999,488	)					(11,999,488	)
Grant of stock options										2,283,860					(2,283,860	)					—
Purchase of treasury stock																		(1,537,587	)		(1,537,587	)
Other comprehensive income												14,972,361									14,972,361
Balance, December 31, 2011		20,752,999		5,649,240	$	207,530	$	56,492	$	170,836,943	$	23,533,447		$	199,604,700		$	(10,787,520	)	$	383,451,592
Issuance of common stock (stock compensation plans)		188,822				1,889				2,995,622											2,997,511
Net income															23,092,620						23,092,620
Cash dividends															(12,278,965	)					(12,278,965	)
Grant of stock options										2,531,598					(2,531,598	)					—
Tax benefit on exercise of stock options										52,422											52,422
Purchase of treasury stock																		(1,925,673	)		(1,925,673	)
Other comprehensive income												4,644,587									4,644,587
Other												(1,783,457	)		1,783,457						—
Balance, December 31, 2012		20,941,821		5,649,240	$	209,419	$	56,492	$	176,416,585	$	26,394,577		$	209,670,214		$	(12,713,193	)	$	400,034,094

See accompanying notes to consolidated financial statements.

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Donegal Group Inc.

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2012			2011			2010
Cash Flows from Operating Activities:
Net income	$	23,092,620		$	452,953		$	11,467,179
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,950,693			4,106,561			3,143,767
Net realized investment gains		(6,859,439	)		(12,281,267	)		(4,395,720	)
Equity in (earnings) loss of DFSC		(4,533,257	)		(2,023,127	)		268,341
Changes in Assets and Liabilities:
Losses and loss expenses		16,419,780			59,088,943			14,904,770
Unearned premiums		26,150,842			39,665,100			21,762,781
Accrued expenses		(3,815,717	)		(330,857	)		718,956
Premiums receivable		(12,481,151	)		(8,247,378	)		(7,478,337	)
Deferred policy acquisition costs		(3,696,742	)		(1,979,376	)		(1,601,400	)
Deferred income taxes		1,151,250			(5,922,491	)		(2,380,430	)
Reinsurance receivable		(6,069,415	)		(35,987,161	)		(5,348,447	)
Accrued investment income		380,953			652,133			(489,244	)
Amounts due to affiliate		(806,954	)		2,460,287			(887,190	)
Reinsurance balances payable		(6,098,002	)		899,017			(320,278	)
Prepaid reinsurance premiums		(4,706,144	)		(17,084,247	)		(8,270,621	)
Current income taxes		3,245,785			(1,713,483	)		(368,145	)
Other, net		(360,477	)		(674,296	)		1,278,821
Net adjustments		1,872,005			20,628,358			10,537,624
Net cash provided by operating activities		24,964,625			21,081,311			22,004,803
Cash Flows from Investing Activities:
Purchase of fixed maturities:
Available for sale		(241,343,085	)		(189,111,596	)		(195,198,227	)
Purchase of equity securities:		(31,254,324	)		(23,857,802	)		(59,191,998	)
Sale of fixed maturities
Available for sale		90,484,097			122,873,102			72,092,788
Maturity of fixed maturities:
Held to maturity		16,061,587			5,888,236			8,649,275
Available for sale		115,501,507			53,763,701			80,116,222
Sale of equity securities		30,001,187			27,036,422			70,029,195
Purchase of MICO		—			(7,207,471	)		(35,088,228	)
Net increase in investment in affiliates		(100,000	)		(20,570,000	)		—
Net purchase of property and equipment		(744,082	)		(238,538	)		(651,160	)
Net sales of short-term investments		16,635,183			314,583			16,052,089
Net cash used in investing activities		(4,757,930	)		(31,109,363	)		(43,190,044	)
Cash Flows from Financing Activities:
Issuance of common stock		2,983,399			1,460,543			1,199,422
Cash dividends paid		(12,208,509	)		(11,874,367	)		(11,405,268	)
Purchase of treasury stock		(1,925,673	)		(1,537,587	)		(145,687	)
Payments on line of credit		(6,000,000	)		(3,617,371	)		—
Borrowings under line of credit		3,500,000			22,500,000			34,955,088
Net cash (used in) provided by financing activities		(13,650,783	)		6,931,218			24,603,555
Net increase (decrease) in cash		6,555,912			(3,096,834	)		3,418,314
Cash at beginning of year		13,245,378			16,342,212			12,923,898
Cash at end of year	$	19,801,290		$	13,245,378		$	16,342,212

See accompanying notes to consolidated financial statements.

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Donegal Group Inc.

Notes to Consolidated Financial Statements

1 - Summary of Significant Accounting Policies

Organization and Business

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 personal and commercial lines of property and casualty coverages exclusively through a network of independent insurance agents in certain Mid-Atlantic, Midwestern, New England and Southern states. We acquired MICO on December 1, 2010, and we have included MICO’s results of operations in our consolidated results of operations since that date. We also own 48.2% of the outstanding stock of Donegal Financial Services Corporation (“DFSC”), a grandfathered unitary savings and loan holding company that owns Union Community Bank FSB (“UCB”), a federal savings bank. UCB has 13 banking offices, all of which are located in Lancaster County, Pennsylvania. Donegal Mutual owns the remaining 51.8% of the outstanding stock of DFSC.

We have four segments: our investment function, our personal lines of insurance, our commercial lines of insurance and our investment in DFSC. 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 December 31, 2012, Donegal Mutual held approximately 39% of our outstanding Class A common stock and approximately 76% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately 66% 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, our insurance subsidiaries and Donegal Mutual 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 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 versus 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, as 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 pool. Pooled business represents the predominant percentage of the net underwriting activity of both Donegal Mutual and Atlantic States. We refer to Note 3 - Transactions with Affiliates for more information regarding the pooling agreement.

In December 2010, we acquired MICO, which had been a majority owned subsidiary of West Bend Mutual Insurance Company (“West Bend”), for $42.3 million in cash. Effective on December 1, 2010, MICO entered into a 50% quota-share agreement with third-party reinsurers and a 25% quota-share reinsurance agreement with Donegal Mutual to replace the 75% quota-share reinsurance agreement MICO maintained with West Bend through November 30, 2010.

In May 2011, DFSC and Union National Financial Corporation (“UNNF”) merged, 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 use the equity method of accounting for our investment in DFSC. Under the equity method, we record our investment at cost, with adjustments for our share of DFSC’s earnings and losses as well as changes in DFSC’s equity due to unrealized gains and losses.

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Basis of Consolidation

Our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America, include our accounts and those of our wholly owned subsidiaries. We have eliminated all significant inter-company accounts and transactions in consolidation. The terms “we,” “us,” “our” or the “Company” as used herein refer to the consolidated entity.

Use of Estimates

In preparing our consolidated financial statements, our management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.

We make estimates and assumptions that can have a significant effect on amounts and disclosures we report in our consolidated financial statements. The most significant estimates relate to our insurance subsidiaries’ reserves for property and casualty insurance unpaid losses and loss expenses, valuation of investments and determination of other-than-temporary impairment and our insurance subsidiaries’ policy acquisition costs. While we believe our estimates and the estimates of our insurance subsidiaries are appropriate, the ultimate amounts may differ from the estimates provided. We regularly review our methods for making these estimates as well as the continuing appropriateness of the estimated amounts, and we reflect any adjustment we consider necessary in our current results of operations.

Reclassification

During 2012, we recorded an entry that reduced Accumulated Other Comprehensive Income and increased Retained Earnings by $1.8 million to correct an immaterial error related to prior years.

Investments

We classify our debt and equity securities into the following categories:

Held to Maturity - Debt securities that we have the positive intent and ability to hold to maturity; reported at amortized cost.

Available for Sale - Debt and equity securities not classified as held to maturity; reported at fair value, with unrealized gains and losses excluded from income and reported as a separate component of stockholders’ equity (net of tax effects).

Short-term investments carried at amortized cost, which approximates fair value.

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 of our 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. 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.

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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 for mortgage-backed debt securities using anticipated prepayments.

We account for investments in affiliates using the equity method of accounting. Under the equity method, we record our investment at cost, with adjustments for our share of the affiliate’s earnings and losses as well as changes in the affiliate’s equity due to unrealized gains and losses.

Fair Values of Financial Instruments

We use the following methods and assumptions in estimating our fair value disclosures:

Investments - We present our investments in available-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 for our fixed maturity and equity investments. We generally obtain one price per security. The 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 determine if the estimates obtained are representative of fair values based upon their 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 monitor the market and are familiar with current trading ranges for similar securities and 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, coupon rates, security type and recent trading activity. Our investment personnel review documentation with respect to the pricing services’ pricing methodology that they obtain periodically to determine if the primary pricing sources, market inputs and pricing frequency for various security types are reasonable. We refer to Note 6 - Fair Value Measurements for more information regarding our methods and assumptions in estimating fair values.

Cash and Short-Term Investments - The carrying amounts reported in the balance sheet for these instruments approximate their fair values.

Premiums and Reinsurance Receivables and Payables - The carrying amounts reported in the balance sheet for these instruments related to premiums and paid losses and loss expenses approximate their fair values.

Subordinated Debentures - The carrying amounts reported in the balance sheet for these instruments approximate their fair values.

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Revenue Recognition

Our insurance subsidiaries recognize insurance premiums as income over the terms of the policies they issue. Our insurance subsidiaries calculate unearned premiums on a daily pro-rata basis. We recorded an unearned premium liability for the fair value of the net unexpired portion of the insurance policies we acquired in connection with our acquisition of MICO. We recognized this unearned premium liability as income over the terms of MICO’s policies.

Policy Acquisition Costs

We defer our insurance subsidiaries’ policy acquisition costs, consisting primarily of commissions, premium taxes and certain other underwriting costs, reduced by ceding commissions, that vary with and relate directly to the production of business. We amortize these deferred policy acquisition costs over the period in which our insurance subsidiaries earn the premiums. The method we follow in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss expenses and certain other costs we expect to incur as our insurance subsidiaries earn the premium. Estimates in the calculation of policy acquisition costs have not shown material variability because of uncertainties in applying accounting principles or as a result of sensitivities to changes in key assumptions.

Property and Equipment

We report property and equipment at depreciated cost that we compute using the straight-line method based upon estimated useful lives of the assets.

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 policyholder claims based on facts and circumstances then known. 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 and expected claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, our insurance subsidiaries may learn additional facts regarding certain claims, and consequently, it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates of liability. We reflect any adjustments to our insurance subsidiaries’ liabilities for losses and loss expenses in our operating results in the period in which our insurance subsidiaries record the changes in 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 a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss their 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 closely monitor their liabilities 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.

We recorded a liability for the fair value of the net loss and loss expense reserves we assumed in connection with our acquisition of MICO. We incorporated various factors in determining the fair value of those reserve estimates, including the guarantee against any deficiency in excess of $1.0 million we discuss in Note 4-Business Combinations.

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 as to our insurance subsidiaries’ internal operations. For example, our insurance subsidiaries have experienced a decrease in claims frequency on workers’ compensation claims during the past several years while claims severity has gradually increased. These trend changes give rise to greater uncertainty as to the pattern of future loss settlements on workers’ compensation 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

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and consistency in reinsurance coverage and collectibility of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries attempt to make appropriate adjustments for such changes in their reserves. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded.

Our insurance subsidiaries seek to enhance their underwriting results by carefully selecting the product lines they underwrite. Our insurance subsidiaries’ personal lines products include standard and preferred risks in private passenger automobile and homeowners lines. Our insurance subsidiaries’ commercial lines products primarily include business offices, wholesalers, service providers, contractors, artisans and light manufacturing operations. Our insurance subsidiaries have limited exposure to asbestos and other environmental liabilities. Our insurance subsidiaries write no medical malpractice liability risks.

Income Taxes

We currently file a consolidated federal income tax return.

We account for income taxes using the asset and liability method. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when we realize or settle such amounts.

Credit Risk

Our objective is to earn competitive returns by investing in a diversified portfolio of securities. Our portfolio of fixed maturity securities and, to a lesser extent, short-term investments is subject to credit risk. We define this risk as the potential loss in fair value resulting from adverse changes in the borrower’s ability to repay the debt. We manage this risk by performing an analysis of prospective investments and through regular reviews of our portfolio by our investment staff. We also limit the amount of our total investment portfolio that we invest in any one security.

Our insurance subsidiaries provide property and liability insurance coverages through independent insurance agencies located throughout their operating areas. Our insurance subsidiaries bill the majority of this business directly to their policyholders, although our insurance subsidiaries bill a portion of their commercial business through their agents, to whom they extend credit in the normal course of business.

Our insurance subsidiaries have reinsurance agreements with Donegal Mutual and with a number of major unaffiliated reinsurers.

Reinsurance Accounting and Reporting

Our insurance subsidiaries rely upon reinsurance agreements to limit their maximum net loss from large single risks or risks in concentrated areas and to increase their capacity to write insurance. Reinsurance does not relieve our insurance subsidiaries from liability to their respective policyholders. To the extent that a reinsurer cannot pay losses for which it is liable under the terms of a reinsurance agreement with one of our insurance subsidiaries, our insurance subsidiaries retain continued liability for such losses. However, in an effort to reduce the risk of non-payment, our insurance subsidiaries require all of their reinsurers to have an A.M. Best rating of A- or better or, with respect to foreign reinsurers, to have a financial condition that, in the opinion of management, is equivalent to a company with an A.M. Best rating of A- or better. We refer to Note 11 - Reinsurance for more information regarding our reinsurance agreements.

Stock-Based Compensation

We measure all share-based payments to employees, including grants of stock options, using a fair-value-based method and record such 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 other than Donegal Mutual, 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, expected term, dividend yield and expected volatility.

In 2012, we realized $52,422 in tax benefits upon the exercise of stock options. We did not realize any tax benefits upon the exercise of stock options in 2011 or 2010.

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Earnings per Share

We calculate basic earnings per share by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

We have two classes of common stock, which we refer to as Class A common stock and Class B common stock. Our Class A common stock is entitled to cash dividends that are at least 10% higher than those declared and paid on our Class B common stock. Accordingly, we use the two-class method for the computation of earnings per common share. The two-class method is an earnings allocation formula that determines earnings per share separately for each class of common stock based on dividends declared and an allocation of remaining undistributed earnings using a participation percentage that reflects the dividend rights of each class.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the underlying fair value of acquired entities. When completing acquisitions, we seek also to identify separately identifiable intangible assets that we have acquired. We assess goodwill and intangible assets with an indefinite useful life for impairment annually. We also assess goodwill and other intangible assets for impairment upon the occurrence of certain events. In making our assessment, we consider a number of factors including operating results, business plans, economic projections, anticipated future cash flows and current market data. Inherent uncertainties exist with respect to these factors and to our judgment in applying them when we make our assessment. Impairment of goodwill and other intangible assets could result from changes in economic and operating conditions in future periods.

2 - Impact of New Accounting Standards

In October 2010, the Financial Accounting Standards Board (the “FASB”) issued updated guidance to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must relate directly to the successful acquisition of a new or renewal insurance contract to qualify for deferral. If the application of this guidance would result in the capitalization of acquisition costs that a reporting entity had not previously capitalized, the entity may elect not to capitalize those costs. The updated guidance is effective for periods beginning after December 15, 2011. We adopted this new guidance prospectively in 2012. The amount of acquisition costs we capitalized during 2012 did not change materially from the amount of acquisition costs that we would have capitalized had we applied our previous policy during the period. Our adoption of this new guidance did not have a material impact on our financial position, results of operations or cash flows.

In May 2011, the FASB issued guidance that eliminates the concepts of in-use and in-exchange when measuring the fair value of all financial instruments. The fair value of a financial asset should be measured on a standalone basis and cannot be measured as part of a group. The new guidance requires several new disclosures including the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy and additional disclosures regarding Level 3 assets. This guidance is effective for interim and annual periods beginning on or after December 15, 2011. We adopted this new guidance in 2012. Our adoption of this new guidance did not impact our financial position, results of operations or cash flows.

In June 2011, the FASB issued new guidance related to the presentation of other comprehensive income. The new guidance provides entities with an option to either replace the income statement with a statement of comprehensive income, which would display both the components of net income and comprehensive in a combined statement, or to present a separate statement of comprehensive income immediately following the income statement. The new guidance does not affect the components of other comprehensive income or the calculation of earnings per share. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The new guidance is to be applied retrospectively with early adoption permitted. We adopted this new guidance in 2012. Our adoption of this new guidance did not impact our financial position, results of operations or cash flows.

In September 2011, the FASB issued new guidance related to evaluating goodwill for impairment. The new guidance provides entities with the option to perform a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the quantitative two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it is not required to perform the quantitative two-step goodwill impairment test. Entities also have the option of bypassing the assessment of qualitative factors for any reporting unit in any period and proceed directly to performing the first step of the quantitative two-step goodwill impairment test, as was required prior to the issuance of this new guidance. An entity may begin or resume performing the qualitative assessment in any subsequent period. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We adopted this new guidance in 2011. Our adoption of this new guidance did not impact our financial position, results of operations or cash flows.

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In July 2012, the FASB issued guidance related to evaluating indefinite-lived intangible assets for impairment. The new guidance provides entities with the option of performing a qualitative assessment of whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If an entity concludes that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value, it is not required to perform the quantitative impairment test. Entities also have the option of bypassing the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. Entities are able to resume performing the qualitative assessment in any subsequent period. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We adopted this new guidance in 2012. Our adoption of this new guidance did not impact our financial position, results of operations or cash flows.

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 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. 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 2012, 2011 and 2010:

	2012		2011		2010
Premiums earned	$	132,876,094	$	118,812,725	$	105,376,068
Losses and loss expenses		92,459,147		97,130,846		81,203,625
Prepaid reinsurance premiums		70,572,281		64,214,378		57,783,435
Liability for losses and loss expenses		83,623,652		77,312,645		65,028,781

The following amounts represent reinsurance Atlantic States assumed from the pool during 2012, 2011 and 2010:

	2012		2011		2010
Premiums earned	$	298,803,060	$	266,687,610	$	238,308,846
Losses and loss expenses		187,415,893		206,907,170		160,256,348
Unearned premiums		157,140,642		141,880,039		125,322,884
Liability for losses and loss expenses		162,863,045		156,941,512		134,580,026

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. Until October 31, 2012, Donegal Mutual and Southern had a quota-share reinsurance agreement whereby Southern assumed 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. The following amounts represent reinsurance Southern and Le Mars assumed from Donegal Mutual pursuant to the quota-share reinsurance agreements during 2012, 2011 and 2010:

	2012		2011		2010
Premiums earned	$	22,189,399	$	17,757,409	$	14,516,901
Losses and loss expenses		19,620,587		14,983,405		12,600,094
Unearned premiums		9,926,381		10,225,922		8,124,069
Liability for losses and loss expenses		8,873,592		7,770,053		7,316,879

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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 2012, 2011 and 2010:

	2012		2011		2010
Premiums earned	$	33,046,914	$	22,123,229	$	4,516,313
Losses and loss expenses		22,569,557		16,038,590		3,463,112
Prepaid reinsurance premiums		15,457,605		14,181,338		4,590,424
Liability for losses and loss expenses		18,285,182		11,868,641		4,006,231

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 $500,000 ($350,000 in 2011 and 2010) of losses in excess of $500,000 ($400,000 in 2011 and 2010).

The following amounts represent reinsurance that our insurance subsidiaries ceded to Donegal Mutual pursuant to these reinsurance agreements during 2012, 2011 and 2010:

	2012		2011		2010
Premiums earned	$	12,460,511	$	12,953,452	$	8,110,268
Losses and loss expenses		10,787,850		20,770,637		6,649,775
Liability for losses and loss expenses		2,206,786		3,980,024		3,441,447

The following amounts represent the effect of affiliated reinsurance transactions on net premiums our insurance subsidiaries earned during 2012, 2011 and 2010:

	2012			2011			2010
Assumed	$	320,992,459		$	284,445,019		$	252,825,747
Ceded		(178,383,519	)		(153,889,406	)		(118,002,649	)
Net	$	142,608,940		$	130,555,613		$	134,823,098

The following amounts represent the effect of affiliated reinsurance transactions on net losses and loss expenses our insurance subsidiaries incurred during 2012, 2011 and 2010:

	2012			2011			2010
Assumed	$	207,036,480		$	221,890,575		$	172,856,442
Ceded		(125,816,554	)		(133,940,073	)		(91,316,512	)
Net	$	81,219,926		$	87,950,502		$	81,539,930

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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 $78,778,333, $64,711,860 and $63,982,793 for 2012, 2011 and 2010, 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, 2012 and 2011, we had $18,806,576 and $10,907,454, respectively, in checking accounts with UCB, a wholly owned subsidiary of DFSC. We earned $1,591, $1,019 and $1,575 in interest on these accounts during 2012, 2011 and 2010, respectively.

4 - Business Combinations

On December 1, 2010, we acquired all of the outstanding stock of MICO. We accounted for this acquisition as a business combination.

We acquired MICO from West Bend and its other stockholders for a price equal to 122% of MICO’s stockholders’ equity at November 30, 2010, or approximately $42.3 million in cash. We paid $35.1 million to MICO’s stockholders in December 2010 and recorded an additional amount payable at December 31, 2010 of $7.2 million, which we paid pursuant to the terms of our acquisition agreement in the first quarter of 2011. The acquisition of MICO enabled us to extend our insurance business to the state of Michigan. MICO writes various lines of property and casualty insurance and had direct written premiums of $105.4 million and $106.6 million and net premiums earned of $26.9 million and $27.0 million for the years ended December 31, 2010 and 2009, respectively. MICO’s stockholders’ equity and total assets at December 31, 2009 were $32.0 million and $224.5 million, respectively. We recorded goodwill of approximately $4.7 million and other intangible assets of approximately $958,000, none of which are deductible for federal income tax purposes. Pursuant to the terms of our acquisition agreement with West Bend, West Bend has guaranteed us against any deficiency in excess of $1.0 million in the loss and loss expenses of MICO at November 30, 2010. Conversely, we have agreed to return 50% of any redundancy in excess of $1.0 million. Any such deficiency or redundancy will be based on a final actuarial review of the development of such reserves to be conducted three years after November 30, 2010. Based upon a preliminary actuarial review at November 30, 2012, the redundancy in the reserves of MICO at November 30, 2010 was less than $1.0 million. Through December 1, 2010, MICO and West Bend were parties to quota-share reinsurance agreements whereby MICO ceded 75% (80% prior to 2008) of its business to West Bend. MICO and West Bend agreed to terminate the reinsurance agreement in effect at November 30, 2010 on a run-off basis. West Bend’s obligations related to all past reinsurance agreements with MICO remain in effect for all policies effective prior to December 1, 2010. West Bend and MICO entered into a trust agreement on December 1, 2010. Under the terms of the trust agreement, for the sole benefit of MICO, West Bend placed into trust assets with a fair value equal to the amount of unearned premiums and unpaid losses and loss adjustment expenses, reduced by any net premium balances not yet paid by MICO, that West Bend had assumed pursuant to such reinsurance agreements at November 30, 2010. The amount of assets required to be held in trust is adjustable monthly based upon the remaining net obligations of West Bend. West Bend may terminate the trust agreement on the earlier of December 1, 2020 or the date when the obligations of West Bend are equal to or less than $5.0 million. At December 31, 2012, West Bend’s net obligations under the reinsurance agreements were approximately $22.6 million, and the fair value of assets held in trust was approximately $26.3 million.

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We recorded the MICO assets that we acquired and the MICO liabilities that we assumed at their estimated acquisition date fair value. The following table summarizes the estimated fair value of the net assets we acquired at the date of the MICO acquisition based on purchase price allocations:

(in thousands)
Assets acquired:
Investments	$	68,693
Premiums receivable		27,803
Prepaid reinsurance premiums		25,054
Reinsurance receivable		83,818
Goodwill		4,703
Other intangible assets		958
Other		2,801
Total assets acquired		213,830
Liabilities assumed:
Losses and loss expenses		104,815
Unearned premiums		33,688
Reinsurance balances payable		16,899
Accrued expenses		9,990
Other		6,142
Total liabilities assumed		171,534
Net assets acquired	$	42,296

We recorded goodwill of $4.7 million in connection with the MICO acquisition. The goodwill consists largely of economies of scale we expect to realize from integrating the operations of MICO with the operations of the Donegal Insurance Group and benefits we expect to derive from MICO’s relationships with its independent agents and policyholders. We have evaluated the goodwill for impairment during 2012. We will evaluate the goodwill for impairment annually or upon the occurrence of certain future events.

We operate MICO as a subsidiary and intend to continue to maintain its trade name for the foreseeable future. We have therefore established a trade name intangible asset in the amount of $958,000, which represents the estimated value of the future benefits we will derive from the continued use of the trade name. We will not amortize the trade name intangible asset because we have determined that the trade name intangible asset has an indefinite life. We have evaluated the trade name intangible asset for impairment during 2012. We will evaluate the trade name intangible asset for impairment annually or upon the occurrence of certain future events.

Our consolidated financial statements for the year ended December 31, 2010 included the operations of MICO from December 1, 2010, the date we acquired it. Effective on December 1, 2010, MICO entered into a 50% quota-share reinsurance agreement with third-party reinsurers and a 25% quota-share reinsurance agreement with Donegal Mutual to replace the 75% quota-share reinsurance agreement MICO maintained with West Bend through November 30, 2010. Our total revenues related to the operations of MICO and Atlantic States’ allocation with respect to Donegal Mutual’s quota-share reinsurance agreement for the period December 1, 2010 through December 31, 2010 were approximately $2.4 million. MICO’s results of operations for the period December 1, 2010 through December 31, 2010 did not significantly impact our consolidated net income for 2010.

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The following table presents our unaudited pro forma historical results for the years ended December 31, 2010 and 2009 as if we had acquired MICO at January 1, 2009 and MICO had entered into a 25% quota-share reinsurance agreement with Donegal Mutual on that date:

	Year Ended December 31,
	2010			2009
	(in thousands, except per share data)
Total revenues	$	458,231		$	423,184
Income before income tax benefit		13,619			15,232
Income tax benefit		(741	)		(146	)
Net income		14,360			15,378
Class A earnings per share - basic and diluted		0.58			0.62
Class B earnings per share - basic and diluted		0.52			0.55

Significant pro forma income statement adjustments for the year ended December 31, 2009 included a $3.8 million decrease in premiums earned related to the recognition of the pro forma fair value adjustment associated with the net unearned premium liability at January 1, 2009. We have prepared the unaudited pro forma results above for comparative purposes only. These unaudited pro forma results are not necessarily indicative of the results of operations that actually would have resulted had the acquisition occurred at January 1, 2009, nor are the pro forma results necessarily indicative of future operating results.

5 - Investments

The amortized cost and estimated fair values of fixed maturities and equity securities at December 31, 2012 and 2011 are as follows:

	2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Held to Maturity
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	1,000,000	$	11,510	$	—	$	1,011,510
Obligations of states and political subdivisions		40,909,132		1,609,211		—		42,518,343
Residential mortgage-backed securities		191,064		14,822		—		205,886
Totals	$	42,100,196	$	1,635,543	$	—	$	43,735,739

	2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	70,253,846	$	1,101,208	$	43,951	$	71,311,103
Obligations of states and political subdivisions		385,371,983		32,221,045		606,065		416,986,963
Corporate securities		73,941,532		3,522,954		108,709		77,355,777
Residential mortgage-backed securities		125,606,445		3,315,976		66,443		128,855,978
Fixed maturities		655,173,806		40,161,183		825,168		694,509,821
Equity securities		8,663,183		200,823		106,748		8,757,258
Totals	$	663,836,989	$	40,362,006	$	931,916	$	703,267,079

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	2011
	Amortized Cost		Gross Unrealized   Gains		Gross Unrealized  Losses		Estimated Fair   Value
Held to Maturity
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
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale
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

At December 31, 2012, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $358.5 million and an amortized cost of $332.4 million. Our holdings also included special revenue bonds with an aggregate fair value of $101.0 million and an amortized cost of $93.9 million. With respect to both categories, we held no securities of any issuer that comprised more than 10% of the category at December 31, 2012. Education bonds and water and sewer utility bonds represented 54% and 19%, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, 2012. Many of the issuers of the special revenue bonds we held at December 31, 2012 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.

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 are similar to general obligation bonds.

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We set forth below the amortized cost and estimated fair value of fixed maturities at December 31, 2012 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	$	1,000,000	$	1,011,510
Due after one year through five years		31,815,724		32,965,749
Due after five years through ten years		9,093,408		9,552,594
Due after ten years		—		—
Residential mortgage-backed securities		191,064		205,886
Total held to maturity	$	42,100,196	$	43,735,739
Available for sale
Due in one year or less	$	8,942,472	$	9,003,925
Due after one year through five years		62,233,761		64,199,249
Due after five years through ten years		181,558,392		192,859,072
Due after ten years		276,832,736		299,591,597
Residential mortgage-backed securities		125,606,445		128,855,978
Total available for sale	$	655,173,806	$	694,509,821

The amortized cost of fixed maturities on deposit with various regulatory authorities at December 31, 2012 and 2011 amounted to $10,565,116 and $10,629,319, respectively.

Investments in affiliates consisted of the following at December 31, 2012 and 2011:

	2012		2011
DFSC	$	36,770,530	$	31,857,246
Other		465,000		465,000
Total	$	37,235,530	$	32,322,246

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 made an additional equity investment in DFSC in the amount of $100,000 during 2012.

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, 2012 and 2011 from the financial statements of DFSC.

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	December 31,
	2012		2011
Balance sheets:
Total assets	$	509,670,100	$	532,938,460
Total liabilities	$	433,490,583	$	466,940,425
Stockholders’ equity		76,179,517		65,998,035
Total liabilities and stockholders’ equity	$	509,670,100	$	532,938,460

	Year Ended December 31,
	2012		2011		2010
Income statements:
Net income (loss)	$	9,401,001	$	4,196,054	$	(556,528	)

Other comprehensive income (loss) in our statements of comprehensive income includes net unrealized gains (losses) of $138,771, $479,401 and ($32,129) for 2012, 2011 and 2010, 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:

	2012			2011			2010
Fixed maturities	$	24,642,897		$	25,044,316		$	23,995,220
Equity securities		85,905			162,934			42,869
Short-term investments		34,482			57,296			91,665
Other		44,874			48,588			46,095
Investment income		24,808,158			25,313,134			24,175,849
Investment expenses		(4,639,239	)		(4,454,955	)		(4,226,135	)
Net investment income	$	20,168,919		$	20,858,179		$	19,949,714

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

	2012			2011			2010
Gross realized gains:
Fixed maturities	$	6,730,331		$	4,959,707		$	4,136,455
Equity securities		926,053			8,760,511			1,791,585
		7,656,384			13,720,218			5,928,040
Gross realized losses:
Fixed maturities		42,135			163,316			533,918
Equity securities		754,810			1,275,635			998,402
		796,945			1,438,951			1,532,320
Net realized gains	$	6,859,439		$	12,281,267		$	4,395,720
Change in difference between fair value and cost of investments:
Fixed maturities	$	5,739,506		$	29,646,545		$	(11,571,194	)
Equity securities		(104,660	)		(7,459,314	)		1,547,487
Totals	$	5,634,846		$	22,187,231		$	(10,023,707	)

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We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at December 31, 2012 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	$	12,308,333	$	43,951	$	—	$	—
Obligations of states and political subdivisions		22,134,226		606,065		—		—
Corporate securities		12,271,750		79,136		2,958,520		29,573
Residential mortgage-backed securities		22,491,562		66,443		—		—
Equity securities		2,226,050		106,748		—		—
Totals	$	71,431,921	$	902,343	$	2,958,520	$	29,573

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 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 seven equity securities that were in an unrealized loss position at December 31, 2012. 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 46 debt securities that were in an unrealized loss position at December 31, 2012. 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 2012, 2011 or 2010. We had no sales or transfers from the held to maturity portfolio in 2012, 2011 or 2010. We have no derivative instruments or hedging activities.

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6 - Fair Value Measurements

We account for financial assets using a framework that establishes a hierarchy that ranks the quality and reliability of inputs, or assumptions, used 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. 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 residential mortgage-backed securities.

We present our investments in available-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. We generally obtain one price per security. The 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 determine if the estimates we obtain are representative of fair values based upon their 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 monitor the market and are familiar with current trading ranges for similar securities and 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, coupon rates, security type and recent trading activity. Our investment personnel review documentation with respect to the pricing services’ pricing methodology that they obtain periodically to determine if the primary pricing sources, market inputs and pricing frequency for various security types are reasonable. At December 31, 2012 and 2011, we received one estimate per security from one of 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 December 31, 2012 and 2011, we did not identify any 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. The carrying values in the 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 reported in the balance sheet for our subordinated debentures and borrowings under line of credit approximate their fair values. We classify these items as Level 3. We evaluate our assets and liabilities on a recurring basis to determine the appropriate level at which to classify them for each reporting period.

We evaluate our assets and liabilities on a regular basis to determine the appropriate level at which to classify them for each reporting period. Based on our review of the methodology and summary of inputs used by the pricing services, we have concluded that our Level 1 and Level 2 investments were classified properly at December 31, 2012 and 2011.

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The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at December 31, 2012:

	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)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	71,311,103	$	—	$	71,311,103	$	—
Obligations of states and political subdivisions		416,986,963		—		416,986,963		—
Corporate securities		77,355,777		—		77,355,777		—
Residential mortgage-backed securities		128,855,978		—		128,855,978		—
Equity securities		8,757,258		5,365,721		3,391,537		—
Totals	$	703,267,079	$	5,365,721	$	697,901,358	$	—

The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at December 31, 2011:

	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)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	60,977,557	$	—	$	60,977,557	$	—
Obligations of states and political subdivisions		398,876,582		—		398,876,582		—
Corporate securities		64,113,649		—		64,113,649		—
Residential mortgage-backed securities		122,630,390		—		122,630,390		—
Equity securities		7,437,538		6,178,136		1,259,402		—
Totals	$	654,035,716	$	6,178,136	$	647,857,580	$	—

7 - Deferred Policy Acquisition Costs

Changes in our insurance subsidiaries’ deferred policy acquisition costs are as follows:

	2012			2011			2010
Balance, January 1	$	36,424,955		$	34,445,579		$	32,844,179
Acquisition costs deferred		78,010,742			70,550,376			67,955,400
Amortization charged to earnings		(74,314,000	)		(68,571,000	)		(66,354,000	)
Balance, December 31	$	40,121,697		$	36,424,955		$	34,445,579

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8 - Property and Equipment

Property and equipment at December 31, 2012 and 2011 consisted of the following:

	2012			2011			Estimated Useful Life
Office equipment	$	8,863,377		$	8,347,493		5-15 years
Automobiles		2,010,762			2,111,218		3 years
Real estate		5,356,705			5,016,722		15-50 years
Software		2,717,206			2,316,617		5 years
		18,948,050			17,792,050
Accumulated depreciation		(12,994,217	)		(11,637,667	)
	$	5,953,833		$	6,154,383

Depreciation expense for 2012, 2011 and 2010 amounted to $944,632, $1.0 million and $1.2 million, respectively.

9 - 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 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 estimates have exceeded their actual liabilities. Changes in our insurance subsidiaries’ estimate of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received since the prior reporting date.

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

	2012			2011			2010
Balance at January 1	$	442,407,615		$	383,318,672		$	263,598,844
Less reinsurance recoverable		(199,392,836	)		(165,422,373	)		(83,336,726	)
Net balance at January 1		243,014,779			217,896,299			180,262,118
Acquisition of MICO		—			—			26,960,063
Incurred related to:
Current year		325,275,882			340,671,237			277,193,930
Prior years		7,595,702			(168,460	)		(2,885,072	)
Total incurred		332,871,584			340,502,777			274,308,858
Paid related to:
Current year		205,876,331			219,183,102			179,069,304
Prior years		119,074,197			96,201,195			84,565,436
Total paid		324,950,528			315,384,297			263,634,740
Net balance at December 31		250,935,835			243,014,779			217,896,299
Plus reinsurance recoverable		207,891,560			199,392,836			165,422,373
Balance at December 31	$	458,827,395		$	442,407,615		$	383,318,672

Our insurance subsidiaries recognized an increase (decrease) in their liability for losses and loss expenses of prior years of $7.6 million, ($168,460) and ($2.9) million in 2012, 2011 and 2010, respectively. Our insurance subsidiaries made no significant changes in their reserving philosophy, key reserving assumptions or claims management personnel, and have made no significant offsetting changes in estimates that increased or decreased their loss and loss expense reserves in these years. The 2012 development represented 3.1% of the December 31, 2011 net carried reserves and resulted primarily from higher-than-expected severity in the private passenger automobile liability and workers’ compensation lines of business in accident years prior to 2012. The majority of the 2012 development related to increases in the liability for losses and loss expenses of

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prior years for Atlantic States and Southern. The 2011 development represented an immaterial percentage of the December 31, 2010 net carried reserves. The 2010 development represented 1.6% of the December 31, 2009 net carried reserves and resulted primarily from lower-than-expected severity in the private passenger automobile liability and homeowners lines of business in accident years prior to 2009.

10 - Borrowings

Lines of Credit

In June 2012, we renewed our existing credit agreement with Manufacturers and Traders Trust Company (“M&T”) relating to a $60.0 million unsecured, revolving line of credit that expires in July 2015. We have the right to request a one-year extension of the credit agreement as of each anniversary date of the agreement. In December 2010 and March 2011, we borrowed $35.0 million and $3.5 million, respectively, in connection with our acquisition of MICO. In May 2011, we borrowed $19.0 million in connection with the merger of UNNF with and into DFSC. At December 31, 2012, we had $52.0 million in outstanding borrowings and had the ability to borrow an additional $8.0 million at an interest rate equal to M&T’s current prime rate or the then current LIBOR rate plus 2.25%, depending on our leverage ratio. The interest rate on our outstanding borrowings is adjustable quarterly. At December 31, 2012 , the interest rate on our outstanding borrowings was 2.46%. We pay a fee of 0.2% per annum on the loan commitment amount regardless of usage. The credit agreement requires our compliance with certain covenants, which include minimum levels of our net worth, leverage ratio and statutory surplus and the A.M. Best ratings of our insurance subsidiaries. We complied with all requirements of the credit agreement during the year ended December 31, 2012.

MICO has an agreement with the Federal Home Loan Bank (“FHLB”) of Indianapolis. Through its membership, MICO has the ability to issue debt to the FHLB of Indianapolis in exchange for cash advances. There were no outstanding borrowings at December 31, 2012 or 2011. The table below presents the amount of FHLB of Indianapolis stock MICO purchased, collateral pledged and assets related to MICO’s agreement at December 31, 2012.

FHLB stock purchased and owned as part of the agreement	$	252,100
Collateral pledged, at par (carrying value $3,946,091)		4,450,000
Borrowing capacity currently available		3,493,664

Atlantic States has an agreement with 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. There were no outstanding borrowings at December 31, 2012 or 2011. The table below presents the amount of FHLB of Pittsburgh stock Atlantic States purchased, collateral pledged and assets related to Atlantic States’ agreement at December 31, 2012.

FHLB stock purchased and owned as part of the agreement	$	256,400
Collateral pledged, at par		—
Borrowing capacity currently available		—

During 2013, Atlantic States issued secured debt in the principal amount of $15.0 million to the FHLB of Pittsburgh in exchange for cash advances in the amount of $15.0 million. Atlantic States then provided intercompany loans to us in the principal amount of $15.0 million to fund our prepayment of our subordinated debentures, as we discuss below.

Subordinated Debentures

On October 29, 2003, we received $10.0 million in net proceeds from the issuance of subordinated debentures. The debentures were scheduled to mature on October 29, 2033 and were callable at our option, at par. The debentures carried an interest rate equal to the three-month LIBOR rate plus 3.85%. At December 31, 2012, the interest rate on these debentures was 4.16%. At December 31, 2012 and 2011, our consolidated balance sheets included an investment in a statutory trust of $310,000 and subordinated debentures of $10.3 million related to this transaction. On January 28, 2013, we prepaid these subordinated debentures in full and liquidated our investment in the statutory trust.

On May 24, 2004, we received $5.0 million in net proceeds from the issuance of subordinated debentures. The debentures were scheduled to mature on May 24, 2034 and were callable at our option, at par. The debentures carried an interest rate equal to the three-month LIBOR rate plus 3.85%. At December 31, 2012, the interest rate on these debentures was 4.16%. At December 31, 2012 and 2011, our consolidated balance sheets included an investment in a statutory trust of $155,000 and subordinated debentures of $5.2 million related to this transaction. On February 25, 2013, we prepaid these subordinated debentures in full and liquidated our investment in the statutory trust.

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In January 2002, West Bend purchased a surplus note from MICO for $5.0 million to increase MICO’s statutory surplus. On December 1, 2010, Donegal Mutual purchased the surplus note from West Bend at face value. The surplus note carries an interest rate of 5.00%, and any repayment of principal or interest requires prior insurance regulatory approval. Upon receipt of regulatory approval, MICO paid $250,000 in interest to Donegal Mutual during each of 2012 and 2011.

11 - Reinsurance

Unaffiliated Reinsurers

Our insurance subsidiaries and Donegal Mutual purchase certain third-party reinsurance on a combined basis. Le Mars, MICO, Peninsula and Sheboygan also have separate third-party reinsurance programs that provide certain coverage that is commensurate with their relative size and exposures. Our insurance subsidiaries use several different reinsurers, all of which, consistent with the requirements of our insurance subsidiaries and Donegal Mutual, have an A.M. Best rating of A- (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 an A- rating from A.M. Best. The external reinsurance our insurance subsidiaries and Donegal Mutual purchase includes “excess of loss reinsurance,” under which their losses are automatically reinsured, through a series of contracts, over a set retention (generally $1.0 million for 2012 and $750,000 prior to 2012), and “catastrophic reinsurance,” under which they recover, through a series of contracts, 90% to 100% of an accumulation of many losses resulting from a single event, including natural disasters, over a set retention (generally $5.0 million). For property insurance, our insurance subsidiaries had excess of loss treaties that provided for coverage up to $5.0 million per loss. For liability insurance, our insurance subsidiaries had excess of loss treaties that provided for coverage up to $40.0 million per occurrence. For workers’ compensation insurance, our insurance subsidiaries had excess of loss treaties that provided for coverage up to $10.0 million on any one life. Our insurance subsidiaries and Donegal Mutual had property catastrophe coverage through a series of layered treaties up to aggregate losses of $135.0 million for any single event. As many as 20 reinsurers provided coverage on any one treaty with no reinsurer taking more than 36.0% of any one treaty. The amount of coverage provided under each of these types of reinsurance depends upon the amount, nature, size and location of the risks being reinsured. Donegal Mutual and our insurance subsidiaries also purchased facultative reinsurance to cover exposures from losses that exceeded the limits provided by the treaty reinsurance Donegal Mutual and our insurance subsidiaries purchased. In order to write automobile insurance in the State of Michigan, MICO is required to be a member of the Michigan Catastrophic Claims Association (“MCCA”). The MCCA provides reinsurance to MICO for personal automobile and commercial automobile personal injury claims in the State of Michigan over a set retention.

Through December 1, 2010, MICO and West Bend were parties to quota-share reinsurance agreements whereby MICO ceded 75% of its business to West Bend. MICO and West Bend agreed to terminate the reinsurance agreement in effect at November 30, 2010 on a run-off basis. West Bend’s obligations related to all past reinsurance agreements with MICO remain in effect for all policies effective prior to December 1, 2010 as we discuss in Note 4-Business Combinations.

MICO maintains a quota-share reinsurance agreement with third-party reinsurers to reduce its net exposures. Effective from December 1, 2010 to December 31, 2011, the quota-share reinsurance percentage was 50%. Effective January 1, 2012, MICO reduced the quota-share reinsurance percentage from 50% to 40%. Effective January 1, 2013, MICO reduced the quota-share reinsurance percentage from 40% to 30%.

The following amounts represent ceded reinsurance transactions with unaffiliated reinsurers during 2012, 2011 and 2010:

	2012		2011		2010
Premiums written	$	76,736,510	$	80,265,127	$	24,357,938
Premiums earned		79,680,782		88,297,408		26,551,687
Losses and loss expenses		56,179,284		82,836,893		19,764,441
Prepaid reinsurance premiums		25,126,276		28,054,302		26,991,912
Liability for losses and loss expenses		103,775,940		106,231,527		92,945,915

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Total Reinsurance

The following amounts represent our total ceded reinsurance transactions with both affiliated and unaffiliated reinsurers during 2012, 2011 and 2010:

	2012		2011		2010
Premiums earned	$	258,064,301	$	242,186,814	$	144,554,336
Losses and loss expenses		181,995,838		216,776,966		111,080,953
Prepaid reinsurance premiums		111,156,162		106,450,018		89,365,771
Liability for losses and loss expenses		207,891,560		199,392,836		165,442,373

The following amounts represent the effect of reinsurance on premiums written for 2012, 2011 and 2010:

	2012			2011			2010
Direct	$	419,811,847		$	397,810,566		$	279,627,255
Assumed		339,389,274			306,416,861			262,574,572
Ceded		(262,754,201	)		(250,176,390	)		(150,679,539	)
Net premiums written	$	496,446,920		$	454,051,037		$	391,522,288

The following amounts represent the effect of reinsurance on premiums earned for 2012, 2011 and 2010:

	2012			2011			2010
Direct	$	408,846,530		$	385,737,801		$	269,394,549
Assumed		324,219,993			287,919,197			253,189,916
Ceded		(258,064,301	)		(242,186,814	)		(144,554,336	)
Net premiums earned	$	475,002,222		$	431,470,184		$	378,030,129

12 - Income Taxes

Our provision for income tax consists of the following:

	2012		2011			2010
Current	$	3,614,390	$	(1,269,775	)	$	757,400
Deferred		1,151,250		(5,922,491	)		(2,380,430	)
Federal tax (benefit) provision	$	4,765,640	$	(7,192,266	)	$	(1,623,030	)

Our effective tax rate is different from the amount computed at the statutory federal rate of 35% for 2012, 2011 and 2010. The reasons for such difference and the related tax effects are as follows:

	2012			2011			2010
Income (loss) before income taxes	$	27,858,260		$	(6,739,313	)	$	9,844,149
Computed “expected” taxes (benefit)		9,750,391			(2,358,760	)		3,445,452
Tax-exempt interest		(5,824,281	)		(6,038,463	)		(6,183,795	)
Proration		869,551			905,326			923,071
Other, net		(30,021	)		299,631			192,242
Federal income tax (benefit) provision	$	4,765,640		$	(7,192,266	)	$	(1,623,030	)

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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 are as follows:

	2012			2011
Deferred tax assets:
Unearned premium	$	17,613,415		$	16,113,291
Loss reserves		7,275,091			7,339,644
Net operating loss carryforward		1,942,128			4,473,462
Net operating loss carryforward - Le Mars		1,797,194			2,191,532
Alternative minimum tax credit carryforward		7,964,853			4,294,879
Other		1,413,285			634,885
Total gross deferred assets		38,005,966			35,047,693
Less valuation allowance		(440,778	)		(440,778	)
Net deferred tax assets		37,565,188			34,606,915
Deferred tax liabilities:
Deferred policy acquisition costs		14,042,594			12,750,631
Net unrealized gains		14,212,465			11,711,531
Other		3,042,593			225,033
Total gross deferred tax liabilities		31,297,652			24,687,195
Net deferred tax asset	$	6,267,536		$	9,919,720

We provide a valuation allowance when we believe it is more likely than not that we will not realize some portion of the tax asset. At December 31, 2012 and 2011, we established a valuation allowance of $440,778, related to a portion of the net operating loss carryforward of Le Mars that we acquired on January 1, 2004. We determined that we were not required to establish a valuation allowance for the other net deferred tax assets of $37.6 million and $34.6 million at December 31, 2012 and 2011, respectively, since it is more likely than not that we will realize these deferred tax assets through reversals of existing temporary differences, future taxable income, carrybacks to taxable income in prior years and the implementation of tax-planning strategies.

Tax years 2009 through 2012 remained open for examination at December 31, 2012. At December 31, 2012, we had a net operating loss carryforward of $5.5 million, which is available to offset our future taxable income. This amount will expire in 2031 if not utilized. The net operating loss carryforward of $5.1 million from Le Mars will begin to expire in 2020 if not utilized and is subject to an annual limitation of approximately $376,000. We also had an alternative minimum tax credit carryforward of $8.0 million with an indefinite life.

13 - Stockholders’ Equity

On April 19, 2001, our stockholders approved an amendment to our certificate of incorporation. Among other things, the amendment reclassified our common stock as Class B common stock and effected a one-for-three reverse split of our Class B common stock effective April 19, 2001. The amendment also authorized a new class of common stock with one-tenth of a vote per share designated as Class A common stock. Our board of directors also declared a dividend of two shares of Class A common stock for each share of Class B common stock, after the one-for-three reverse split, held of record at the close of business April 19, 2001.

Each share of Class A common stock outstanding at the time of the declaration of any dividend or other distribution payable in cash upon the shares of Class B common stock is entitled to a dividend or distribution payable at the same time and to stockholders of record on the same date in an amount at least 10% greater than any dividend declared upon each share of Class B common stock. In the event of our merger or consolidation with or into another entity, the holders of Class A common stock and the holders of Class B common stock are entitled to receive the same per share consideration in such merger or consolidation. In the event of our liquidation, dissolution or winding-up, any assets available to common stockholders will be distributed pro-rata to the holders of Class A common stock and Class B common stock after payment of all of our obligations.

In February 2009, our board of directors authorized a share repurchase program, pursuant to which we may purchase up to 300,000 shares of our Class A common stock at market prices prevailing from time to time in the open market subject to the provisions of Securities and Exchange Commission (“SEC”) Rule 10b-18 and in privately negotiated transactions. We purchased 135,064 and 119,257 shares of our Class A common stock under this program during 2012 and 2011, respectively. At December 31, 2012, we had the authority remaining to purchase 28,308 shares under this program.

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At December 31, 2012, our treasury stock consisted of 916,622 and 72,465 shares of Class A common stock and Class B common stock, respectively. At December 31, 2011, our treasury stock consisted of 781,558 and 72,465 shares of Class A common stock and Class B common stock, respectively.

14 - Stock Compensation Plans

Equity Incentive Plans

During 1996, we adopted an Equity Incentive Plan for Employees. During 2001, we adopted a nearly identical plan that made a total of 2,666,667 shares of Class A common stock available for issuance to employees of our subsidiaries and affiliates. During 2005, we amended the plan to make a total of 4,000,000 shares of Class A common stock available for issuance. During 2007, we adopted a nearly identical plan that made a total of 3,500,000 shares of Class A common stock available for issuance to employees of our subsidiaries and affiliates. During 2011, we adopted a nearly identical plan that made a total of 3,500,000 shares of Class A common stock available for issuance to employees of our subsidiaries and affiliates. Each plan provides for the granting of awards by our board of directors in the form of stock options, stock appreciation rights, restricted stock or any combination of the above. The plans provide that stock options may become exercisable up to ten years from date of grant, with an option price not less than fair market value on date of grant. We have not granted any stock appreciation rights.

During 1996, we adopted an Equity Incentive Plan for Directors. During 2001, we adopted a nearly identical plan that made 355,556 shares of Class A common stock available for issuance to our directors and those of our subsidiaries and affiliates. During 2007, we adopted a nearly identical plan that made 400,000 shares of Class A common stock available for issuance to our directors and the directors of our subsidiaries and affiliates. During 2011, we adopted a nearly identical plan that made 400,000 shares of Class A common stock available for issuance to our directors and the directors of our subsidiaries and affiliates.We may make awards in the form of stock options. The plan also provides for the issuance of 400 shares of restricted stock on the first business day of January in each year to each of our directors and each director of Donegal Mutual who does not serve as one of our directors. We issued 6,800, 5,598 and 5,598 shares of restricted stock on January 2, 2012, 2011 and 2010, respectively.

We measure all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and record such 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 other than Donegal Mutual, 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, expected term, dividend yield and expected volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected term used as the assumption in the model. We base the expected term of an option award on our historical experience for similar awards. We determine the dividend yield by dividing the per share dividend by the grant date stock price. We base the expected volatility on the volatility of our stock price over a historical period comparable to the expected term.

The weighted-average grant date fair value of options granted during 2012 was $2.85. We calculated this fair value based upon a risk-free interest rate of .43%, expected life of five years, expected volatility of 33% and expected dividend yield of 3%.

The weighted-average grant date fair value of options granted during 2011 was $1.90. We calculated this fair value based upon a risk-free interest rate of .75%, expected life of five years, expected volatility of 31% and expected dividend yield of 4%.

The weighted-average grant date fair value of options granted during 2010 was $1.26. We calculated this fair value based upon a risk-free interest rate of 1.04%, expected life of three years, expected volatility of 29% and expected dividend yield of 4%.

We charged compensation expense for our stock compensation plans against income before income taxes of $420,735, $283,811 and $46,733 for the years ended December 31, 2012, 2011 and 2010, respectively, with a corresponding income tax benefit of $143,050, $96,496 and $15,889. At December 31, 2012 and 2011, our total unrecognized compensation cost related to non-vested share-based compensation granted under our stock compensation plans was $1.2 million and $929,679, respectively. We expect to recognize this cost over a weighted average period of 8.9 years.

We account for share-based compensation to employees and directors of Donegal Mutual as share-based compensation to employees of a controlling entity. As such, we measure the fair value of an award at the grant date and recognize the fair value as a dividend to the controlling entity. These provisions apply to options granted to the employees and directors of Donegal Mutual, the employer of record for the employees that provide services to us. We recorded implied dividends of $2.5 million, $2.3 million and $1.3 million for the years ended December 31, 2012, 2011 and 2010, respectively.

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During 2012, we received cash from option exercises under all stock compensation plans of $1.1 million. We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of $52,422 for 2012. We did not receive any cash from option exercises in 2011 or 2010. No further shares are available for plans in effect prior to 2011.

Information regarding activity in our stock option plans follows:

	Number of Options			Weighted-Average Exercise Price Per Share
Outstanding at December 31, 2009		3,290,099		$	17.98
Granted - 2010		1,787,500			14.00
Forfeited - 2010		(15,500	)		15.69
Expired - 2010		(1,063,432	)		15.76
Outstanding at December 31, 2010		3,998,667			16.80
Granted - 2011		2,321,000			12.52
Forfeited - 2011		(52,000	)		15.63
Expired - 2011		(958,667	)		21.00
Outstanding at December 31, 2011		5,309,000			14.18
Granted - 2012		1,593,600			14.50
Exercised - 2012		(82,102	)		13.01
Forfeited - 2012		(109,673	)		13.84
Expired - 2012		(10,000	)		21.00
Outstanding at December 31, 2012		6,700,825		$	14.27
Exercisable at:
December 31, 2010		1,805,751		$	18.13
December 31, 2011		1,821,333		$	16.42
December 31, 2012		3,072,970		$	15.03

Shares available for future option grants at December 31, 2012 totaled 40,936 shares under all plans.

The following table summarizes information about fixed stock options at December 31, 2012:

Exercise Price	Number of Options Outstanding		Weighted-Average Remaining Contractual Life	Number of Options Exercisable
$12.50		2,184,542	9.0 years		728,181
14.00		1,710,683	3.0 years		1,133,789
14.50		1,593,600	10.0 years		—
15.00		3,000	3.0 years		2,000
17.50		1,198,500	0.5 years		1,198,500
18.70		3,000	0.5 years		3,000
21.00		7,500	0.5 years		7,500
Total		6,700,825			3,072,970

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Employee Stock Purchase Plans

During 1996, we adopted an Employee Stock Purchase Plan. During 2001, we adopted a nearly identical plan that made 533,333 shares of Class A common stock available for issuance. During 2011, we adopted another nearly identical plan that made 300,000 shares of Class A common stock available for issuance.

The 2011 plan extends over a 10-year period and provides for shares to be offered to all eligible employees at a purchase price equal to the lesser of 85% of the fair market value of our Class A common stock on the last day before the first day of each enrollment period (June 1 and December 1 of each year) under the plan or 85% of the fair market value of our common stock on the last day of each subscription period (June 30 and December 31 of each year).

A summary of plan activity follows:

	Shares Issued
	Price		Shares
January 1, 2010	$	12.85		11,717
July 1, 2010		10.45		12,403
January 1, 2011		11.02		13,243
July 1, 2011		10.88		11,371
January 1, 2012		11.91		10,523
July 1, 2012		11.29		19,031

On January 1, 2013, we issued an additional 16,485 shares at a price of $11.93 per share under this plan.

Agency Stock Purchase Plans

During 1996, we adopted an Agency Stock Purchase Plan. During 2001, we adopted a nearly identical plan that made 533,333 shares of Class A common stock available for issuance. During 2011, we adopted another nearly identical plan that made 300,000 shares of Class A common stock available for issuance. The plan provides for agents of our insurance subsidiaries and Donegal Mutual to invest up to $12,000 per subscription period (April 1 to September 30 and October 1 to March 31 of each year) under various methods. We issue stock at the end of each subscription period at a price equal to 90% of the average market price during the last ten trading days of each subscription period. During 2012, 2011 and 2010, we issued 70,366, 66,260 and 56,879 shares, respectively, under this plan. Expense recognized under the plan was not material.

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15 - Statutory Net Income, Capital and Surplus and Dividend Restrictions

The following table presents selected information, as filed with insurance regulatory authorities, for our insurance subsidiaries as determined in accordance with accounting practices prescribed or permitted by such insurance regulatory authorities:

	2012			2011			2010
Atlantic States:
Statutory capital and surplus	$	180,465,658		$	173,505,872		$	191,775,057
Statutory unassigned surplus		124,924,794			113,497,280			131,817,978
Statutory net income (loss)		12,507,540			(7,729,040	)		11,002,447
Southern:
Statutory capital and surplus		58,841,059			60,876,093			63,609,630
Statutory unassigned surplus		7,843,473			9,364,037			12,612,044
Statutory net (loss) income		(1,539,943	)		1,795,195			(2,083,206	)
Le Mars:
Statutory capital and surplus		26,803,140			24,720,327			25,539,580
Statutory unassigned surplus		14,210,400			11,373,158			12,485,531
Statutory net income (loss)		2,423,225			(1,661,327	)		(3,166,242	)
Peninsula:
Statutory capital and surplus		42,471,092			40,744,215			41,932,367
Statutory unassigned surplus		24,671,678			22,601,043			23,580,784
Statutory net income		1,478,823			1,210,247			2,336,947
Sheboygan:
Statutory capital and surplus		10,944,235			10,800,499			11,671,405
Statutory unassigned (deficit) surplus		(1,087,936	)		(1,437,493	)		(479,140	)
Statutory net loss		(33,316	)		(1,237,478	)		(286,613	)
MICO:
Statutory capital and surplus		42,443,200			39,264,423			37,343,663
Statutory unassigned surplus		16,440,388			12,689,880			10,240,870
Statutory net income		2,698,257			2,889,619			3,026,178

Our principal source of cash for payment of dividends is dividends from our insurance subsidiaries. State insurance laws require our insurance subsidiaries to maintain certain minimum capital and surplus amounts on a statutory basis. 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 may further impact their ability to pay dividends. Our insurance subsidiaries’ statutory capital and surplus at December 31, 2012 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin. Amounts available for distribution to us as dividends from our insurance subsidiaries without prior approval of insurance regulatory authorities in 2013 are $18.0 million from Atlantic States, $0 from Southern, $2.7 million from Le Mars, $4.3 million from Peninsula, $0 from Sheboygan and $4.2 million from MICO, or a total of approximately $29.2 million.

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16 - Reconciliation of Statutory Filings to Amounts Reported Herein

Our insurance subsidiaries must file financial statements with state insurance regulatory authorities using accounting principles and practices prescribed or permitted by those authorities. We refer to these accounting principles and practices as statutory accounting principles (“SAP”). Accounting principles used to prepare these SAP financial statements differ from those used to prepare financial statements on the basis of generally accepted accounting principles (“GAAP”).

Reconciliations of statutory net income and capital and surplus, as determined using SAP, to the amounts included in the accompanying GAAP financial statements are as follows:

	Year Ended December 31,
	2012			2011			2010
Statutory net income (loss) of insurance subsidiaries	$	17,534,586		$	(4,732,784	)	$	9,163,680
Increases (decreases):
Deferred policy acquisition costs		3,696,742			1,979,376			1,601,400
Deferred federal income taxes		(1,151,250	)		5,922,490			2,380,430
Salvage and subrogation recoverable		772,600			1,273,000			748,000
Amortization of MICO fair value adjustments		(5,416	)		(3,275,777	)		(597,643	)
Consolidating eliminations and adjustments		(5,421,779	)		(15,080,164	)		(12,178,977	)
Parent-only net income		7,667,137			14,366,812			10,350,289
Net income as reported herein	$	23,092,620		$	452,953		$	11,467,179

	Year Ended December 31,
	2012			2011			2010
Statutory capital and surplus of insurance subsidiaries	$	361,968,384		$	349,911,429		$	371,871,702
Increases (decreases):
Deferred policy acquisition costs		40,121,697			36,424,955			34,445,579
Deferred federal income taxes		(25,682,004	)		(21,007,223	)		(14,834,855	)
Salvage and subrogation recoverable		12,000,600			11,228,000			9,955,000
Non-admitted assets and other adjustments, net		2,005,603			1,478,988			4,889,231
Fixed maturities		39,607,340			33,165,065			4,430,879
Parent-only equity and other adjustments		(29,987,526	)		(27,749,622	)		(30,654,726	)
Stockholders’ equity as reported herein	$	400,034,094		$	383,451,592		$	380,102,810

17 - Supplementary Cash Flow Information

The following table reflects net income taxes and interest paid during 2012, 2011 and 2010:

	2012		2011		2010
Income taxes	$	1,626,965	$	324,291	$	1,100,000
Interest		2,128,693		1,793,366		705,210

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18 - Earnings Per Share

We have two classes of common stock, which we refer to as Class A common stock and Class B common stock. Our Class A common stock is entitled to be paid cash dividends that are at least 10% higher than the cash we pay on our Class B common stock. Accordingly, we use the two-class method for the computation of earnings per common share. The two-class method is an earnings allocation formula that determines earnings per share separately for each class of common stock based on dividends declared and an allocation of remaining undistributed earnings using a participation percentage reflecting the dividend rights of each class.

We present below a reconciliation of the numerators and denominators we used in the basic and diluted per share computations for our Class A common stock:

	Year Ended December 31,
(dollars in thousands, except per share data)	2012		2011		2010
Basic earnings per share:
Numerator:
Allocation of net income	$	18,455	$	390	$	9,183
Denominator:
Weighted-average shares outstanding		20,031,455		19,997,146		19,961,274
Basic earnings per share	$	0.92	$	0.02	$	0.46
Diluted earnings per share:
Numerator:
Allocation of net income	$	18,455	$	390	$	9,183
Denominator:
Number of shares used in basic computation		20,031,455		19,997,146		19,961,274
Weighted-average effect of dilutive securities
Add: Director and employee stock options		274,103		36,499		17,794
Number of shares used in per share computations		20,305,558		20,033,645		19,979,068
Diluted earnings per share	$	0.91	$	0.02	$	0.46

We used the following information in the basic and diluted per share computations for our Class B common stock:

	Year Ended December 31,
(dollars in thousands, except per share data)	2012		2011		2010
Basic and diluted earnings per share:
Numerator:
Allocation of net income	$	4,638	$	63	$	2,284
Denominator:
Weighted-average shares outstanding		5,576,775		5,576,775		5,576,775
Basic and diluted earnings per share	$	0.83	$	0.01	$	0.41

During 2012, 2011 and 2010, we did not include certain options to purchase shares of our Class A common stock in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of our Class A common stock. The following table reflects such options that remained outstanding at December 31, 2012, 2011 and 2010:

	2012		2011		2010
Options excluded from diluted earnings per share		1,209,000		1,238,000		2,219,167

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19 - Condensed Financial Information of Parent Company

Condensed Balance Sheets

(in thousands)

December 31,	2012		2011
Assets
Investment in subsidiaries/affiliates (equity method)	$	470,565	$	445,795
Short-term investments		326		9,258
Cash		805		684
Property and equipment		883		1,224
Other		304		381
Total assets	$	472,883	$	457,342
Liabilities and Stockholders’ Equity
Liabilities
Cash dividends declared to stockholders	$	3,067	$	2,996
Borrowings under line of credit		52,000		54,500
Subordinated debentures		15,465		15,465
Other		2,316		930
Total liabilities		72,848		73,891
Stockholders’ equity		400,035		383,451
Total liabilities and stockholders’ equity	$	472,883	$	457,342

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Condensed Statements of Income and Comprehensive Income

(in thousands)

Year Ended December 31,	2012		2011			2010
Statements of Income
Revenues
Dividends from subsidiaries	$	7,000	$	16,000		$	12,000
Other		5,487		2,995			701
Total revenues		12,487		18,995			12,701
Expenses
Operating expenses		2,323		2,392			2,060
Interest		2,118		1,864			778
Total expenses		4,441		4,256			2,838
Income before income tax expense (benefit) and equity in undistributed net income (loss) of subsidiaries		8,046		14,739			9,863
Income tax expense (benefit)		378		372			(487	)
Income before equity in undistributed net income (loss) of subsidiaries		7,668		14,367			10,350
Equity in undistributed net income (loss) of subsidiaries		15,425		(13,914	)		1,117
Net income	$	23,093	$	453		$	11,467
Statements of Comprehensive Income
Net income	$	23,093	$	453		$	11,467
Other comprehensive income (loss), net of tax
Unrealized gain (loss) - subsidiaries		4,644		14,972			(6,446	)
Other comprehensive income (loss), net of tax		4,644		14,972			(6,446	)
Comprehensive income	$	27,737	$	15,425		$	5,021

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Condensed Statements of Cash Flows

(in thousands)

Year Ended December 31,	2012			2011			2010
Cash flows from operating activities:
Net income	$	23,093		$	453		$	11,467
Adjustments:
Equity in undistributed net (income) loss of subsidiaries		(15,425	)		13,914			(1,117	)
Other		(2,624	)		(396	)		547
Net adjustments		(18,049	)		13,518			(570	)
Net cash provided		5,044			13,971			10,897
Cash flows from investing activities:
Net sale (purchase) of short-term investments		8,932			6,437			(249	)
Net purchase of property and equipment		(147	)		(380	)		(492	)
Investment in subsidiaries		(100	)		(27,777	)		(35,088	)
Other		44			43			20
Net cash used		8,729			(21,677	)		(35,809	)
Cash flows from financing activities:
Cash dividends paid		(12,208	)		(11,874	)		(11,405	)
Issuance of common stock		2,983			1,461			1,199
Payments on line of credit		(6,000	)		(3,000	)		—
Borrowings under line of credit		3,500			22,500			35,000
Repurchase of treasury stock		(1,927	)		(1,538	)		(146	)
Net cash provided (used)		(13,652	)		7,549			24,648
Net change in cash		121			(157	)		(264	)
Cash at beginning of year		684			841			1,105
Cash at end of year	$	805		$	684		$	841

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20 - Segment Information

We have four reportable segments, which consist of our investment function, our personal lines of insurance, our commercial lines of insurance and our investment in DFSC. Using independent agents, our insurance subsidiaries market personal lines of insurance to individuals and commercial lines of insurance to small and medium-sized businesses.

We evaluate the performance of the personal lines and commercial lines primarily based upon our insurance subsidiaries’ underwriting results as determined under SAP for our total business.

We do not allocate assets to the personal and commercial lines and review the two segments in total for purposes of decision-making. We operate only in the United States and no single customer or agent provides 10 percent or more of our revenues.

Financial data by segment is as follows:

	2012			2011			2010
	(in thousands)
Revenues:
Premiums earned:
Commercial lines	$	174,735		$	152,247		$	117,755
Personal lines		300,272			282,498			260,900
SAP premiums earned		475,007			434,745			378,655
GAAP adjustments		(5	)		(3,275	)		(625	)
GAAP premiums earned		475,002			431,470			378,030
Net investment income		20,169			20,858			19,950
Realized investment gains		6,859			12,281			4,396
Equity in earnings (loss) of DFSC		4,533			2,023			(269	)
Other		8,420			8,386			6,442
Total revenues	$	514,983		$	475,018		$	408,549

	2012			2011			2010
	(in thousands)
Income before income taxes:
Underwriting income (loss):
Commercial lines	$	5,251		$	(6,560	)	$	2,252
Personal lines		(18,236	)		(40,739	)		(22,526	)
SAP underwriting loss		(12,985	)		(47,299	)		(20,274	)
GAAP adjustments		5,545			1,532			2,458
GAAP underwriting loss		(7,440	)		(45,767	)		(17,816	)
Net investment income		20,169			20,858			19,950
Realized investment gains		6,859			12,281			4,396
Equity in earnings (loss) of DFSC		4,533			2,023			(269	)
Other		3,737			3,866			3,583
Income (loss) before income taxes	$	27,858		$	(6,739	)	$	9,844

21 - Guaranty Fund and Other Insurance-Related Assessments

Our insurance subsidiaries’ liabilities for guaranty fund and other insurance-related assessments were $1,403,829 and $1,812,078 at December 31, 2012 and 2011, respectively. These liabilities included $433,994 and $548,644 related to surcharges collected by our insurance subsidiaries on behalf of regulatory authorities for 2012 and 2011, respectively.

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22 - Interim Financial Data (unaudited)

	2012
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Net premiums earned	$	114,691,791	$	117,569,122	$	120,916,960	$	121,824,349
Total revenues		125,348,162		127,299,190		130,431,531		131,903,702
Net losses and loss expenses		76,609,219		86,385,353		82,105,094		87,771,918
Net income		8,010,147		2,023,067		6,839,384		6,220,022
Net earnings per common share:
Class A common stock - basic		0.32		0.08		0.27		0.25
Class A common stock - diluted		0.31		0.08		0.27		0.25
Class B common stock - basic and diluted		0.29		0.07		0.25		0.22

	2011
	First Quarter		Second Quarter			Third Quarter		Fourth Quarter
Net premiums earned	$	103,795,279	$	104,991,401		$	108,506,809	$	114,176,695
Total revenues		111,583,442		117,054,498			119,164,471		127,215,208
Net losses and loss expenses		73,079,565		84,195,796			89,411,543		93,815,873
Net income (loss)		2,205,936		(1,693,989	)		819,926		(878,920	)
Net earnings (loss) per common share:
Class A common stock - basic and diluted		0.09		(0.07	)		0.03		(0.03	)
Class B common stock - basic and diluted		0.08		(0.06	)		0.03		(0.03	)

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of Donegal Group Inc.

We have audited the accompanying consolidated balance sheets of Donegal Group Inc. and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of Donegal Financial Services Corporation (a 48.2 percent owned investee company). The Company’s investment in Donegal Financial Services Corporation at December 31, 2012, was $36,770,530, and its equity in earnings of Donegal Financial Services Corporation was $4,533,257 for the year then ended. The financial statements of Donegal Financial Services Corporation were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Donegal Financial Services Corporation, is based solely on the report of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Donegal Group Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Oversight Board (United States), Donegal Group Inc.‘s internal control over financial reporting as of December 31, 2012 based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Philadelphia, Pennsylvania

March 12, 2013

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. 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 Rules 13a-15(e) and 15d-15(e) under the Exchange Act) at December 31, 2012 covered by this Form 10-K Report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, at December 31, 2012, our disclosure controls and procedures are 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 are 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.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, our management has conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Based on our evaluation under the COSO Framework, our management has concluded that our internal control over financial reporting was effective at December 31, 2012.

The effectiveness of our internal control over financial reporting at December 31, 2012 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included in this Form 10-K Annual Report.

Changes in Internal Control over Financial Reporting

We did not make any changes to our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2012 that have materially affected, or are reasonably likely to affect materially, our internal control over financial reporting.

Item 9B. Other Information.

None.

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of Donegal Group Inc.

We have audited Donegal Group Inc.’s (the Company) internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Donegal Group Inc.‘s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Donegal Group Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Donegal Group Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and our report dated March 12, 2013 expressed an unqualified opinion on those consolidated financial statements.

Philadelphia, Pennsylvania

March 12, 2013

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PART III

Item 10. Directors, Executive Officers and Corporate Governance of the Registrant.

We incorporate the response to this Item 10 by reference to our proxy statement we will file with the SEC on or about March 18, 2013 relating to our annual meeting of stockholders that we will hold on April 18, 2013, or our Proxy Statement. We respond to this Item with respect to our executive officers by reference to Part I of this Form 10-K Report.

We incorporate the full text of our Code of Business Conduct and Ethics by reference to Exhibit 14 to this Form 10-K Report.

Item 11. Executive Compensation.

We incorporate the response to this Item 11 by reference to our Proxy Statement. Neither the Report of our Compensation Committee nor the Report of our Audit Committee included in our Proxy Statement shall constitute or be deemed to constitute a filing with the SEC under the Securities Act or the Exchange Act or be deemed to have been incorporated by reference into any filing we make under the Securities Act or the Exchange Act, except to the extent we specifically incorporate the Report of Our Compensation Committee or the Report of Our Audit Company by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

We incorporate the response to this Item 12 by reference to our Proxy Statement.

Item 13. Certain Relationships and Related Transactions and Director Independence.

We incorporate the response to this Item 13 by reference to our Proxy Statement.

Item 14. Principal Accountant Fees and Services.

We incorporate the response to this Item 14 by reference to our Proxy Statement.

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PART IV

Item 15. Exhibits and Financial Statement Schedule.

(a) Financial statements, financial statement schedule and exhibits filed:

(a) Consolidated Financial Statements

	Page
Reports of Independent Registered Public Accounting Firm	94
Donegal Group Inc. and Subsidiaries:
Consolidated Balance Sheets at December 31, 2012 and 2011	57
Consolidated Statements of Income and Comprehensive Income for each of the years in the three-year period ended December 31, 2012, 2011 and 2010	58
Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended December 31, 2012, 2011 and 2010	59
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December  31, 2012, 2011 and 2010	60
Notes to Consolidated Financial Statements	61
Report and Consent of Independent Registered Public Accounting Firm (Filed as Exhibit 23.1)
Consent of Independent Registered Public Accounting Firm (Filed as Exhibit 23.2)

(b) Financial Statement Schedule

Schedule III - Supplementary Insurance Information	Filed herewith
Consolidated Financial Statements of Donegal Financial Services Corporation	Filed herewith

We have omitted all other schedules since they are not required, not applicable or the information is included in the financial statements or notes to the financial statements.

(c) Exhibits

Exhibit No.	Description of Exhibits	Reference
3.1	Certificate of Incorporation of Donegal Group Inc., as amended.	(a)
3.2	Amended and Restated By-laws of Donegal Group Inc.	(i)
Management Contracts and Compensatory Plans or Arrangements
10.1	Donegal Group Inc. 2011 Employee Stock Purchase Plan.	(c)
10.2	Donegal Group Inc. 2011 Equity Incentive Plan for Employees.	(c)
10.3	Donegal Group Inc. 2011 Equity Incentive Plan for Directors.	(c)
10.4	Employment Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company, Donegal Group Inc. and Donald H. Nikolaus.	(d)
10.5	Consulting Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company, Donegal Group Inc. and Donald H. Nikolaus.	(d)
10.6	Employment Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company, Donegal Group Inc. and Kevin G. Burke.	(d)
10.7	Employment Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company, Donegal Group Inc. and Cyril J. Greenya.	(d)
10.8	Employment Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company, Donegal Group Inc. and Jeffrey D. Miller.	(d)

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10.9	Employment Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company, Donegal Group Inc. and Robert G. Shenk.	(d)
10.10	Employment Agreement dated as of July 29, 2011 among Donegal Mutual Insurance Company, Donegal Group Inc. and Daniel J. Wagner.	(d)
10.11	Donegal Mutual Insurance Company 401(k) Plan.	(e)
10.12	Amendment No. 1 effective January 1, 2000 to Donegal Mutual Insurance Company 401(k) Plan.	(e)
10.13	Amendment No. 2 effective January 6, 2000 to Donegal Mutual Insurance Company 401(k) Plan.	(b)
10.14	Amendment No. 3 effective July 23, 2001 to Donegal Mutual Insurance Company 401(k) Plan.	(b)
10.15	Amendment No. 4 effective January 1, 2002 to Donegal Mutual Insurance Company 401(k) Plan.	(b)
10.16	Amendment No. 5 effective December 31, 2001 to Donegal Mutual Insurance Company 401(k) Plan.	(b)
10.17	Amendment No. 6 effective July 1, 2002 to Donegal Mutual Insurance Company 401(k) Plan.	(h)
10.18	Donegal Group Inc. 2007 Equity Incentive Plan for Employees.	(j)
10.19	Donegal Group Inc. 2007 Equity Incentive Plan for Directors.	(j)
10.20	Donegal Group Inc. Incentive Compensation Program.	(k)
Other Material Contracts
10.21	Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual Insurance Company and Southern Insurance Company of Virginia.	(f)
10.22	Surplus Note Purchase Agreement dated September 8, 2009 between Donegal Mutual Insurance Company and Southern Mutual Insurance Company.	(l)
10.23	Quota-share Reinsurance Agreement dated October 30, 2009 but effective 11:59 p.m. on October 31, 2009 between Donegal Mutual Insurance Company and Southern Mutual Insurance Company.	(l)
10.24	Services and Affiliation Agreement dated October 30, 2009 between Donegal Mutual Insurance Company and Southern Mutual Insurance Company.	(l)
10.25	Technology License Agreement dated October 30, 2009 between Donegal Mutual Insurance Company and Southern Mutual Insurance Company.	(l)
10.26	Amended and Restated Proportional Reinsurance Agreement dated March 1, 2010 between Donegal Mutual Insurance Company and Atlantic States Insurance Company.	(l)
10.27	Agreement and Plan of Merger dated April 19, 2010, and as amended May 20, 2010, among Donegal Acquisition Inc., Donegal Financial Services Corporation, Donegal Group Inc. and Union National Financial Corporation; amended dated September 1, 2010; amended dated December 8, 2010.	(m)
10.28	Amended and Restated Agreement and Plan of Merger dated December 6, 2010 among Michigan Insurance Company, West Bend Mutual Insurance Company, Donegal Group Inc. and DGI Acquisition Corp.	(n)
10.29	Amended and Restated Tax Sharing Agreement dated December 1, 2010 among Donegal Group Inc., Atlantic States Insurance Company, Southern Insurance Company of Virginia, Le Mars Insurance Company, The Peninsula Insurance Company, Peninsula Indemnity Company and Michigan Insurance Company.	(o)
10.30	Amended and Restated Services Allocation Agreement dated December 1, 2010 among Donegal Group Inc., Atlantic States Insurance Company, Southern Insurance Company of Virginia, Le Mars Insurance Company, The Peninsula Insurance Company, Peninsula Indemnity Company and Michigan Insurance Company.	(o)
10.31	Quota-share Reinsurance Agreement dated December 1, 2010 between Donegal Mutual Insurance Company and Michigan Insurance Company.	(o)
10.32	Donegal Group Inc. 2011 Agency Stock Purchase Plan.	(p)

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10.33	Credit Agreement dated June 21, 2010 between Donegal Group Inc. and Manufacturers and Traders Trust Company, First Amendment to Credit Agreement dated October 12, 2010 and Second Amendment to Credit Agreement dated June 1, 2011.	(q)
10.34	Third Amendment to Credit Agreement between Donegal Group Inc. and Manufacturers and Traders Trust Company dated June 1, 2012 and Fourth Amendment to Credit Agreement dated December 5, 2012.	Filed herewith
14	Code of Business Conduct and Ethics.	(g)
21	Subsidiaries of Registrant.	Filed herewith
23.1	Report and Consent of Independent Registered Public Accounting Firm.	Filed herewith
23.2	Consent of Independent Registered Public Accounting Firm.	Filed herewith
31.1	Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer.	Filed herewith
31.2	Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer.	Filed herewith
32.1	Section 1350 Certification of Chief Executive Officer.	Filed herewith
32.2	Section 1350 Certification of Chief Financial Officer.	Filed herewith
Exhibit 101.INS	XBRL Instance Document	Filed herewith
Exhibit 101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith
Exhibit 101.PRE	XBRL Taxonomy Presentation Linkbase Document	Filed herewith
Exhibit 101.CAL	XBRL Taxonomy Calculation Linkbase Document	Filed herewith
Exhibit 101.LAB	XBRL Taxonomy Label Linkbase Document	Filed herewith
Exhibit 101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith

(a) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form S-3 Registration Statement No. 333-59828 filed April 30, 2001.

(b) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended December 31, 2001.

(c) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated April 22, 2011.

(d) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated August 3, 2011.

(e) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended December 31, 1999.

(f) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended December 31, 1996.

(g) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Annual Report for the year ended December 31, 2003.

(h) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Annual Report for the year ended December 31, 2002.

(i) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated July 18, 2008.

(j) We incorporate such exhibit by reference to the like-numbered exhibit in Registrant’s Form 8-K Report dated April 20, 2007.

(k) We incorporate such exhibit by reference to the description of such plan in Registrant’s definitive proxy statement for its Annual Meeting of Stockholders held on April 21, 2011 filed on March 18, 2011.

(l) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Annual Report for the year ended December 31, 2009.

(m) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form S-4 registration statement filed June 25, 2010, Registrant’s Form 8-K Report dated September 1, 2010 and Registrant’s Form 8-K Report dated December 8, 2010.

(n) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated December 8, 2010.

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(o) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Annual Report for the year ended December 31, 2010.

(p) We incorporate such exhibit by reference to the like-described exhibit filed in Registrant’s Form S-3 registration statement filed on May 27, 2011.

(q) We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Annual Report for the year ended December 31, 2011.

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DONEGAL GROUP INC. AND SUBSIDIARIES

SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION

Years Ended December 31, 2012, 2011 and 2010

($ in thousands)

Segment	Net Earned Premiums		Net Investment Income		Net Losses And Loss Expenses		Amortization of Deferred Policy Acquisition Costs		Other Underwriting Expenses		Net Premiums Written
Year Ended December 31, 2012
Personal lines	$	300,269	$	—	$	218,502	$	46,977	$	46,725	$	308,571
Commercial lines		174,733		—		114,370		27,337		27,190		187,876
Investments		—		20,169		—		—		—		—
	$	475,002	$	20,169	$	332,872	$	74,314	$	73,915	$	496,447
Year Ended December 31, 2011
Personal lines	$	280,370	$	—	$	232,141	$	44,558	$	43,487	$	291,065
Commercial lines		151,100		—		108,362		24,013		23,437		162,986
Investments		—		20,858		—		—		—		—
	$	431,470	$	20,858	$	340,503	$	68,571	$	66,924	$	454,051
Year Ended December 31, 2010
Personal lines	$	260,469	$	—	$	196,008	$	45,719	$	37,596	$	268,047
Commercial lines		117,561		—		78,301		20,635		16,969		123,475
Investments		—		19,950		—		—		—		—
	$	378,030	$	19,950	$	274,309	$	66,354	$	54,565	$	391,522

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DONEGAL GROUP INC. AND SUBSIDIARIES

SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED

($ in thousands)

	At December 31,
Segment	Deferred Policy Acquisition Costs		Liability For Losses And Loss Expenses		Unearned Premiums		Other Policy Claims and Benefits Payable
2012
Personal lines	$	24,956	$	201,884	$	225,841	$	—
Commercial lines		15,166		256,943		137,247		—
Investments		—		—		—		—
	$	40,122	$	458,827	$	363,088	$	—
2011
Personal lines	$	23,385	$	207,047	$	216,314	$	—
Commercial lines		13,040		235,361		120,623		—
Investments		—		—		—		—
	$	36,425	$	442,408	$	336,937	$	—

See accompanying Report and Consent of Independent Registered Public Accounting Firm.

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Donegal Financial Services

Corporation

Financial Statements

December 31, 2012 and 2011

Donegal Financial Services Corporation

Table of Contents

December 31, 2012 and 2011

	Page
Report of Independent Registered Public Accounting Firm		1
Financial Statements
Consolidated Balance Sheet		2
Consolidated Statement of Operations		3
Consolidated Statement of Comprehensive Income (Loss)		4
Consolidated Statement of Shareholders’ Equity		5
Consolidated Statement of Cash Flows		6
Notes to Consolidated Financial Statements		8

Report of Independent Registered Public Accounting Firm

Board of Directors

Donegal Financial Services Corporation

We have audited the accompanying consolidated balance sheet of Donegal Financial Services Corporation and subsidiary (the “Company”) as of December 31, 2012 and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

We have audited the accompanying consolidated balance sheet of the Company as of December 31, 2011, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Donegal Financial Services Corporation and subsidiary, as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.

Lancaster, Pennsylvania

March 8, 2013

1

Donegal Financial Services Corporation

Consolidated Balance Sheet

(Dollars in Thousands, Except Share Data)

December 31, 2012 and 2011

	2012		2011
Assets
Cash and due from banks	$	17,989	$	18,249
Interest-bearing demand deposits in other banks		11,012		34,064
Cash and cash equivalents		29,001		52,313
Interest-bearing time deposits in other banks		6		100
Securities available-for-sale		148,057		96,369
Loans held for sale		4,266		1,331
Loans receivable, net of allowance for loan losses of $4,038 at December 31, 2012 and $3,413 at December 31, 2011		290,507		339,507
Restricted investment in bank stocks		2,320		3,249
Property and equipment, net		11,829		12,245
Bank-owned life insurance		12,558		12,165
Goodwill		901		901
Intangible assets		1,317		1,665
Other real estate owned		556		733
Accrued interest receivable		1,778		1,714
Other assets		6,574		10,646
Total assets	$	509,670	$	532,938
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Demand, non-interest bearing	$	75,317	$	79,662
Interest bearing		347,519		374,914
Total deposits		422,836		454,576
Junior subordinated debentures		7,387		7,103
Other liabilities		3,267		5,261
Total liabilities		433,490		466,940
Shareholders’ Equity
Common stock, par value $0.01 per share; 1,000 shares authorized, issued and outstanding		1		1
Surplus		61,961		61,623
Retained earnings		11,777		2,376
Accumulated other comprehensive income		2,441		1,998
Total shareholders’ equity		76,180		65,998
Total liabilities and shareholders’ equity	$	509,670	$	532,938

See notes to consolidated financial statements

2

Donegal Financial Services Corporation

Consolidated Statement of Operations

(Dollars in Thousands)

Years Ended December 31, 2012, 2011, and 2010

	2012		2011		2010
Interest Income
Loans, including fees	$	25,644	$	18,445	$	3,830
Securities:
Taxable		2,174		1,911		1,231
Tax exempt		864		372		—
Other		84		66		1
Total interest income		28,766		20,794		5,062
Interest Expense
Deposits		2,394		2,169		1,330
Junior subordinated debentures		767		469		—
Other		—		11		2
Total interest expense		3,161		2,649		1,332
Net interest income		25,605		18,145		3,730
Provision for Loan Losses		1,148		2,641		157
Net interest income after provision for loan losses		24,457		15,504		3,573
Other Income
Service charges on deposits		1,433		1,105		171
Other service charges, commissions, fees		1,368		934		40
Income from fiduciary activities		76		42		—
Alternative investment sales commissions		852		609		—
Gains on sales of loans		775		790		367
Net realized gains on sales of securities		1,488		1,805		117
Earnings from bank-owned life insurance		393		256		—
Other		92		115		112
Total other income		6,477		5,656		807
Other Expenses
Salaries and employee benefits		8,632		7,364		1,457
Occupancy and equipment		2,598		1,984		681
Advertising and marketing		224		123		84
Data and ATM processing		2,020		1,476		—
Professional fees		879		979		340
Supplies and printing		267		221		38
FDIC insurance		237		220		94
Merger expenses		255		620		1,434
Amortization of core deposit intangible		306		223		—
Other		1,372		1,146		260
Total other expenses		16,790		14,356		4,388
Income (loss) before income tax expense		14,144		6,804		(8	)
Income Tax Expense		4,743		2,608		549
Net income (loss)	$	9,401	$	4,196	$	(557	)

See notes to consolidated financial statements

3

Donegal Financial Services Corporation

Consolidated Statements of Comprehensive Income (Loss)

(Dollars in Thousands)

Years Ended December 31, 2012, 2011, and 2010

	2012			2011			2010
Net Income (Loss)	$	9,401		$	4,196		$	(557	)
Other comprehensive income (loss):
Unrealized gains (losses) arising during the period on available-for-sale securities, net of income taxes of $734, $1,401, and $(12), respectively		1,425			2,721			(26	)
Reclassification adjustment for net gains on sales of available-for-sale securities included in net income (loss), net of income taxes of $506, $614, and $40, respectively		(982	)		(1,191	)		(77	)
Total other comprehensive income (loss)		443			1,530			(103	)
Total comprehensive income (loss)	$	9,844		$	5,726		$	(660	)

See notes to consolidated financial statements

4

Donegal Financial Services Corporation

Consolidated Statement of Shareholders’ Equity

(Dollars in Thousands)

Years Ended December 31, 2012, 2011, and 2010

	Common Stock		Surplus		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total
Balance, January 1, 2010	$	1	$	18,959	$	(1,263	)	$	571		$	18,268
Net loss		—		—		(557	)		—			(557	)
Other comprehensive loss, net of taxes		—		—		—			(103	)		(103	)
Balance, December 31, 2010		1		18,959		(1,820	)		468			17,608
Net income		—		—		4,196			—			4,196
Other comprehensive income, net of taxes		—		—		—			1,530			1,530
Cash capital contribution from Donegal Mutual Insurance Company		—		12,160		—			—			12,160
Cash capital contribution from Donegal Group Inc.		—		20,570		—			—			20,570
Stock capital contribution from Donegal Mutual Insurance Company		—		9,934		—			—			9,934
Balance, December 31, 2011		1		61,623		2,376			1,998			65,998
Net income		—		—		9,401			—			9,401
Other comprehensive income, net of taxes		—		—		—			443			443
Cash capital contribution from Donegal Mutual Insurance Company		—		338		—			—			338
Balance, December 31, 2012	$	1	$	61,961	$	11,777		$	2,441		$	76,180

See notes to consolidated financial statements

5

Donegal Financial Services Corporation

Consolidated Statement of Cash Flows

(Dollars in Thousands)

Years Ended December 31, 2012, 2011, and 2010

	2012			2011			2010
Cash Flows from Operating Activities
Net income (loss)	$	9,401		$	4,196		$	(557	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for loan losses		1,148			2,641			157
Depreciation and amortization		1,006			784			212
Intangible amortization		348			245			—
Accretion of junior subordinated debentures		284			58			—
Net gains on sales of securities		(1,488	)		(1,805	)		(117	)
Net loss (gain) on sales of other real estate owned		67			(16	)		(6	)
Gain on sales of loans		(775	)		(790	)		(367	)
Proceeds from sales of loans		23,358			23,313			20,373
Loans originated for sale		(25,518	)		(23,256	)		(19,369	)
Stock option expense		138			—			—
Net loss on sale of property and equipment		1			24			—
Amortization on securities, net		642			256			95
Earnings from bank-owned life insurance		(393	)		(256	)		—
Deferred income taxes (benefit)		2,765			(6,455	)		272
Decrease (increase) in accrued interest receivable and other assets		1,015			(6,418	)		(17	)
(Decrease) increase in other liabilities		(1,994	)		(983	)		1,742
Net cash provided by (used in) operating activities		10,005			(8,462	)		2,418
Cash Flows from Investing Activities
Purchases of securities available-for-sale		(114,226	)		(91,457	)		(15,859	)
Proceeds from sales of securities available-for-sale		44,170			47,762			2,004
Proceeds from maturities and principal repayments of securities available-for-sale		19,885			15,683			14,057
Net cash proceeds from bank acquisition		—			79,162			—
Net decrease (increase) in loans		47,335			9,659			(636	)
Net maturities of interest bearing time deposits		94			—			—
Redemption of restricted stock		929			841			42
Proceeds from the sale of property and equipment		7			8			—
Purchases of property and equipment		(598	)		(72	)		(17	)
Proceeds from sale of other real estate owned		627			140			34
Net cash (used in) provided by investing activities		(1,777	)		61,726			(375	)
Cash Flows from Financing Activities
Net (decrease) increase in deposits		(31,740	)		(26,258	)		2,349
Net decrease in short-term borrowings		—			—			(3,834	)
Proceeds from long-term debt		—			27,677			—
Repayment of long-term debt		—			(39,030	)		—
Capital contribution from Donegal Mutual Insurance Company		200			12,160
Capital contribution from Donegal Group Inc.		—			20,570			—
Net cash used in financing activities		(31,540	)		(4,881	)		(1,485	)
Net (decrease) increase in cash and cash equivalents		(23,312	)		48,383			558
Cash and Cash Equivalents, Beginning of Year		52,313			3,930			3,372
Cash and Cash Equivalents, End of Year	$	29,001		$	52,313		$	3,930

See notes to consolidated financial statements

6

Donegal Financial Services Corporation

Consolidated Statement of Cash Flows

(Dollars in Thousands)

Years Ended December 31, 2012, 2011, and 2010

	2012		2011		2010
Supplementary Cash Flows Information
Interest paid	$	3,296	$	2,270	$	1,331
Income taxes paid	$	1,100	$	1,698	$	48
Supplementary Schedule of Noncash Investing Activities
Loan transfers to other real estate owned	$	517	$	857	$	28
Acquisitions:
Assets Acquired:
Securities acquired through merger	$	—	$	33,391	$	—
Loans acquired through merger		—		291,903		—
Restricted stock acquired through merger		—		3,257		—
Property and equipment acquired through merger		—		12,588		—
Goodwill and intangible assets acquired through merger		—		2,811		—
Bank-owned life insurance acquired through merger		—		11,909		—
Other assets acquired through merger		—		14,194		—
	$	—	$	370,053	$	—
Liabilities Assumed:
Deposits acquired through merger	$	—	$	401,685	$	—
Junior subordinated debentures acquired through merger		—		7,045		—
Long-term debt acquired through merger		—		11,353		—
Other liabilities acquired through merger		—		3,883		—
	$	—	$	423,966	$	—

See notes to consolidated financial statements

7

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

1. Summary of Significant Accounting Policies

The accounting policies discussed below are followed consistently by Donegal Financial Services Corporation (the “Company”). These policies are in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and conform to common practices in the banking industry.

Nature of Operations

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Union Community Bank, FSB, (the “Bank”). All material intercompany transactions have been eliminated in consolidation. The Company is owned by Donegal Mutual Insurance Company (the “Insurance Company”) and Donegal Group Inc.

The Company is a one-bank holding company and provides full banking services through its subsidiary, Union Community Bank, FSB. The Bank serves primarily Lancaster County, Pennsylvania.

On May 6, 2011, Donegal Financial Services Corporation, the parent company of Province Bank, FSB, merged with Union National Financial Corporation, the parent company of Union National Community Bank, pursuant to which Union National Financial Corporation merged with and into Donegal Financial Services Corporation. As part of the transaction, Union National Community Bank merged with and into Province Bank, FSB. The entity is operating under the new name Union Community Bank, FSB. This series of transactions is collectively referred to as the “acquisition”.

Estimates

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the evaluation of investment securities for other than temporary impairment, the fair valuing of assets acquired and liabilities assumed, and the evaluation of goodwill for impairment.

Presentation of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, interest-bearing demand deposits with other banks, and short-term investments consisting of money market accounts and U.S. Treasury bills purchased with a maturity date of three months or less. Generally, federal funds are purchased and sold for one-day periods.

8

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

Securities

Management determines the appropriate classification of debt securities at the time of purchase, or acquisition, and re-evaluates such designation as of each balance sheet date.

Securities classified as available-for-sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available-for-sale are carried at fair value. Unrealized gains and losses are reported as increases or decreases in other comprehensive income (loss). Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Other-than-temporary impairment guidance on debt securities specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a loss due to credit quality. When an entity does not intend to sell the security, and it is more likely than not, the entity will not have to sell the security before the recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income (loss). The Company has not recognized any other-than-temporary impairment losses in the years ended December 31, 2012, 2011 or 2010.

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried in the aggregate at the lower of cost or estimated fair value. The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attribute of that loan. Net unrealized losses are recognized through a valuation allowance with corresponding charges in the consolidated statement of operations. The Company did not write down any loans held for sale during the years ended December 31, 2012, 2011 or 2010. All sales are made without recourse and are sold with servicing released.

Loans Receivable

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are generally stated at their outstanding unpaid principal balances, net of an allowance for credit losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan. Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method.

9

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

The loan portfolio is segmented into commercial and consumer loans. Commercial loans consist of the following classes: commercial real estate secured; commercial & industrial (“C&I”); and commercial other. Consumer loans consist of the following classes: residential mortgage loans; home equity installment loans and lines of credit; and consumer loans other.

Commercial Loans - Real Estate Secured - the Company engages in commercial lending secured by real estate in its primary market, Lancaster County, Pennsylvania, and surrounding areas. The majority of the commercial loan portfolio is secured by owner-occupied commercial office and manufacturing properties, as well as agricultural land. A smaller portion of the Company’s commercial real estate portfolio is secured by commercial real estate development and construction projects.

Generally, commercial real estate loans have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property, and typically require the personal guarantees of the principals of the borrowing entities. Terms of construction loans depend on the specifics of the project such as estimated absorption rates, estimated time to complete, etc. In underwriting commercial real estate loans, the Company performs a thorough analysis of the financial condition and cash flows of the borrower, the borrower’s credit history, the borrower’s character, and the reliability and predictability of the cash flow generated by the business and property securing the loan. Appraisals supporting the underwriting of properties securing commercial real estate loans are performed by independent appraisers.

Commercial real estate loans generally present a higher level of risk than other types of loans primarily due to adverse economic conditions causing declines in the values of the collateral. This market value risk is somewhat mitigated for owner-occupied commercial real estate loans since the performance and cash flow of the business is the primary source of loan repayment, and not the sale or rent of the real estate.

Commercial Loans - C & I, and Other - The Company originates commercial loans not secured by real estate, but instead by business operations and non-real-estate assets, generally referred to as commercial and industrial loans. These commercial and industrial loans are made primarily to businesses located in the Company’s primary market, Lancaster County, Pennsylvania, and surrounding areas. These loans are used for various business purposes which include short-term loans and lines of credit to finance machinery and equipment purchases, and inventory and accounts receivable management, supporting the businesses growth, stability, and profitability.

Generally, the maximum term for commercial loans used for machinery and equipment purchases is based on the projected useful life of such machinery and equipment. Most working capital and business lines of credit are written on demand and require annual renewal. Commercial and industrial loans are generally secured with short-term assets; however, in some cases, additional collateral such as junior liens on real estate is provided as additional security for the loan. Loan-to-values have been established by the Company, specific to the type of business collateral, and generally do not exceed 75% of the value of the underlying business assets. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports and collateral appraisals.

10

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

In underwriting commercial and industrial loans, an analysis of the borrower’s capacity to repay the loan, the adequacy of the borrower’s capital and collateral, the borrower’s character, as well as an evaluation of the local and broader economic conditions affecting the borrower’s business, is performed. Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Company’s underwriting analysis.

Commercial loans generally present a higher level of risk than other types of loans primarily due to adverse economic conditions having a negative effect on business sales, receivable collections, and, cash flows.

Residential Mortgage Loans, and Home Equity Loans and Lines of Credit - The Company originates one-to-four-family first position residential mortgage loans, and junior lien home equity loans and lines of credit, through the Company’s marketing efforts, to present customers, new walk-in customers, and referred customers. Residential mortgage and home equity credits include fixed-rate and adjustable rate mortgages with terms up to a maximum of 20 years for both permanent structures and those under construction. These one-to-four-family mortgage originations are secured by residential properties primarily located in the Company’s primary market, Lancaster County, Pennsylvania, and surrounding areas. The majority of residential mortgage and home equity credits have a total loans-to-value ratio of 80% or less. If the total of residential mortgage and home equity loans and lines on a residential property exceed 80% of the underlying real estate value, the borrowers are required to have private mortgage insurance.

In underwriting one-to-four-family residential mortgage and home equity credits, the Company evaluates both the borrower’s ability to make monthly payments (from the borrower’s existing financial condition and sustainable income sources), and the value of the residential property securing the loan. Real estate properties securing residential mortgage and home equity credits are appraised by independent appraisers. The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (and flood insurance, if necessary) in an amount not less than the appraised value of the property securing the loan. The Company has not engaged in sub-prime residential mortgage originations.

Residential mortgage and home equity credits present a credit risk to the Company, but generally at a lower risk profile as compared to other types of loans since, though adverse economic conditions may cause a decline in property value or cessation in borrower repayment ability, the loan-to-value underwriting standards and generally higher marketability of residential real estate provides for more effective collateral liquidation to cover outstanding loan balances.

Consumer Loans, Other - The Company offers a variety of secured and unsecured consumer loans, including vehicle loans, loans secured by savings deposits, and unsecured consumer loans. Consumer loan terms vary according to the type and value of collateral and creditworthiness of the borrower. In underwriting consumer loans, a thorough analysis of the borrower’s willingness and financial ability to repay the loan as agreed is performed. The ability to repay shall be determined by the borrower’s employment history, current financial conditions, and credit background.

11

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

Consumer loans not secured by real estate generally entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Nonaccrual Loans - Generally, a loan is classified as nonaccrual, and the accrual of interest on such loan is discontinued, when (1) the contractual payment of principal or interest has become 90 days past due or (2) management has serious doubts about the further collectability of principal or interest, even though the loan is currently performing. A loan 90 days or more past due may remain on accrual status if it is in the process of collection and is either guaranteed or well-secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans including impaired loans is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when both principal and interest are brought current, the loan has performed in accordance with the contractual terms for a reasonable period of time (generally six months), and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on the contractual due dates for loan payments.

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a monthly evaluation of the adequacy of the allowance, which is based on the Company’s past loan loss experience, industry peer analysis, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

12

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

The allowance for loan losses consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the (i) discounted cash flows, or (ii) collateral value, or (iii) observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity loans and home equity lines of credit, and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for relevant qualitative factors. Separate qualitative factor adjustments are made for higher-risk criticized loans that are not impaired.

Qualitative risk factors used by the Company to adjust historical loan loss rates include:

1. Lending policies and procedures including underwriting standards and risk assessment.

2. Quality of the Company’s credit and collection processes.

3. National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.

4. Nature and volume of the portfolio and terms of loans.

5. Experience, ability, and depth of lending management and staff.

6. Volume and severity of past due, classified and nonaccrual loans as well as trends and other loan modifications.

7. Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors.

8. Existence and effect of any concentrations of credit and changes in the level of such concentrations.

9. Effect of external factors, such as competition and legal and regulatory requirements.

Each qualitative factor is assigned a value that is added to or deducted from the historical loss rate for separately defined loan pools to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation.

A relatively small component of the allowance for loan losses is an unallocated component which covers uncertainties that could affect management’s estimate of probable losses. The unallocated component reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating the specific and general loss components in the portfolio.

13

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

If, based on current information and events, it is probable that the Company will be unable to collect both the contractual principal and interest payments as scheduled according to a loan’s contractual terms, the loan is considered impaired. However, management determines the significance of payment delays and shortfalls on a case-by-case basis and may judge an insignificant delay or insignificant shortfall in the amount of payments as not reflective of an impairment. For example, a loan is not considered impaired during a period of delay in payment if the Company expects to collect all amounts due including interest accrued at the contractual interest rate for the period of delay.

Measuring impairment of a loan requires judgment and estimates, and the eventual outcomes may differ from those estimates. When the Company determines that a loan is impaired, the Company measures impairment based on the present value of expected future cash flows, or based upon a loan’s observable market price, or based upon the fair value of collateral if the loan is collateral dependent. When the Company uses the fair value of collateral to measure impairment where some or all of the repayment of the loan is dependent upon the liquidation of the collateral, the fair value of the collateral shall be adjusted by the estimated costs of liquidation.

For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are associated with a commercial relationship or the subject of a troubled debt restructuring agreement.

Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.

14

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

The allowance calculation methodology includes further segregation of loan pools into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged off against the allowance for loan losses. Loans not criticized are rated pass.

In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to or charge-offs against the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management.

Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

Reserve for Unfunded Lending Commitments - The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the balance sheet. The Company had a reserve of $129,000 as of December 31, 2012 and $124,000 as of December 31, 2011.

Acquired Loans

Loans that we acquire in connection with acquisitions are recorded at fair value with no carryover of the related allowance for loan losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows will require us to evaluate the need for an additional allowance for credit losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount which we will then reclassify as accretable discount that will be recognized into interest income over the remaining life of the loan.

15

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

Acquired loans that met the criteria for impaired or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent if we expect to fully collect the new carrying value (i.e. fair value) of the loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. In addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value adjustment.

Loans acquired through business combinations that do not meet the specific criteria of Accounting Standards Codification (“ASC”) 310-30, but for which a discount is attributable at least in part to credit quality, are also accounted for in accordance with this guidance. As a result, related discounts are recognized subsequently through accretion based on the contractual cash flows of the acquired loans.

Business Combinations and Core Deposit Intangible

We account for our merger and acquisitions using the acquisition accounting method. Acquisition accounting requires the total purchase price to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain intangible assets that must be recognized. Typically, this allocation results in the purchase price exceeding the fair value of net assets acquired, which is recorded as goodwill. Core deposit intangibles are a measure of the value of checking, money market and savings deposits acquired in business combinations accounted for under the purchase method. Core deposit intangibles are being amortized over the sum of year’s digits. We complete an annual impairment test for goodwill and other intangible assets. Identifiable intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

Goodwill

Goodwill represents the excess of the purchase price over the underlying fair value of merged entities. We assess goodwill for impairment annually as of October 1 of each year. If certain events occur which indicate goodwill might be impaired between annual tests, goodwill must be tested when such events occur. In making this assessment, we consider a number of factors including operating results, business plans, economic projections, anticipated future cash flows, current market data, etc. There are inherent uncertainties related to these factors and our judgment in applying them to the analysis of goodwill impairment. Changes in economic and operating conditions could result in goodwill impairment in future periods. The Company did not identify any impairment on its outstanding goodwill from its most recent testing which was performed as of October 1, 2012. Goodwill was evaluated in accordance with ASC 350-20 using a qualitative analysis.

Transfers of Financial Assets

Transfers of financial assets, including loan and loan participation sales, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

16

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

Property and Equipment

Buildings and improvements, leasehold improvements, and furniture, fixtures and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the assets’ estimated useful lives.

Restricted Investment in Bank Stock

Federal law requires a member institution of the Federal Home Loan Bank system to hold stock of its district Federal Home Loan Bank according to a predetermined formula. This restricted stock is carried at cost.

Management evaluates the restricted stock for impairment in accordance with ASC 942, Financial Services - Depository and Lending. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

Management believes no impairment charge was necessary related to the FHLB restricted stock in 2012, 2011 or 2010.

Bank-Owned Life Insurance

The Company invests in bank-owned life insurance (“BOLI”) as a source of funding for employee benefit expenses. BOLI involves the purchase of life insurance by the Company on a chosen group of employees. The Company is the owner and is a joint or sole beneficiary of the policies. This life insurance investment is carried as an asset at the cash surrender value of the underlying policies. Income from the increase in cash surrender value of the policies and income from the realization of death benefits is reflected in non-interest income.

ASC Topic 715, Compensation - Retirement Benefits, requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The Company has certain split-dollar life insurance arrangements as part of the Company’s bank-owned life insurance program, and recognized its liability and related compensation expense in accordance with ASC Topic 715. Compensation expense related to this split-dollar life insurance was $43,000, $16,000, and $-0- for the years ended December 31, 2012, 2011 and 2010, respectively.

17

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

Mortgage Servicing Rights

Mortgage servicing rights are recognized as assets upon the sale of a mortgage loan. A portion of the cost of the loan is allocated to the servicing right based upon relative fair value. The fair value of servicing rights is based on the present value of estimated future cash flows for pools of mortgages sold stratified by rate and maturity date. Assumptions that are incorporated in the valuation of servicing rights include assumptions about prepayment speeds on mortgages and the cost to service loans. Servicing rights are reported in intangible assets and are amortized over the estimated period of future servicing income to be received on the underlying mortgage loans. The carrying amount of mortgage servicing rights was $109,000 and $150,000 at December 31, 2012 and 2011. Any related amortization expense is netted against loan servicing fee income and is reflected in the income statement in other non-interest income. Amortization expense was $42,000, $22,000, and $-0- at December 31, 2012, 2011, and 2010, respectively. Servicing rights are evaluated for impairment based upon estimated fair value as compared to unamortized book value.

The Company retains the servicing rights on certain mortgage loans sold to the FHLB and receives mortgage banking fee income based upon the principal balance outstanding. Total loans serviced for the FHLB amounted to $10,858,000 and $15,042,000 at December 31, 2012 and 2011. These mortgage loans sold to the FHLB and serviced by the Company are not reflected in the balance sheet.

Other Real Estate Owned

Other real estate owned (“OREO”) includes assets acquired through foreclosure, deed in-lieu of foreclosure, and loans identified as in-substance foreclosures. A loan is classified as an in-substance foreclosure when effective control of the real estate collateral has been taken prior to completion of formal foreclosure proceedings. OREO is held for sale and is recorded at fair value less estimated costs to sell. Net costs to maintain OREO and subsequent net losses or gains attributable to OREO liquidations are included in the income statement in other expense as realized. No depreciation or amortization expense is recognized.

Advertising Costs

The Company follows the policy of charging the costs of advertising to expense as incurred.

Income Taxes

The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes).

The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

18

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.

The Company recognizes interest and penalties on income taxes as a component of income tax expense. Tax years subject to examination by tax authorities are the years ended December 31, 2011, 2010, and 2009.

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the consolidated balance sheet when they are funded.

Subsequent Events

The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of December 31, 2012 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through March 8, 2013, the date these consolidated financial statements were available to be issued.

Reclassifications

Certain amounts in the 2011 and 2010 consolidated financial statements have been reclassified to conform to the 2012 presentation. Such reclassifications had no impact on net income.

2. Merger

On May 6, 2011, Donegal Financial Services Corporation, the parent company of Province Bank, FSB, merged with Union National Financial Corporation, the parent company of Union National Community Bank, with Donegal Financial Services Corporation as the surviving entity. As part of the transaction, Union National Community Bank merged with and into Province Bank, FSB. The merged Bank is operating under the new name Union Community Bank, FSB.

19

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

The assets and liabilities of Union National Community Bank and Union National Financial Corporation were recorded on the consolidated balance sheet at their estimated fair value as of May 6, 2011, and their results of operations have been included in the consolidated income statement since such date.

Included in the purchase price was goodwill and core deposit intangible of $901,000 and $1,738,000, respectively. The core deposit intangible will be amortized over a ten-year period using a sum of the year’s digits basis. The goodwill will not be amortized, but will be measured annually for impairment. Core deposit intangible amortization expense of $306,000 and $223,000 was recorded in 2012 and 2011. Intangible amortization expense projected for the succeeding five years beginning 2013 is estimated to be $271,000, $237,000, $203,000, $168,000 and $134,000 per year respectively and $196,000 in total for years after 2017.

The allocation of the purchase price follows (in thousands):

Cash from Donegal Group Inc.	$	12,176
Cash from Donegal Mutual Insurance Company		3,139
Value of 248,999 shares of Union National Financial Corporation common stock contributed by Donegal Mutual Insurance Company		2,054
Value of 600,000 shares of Donegal Group Inc. Class A common stock contributed by Donegal Mutual Insurance Company		7,880
Total cost of acquisition		25,249
Union National Financial Corporation net assets acquired:
Shareholders’ equity		29,306
Estimated adjustments to reflect assets acquired and liabilities assumed at fair value:
Total fair value adjustments		(7,511	)
Associated deferred income taxes		2,553
Fair value adjustment to net assets acquired, net of tax		(4,958	)
Total Union National Financial Corporation net assets acquired		24,348
Goodwill resulting from the merger	$	901

20

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

The following table summarizes the estimated fair value of the assets acquired (in thousands):

Total purchase price	$	25,249
Net assets acquired:
Cash and due from banks		79,162
Securities available-for-sale		33,391
Loans		291,903
Property and equipment		12,588
Restricted investment in bank stocks		3,257
Bank-owned life insurance		11,909
Core deposit intangible		1,738
Accrued interest receivable		1,529
Deferred tax asset		7,354
Other assets		5,483
Non-interest bearing deposits		(72,841	)
Interest-bearing deposits		(328,844	)
Borrowings		(11,353	)
Junior subordinated debentures		(7,045	)
Other liabilities		(3,883	)
		24,348
Goodwill	$	901

The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $316,448,000. The table below illustrates the fair value adjustments made to the amortized costs basis in order to present a fair value of the loans acquired (in thousands).

Gross amortized costs basis at May 6, 2011	$	316,448
Market rate adjustment		(4,178	)
Credit fair value adjustment on pools of homogeneous loans		(9,118	)
Credit fair value adjustment on distressed loans		(11,249	)
Fair value of purchased loans at May 6, 2011	$	291,903

The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the stated rates of the acquired loans. The credit adjustment made on pools of homogeneous loans represents the changes in credit quality of the underlying borrowers from the loan inception to the acquisition date. The credit adjustment on distressed loans is derived in accordance with ASC 310-30-30 and represents the portion of the loan balance that has been deemed uncollectible based on our expectations of future cash flows for each respective loan.

21

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

Information about the acquired Union National Financial Corporation distressed loan portfolio as of May 6, 2011 is as follows (in thousands):

Contractually required principal and interest at acquisition	$	23,871
Contractual cash flows not expected to be collected (nonaccretable discount)		(9,613	)
Expected cash flows at acquisition		14,258
Interest component of expected cash flows (accretable discount)		(1,636	)
Fair value of acquired loans	$	12,622

ASC 805 allows adjustments to the goodwill calculation based on new information obtained during the measurement period. As a result of this guidance, the Company identified a $539,000 adjustment to the deferred tax asset during the measurement period, which resulted in a decrease of goodwill of $539,000, and an increase in deferred tax assets which has been reflected in the 2011 consolidated financial statements.

3. Restrictions on Cash and Cash Equivalents

The Company is required to maintain cash reserve balances for the Federal Reserve Bank. The total required reserve balances were $8,444,000 and $9,040,000 as of December 31, 2012 and 2011, respectively.

4. Securities Available-for-Sale

The amortized cost, related fair value and unrealized gains and losses of securities available-for-sale are as follows at December 31, 2012 and 2011 (in thousands):

	2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. treasuries	$	3,014	$	2	$	(14	)	$	3,002
U.S. government agencies securities		16,521		223		(39	)		16,705
Corporate debt securities		9,550		334		(14	)		9,870
Tax-free municipal securities		42,111		1,472		(249	)		43,334
Taxable municipal securities		3,347		494		—			3,841
U.S. government sponsored enterprise mortgage-backed securities		69,525		1,525		(36	)		71,014
Equity securities		291		—		—			291
	$	144,359	$	4,050	$	(352	)	$	148,057

22

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

	2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. treasuries	$	6,115	$	126	$	—		$	6,241
U.S. government agencies securities		10,607		163		(2	)		10,768
Corporate debt securities		4,831		50		(7	)		4,874
Tax-free municipal securities		19,585		1,123		(3	)		20,705
Taxable municipal securities		3,350		355		—			3,705
U.S. government sponsored enterprise mortgage-backed securities		48,813		1,224		(2	)		50,035
Equity securities		41		—		—			41
	$	93,342	$	3,041	$	(14	)	$	96,369

Certain obligations of the U.S. Government are pledged to secure public deposits and for other purposes as required or permitted by law. The carrying value of the pledged assets was $35,305,000 and $35,219,000 at December 31, 2012 and 2011, respectively.

The amortized cost and fair value of securities as of December 31, 2012, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without any penalty (in thousands).

	Amortized Cost		Fair Value
Due in one year or less	$	2,012	$	2,040
Due after one year through five years		5,353		5,534
Due after five years through ten years		25,409		25,936
Due after ten years		41,769		43,242
U.S. government sponsored enterprise mortgage-backed securities		69,525		71,014
Equity securities		291		291
	$	144,359	$	148,057

23

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2012 and 2011 (in thousands):

	2012
	Less than 12 Months					12 Months or More				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. treasuries	$	1,998	$	(14	)	$	—	$	—	$	1,998	$	(14	)
U.S. government agencies securities		4,740		(39	)		—		—		4,740		(39	)
Corporate debt securities		1,844		(14	)		—		—		1,844		(14	)
Tax-free municipal securities		9,713		(249	)		—		—		9,713		(249	)
U.S. government sponsored enterprise mortgage-backed securities		10,151		(36	)		—		—		10,151		(36	)
	$	28,446	$	(352	)	$	—	$	—	$	28,446	$	(352	)

	2011
	Less than 12 Months					12 Months or More				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government agencies securities	$	748	$	(2	)	$	—	$	—	$	748	$	(2	)
Corporate debt securities		1,893		(7	)		—		—		1,893		(7	)
Tax-free municipal securities		551		(3	)		—		—		551		(3	)
U.S. government sponsored enterprise mortgage-backed securities		945		(2	)		—		—		945		(2	)
	$	4,137	$	(14	)	$	—	$	—	$	4,137	$	(14	)

The Company has 25 and 5 securities in an unrealized loss position at December 31, 2012 and 2011, respectively. Unrealized losses on these securities have not been recognized into earnings because the issuers of the securities are of high credit quality, management has the ability and intent to hold these securities for the foreseeable future and does not believe they will have to sell the securities or be required to sell the securities, and the declines in fair value are largely due to market interest rates and not a result of credit risk. The fair values of these securities are expected to recover as they approach maturity and/or market interest rates fluctuate.

Gross realized losses on securities sold during 2012, 2011, and 2010 totaled $3,000, $34,000, and $-0-, respectively. Gross realized gains on securities sold during 2012, 2011, and 2010 totaled $1,491,000, $1,839,000, and $117,000, respectively.

24

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

5. Loans and Allowance for Loan Losses

Credit Quality Indicators

The following tables present the classes of the loan portfolio summarized by the aggregate credit risk ratings (special mention, substandard and doubtful) within the Company’s internal risk rating system as of December 31, 2012 and 2011 (in thousands):

	2012
	Pass		Special Mention		Sub-standard		Doubtful		Total
Commercial loans:
Real estate secured	$	143,752	$	2,695	$	19,603	$	—	$	166,050
C & I		23,429		191		4,182		—		27,802
Other		4,265		—		—		—		4,265
Residential mortgage loans		9,631		—		168		—		9,799
Home equity installments and lines of credit		81,866		—		499		—		82,365
Consumer loans, other		4,232		—		32		—		4,264
	$	267,175	$	2,886	$	24,484	$	—	$	294,545

	2011
	Pass		Special Mention		Sub-standard		Doubtful		Total
Commercial loans:
Real estate secured	$	175,026	$	3,553	$	22,281	$	—	$	200,860
C & I		27,544		470		3,468		—		31,482
Other		8,211		—		—		—		8,211
Residential mortgage loans		12,248		—		202		—		12,450
Home equity installments and lines of credit		84,607		—		289		—		84,896
Consumer loans, other		4,997		—		24		—		5,021
	$	312,633	$	4,023	$	26,264	$	—	$	342,920

25

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

Loans that are individually and collectively evaluated for impairment, as well as the related allowance for loan loss at December 31, 2012 and 2011 are presented below (in thousands):

	2012
	Total				Individually Evaluated for Impairment				Loans Acquired with Credit Deterioration				Collectively Evaluated for Impairment
	Unpaid Balance		Allowance for Loan Losses		Unpaid Balance		Allowance for Loan Losses		Unpaid Balance		Allowance for Loan Losses		Unpaid Balance		Allowance for Loan Losses
Commercial loans:
Real estate secured	$	166,050	$	2,451	$	—	$	—	$	—	$	—	$	166,050	$	2,451
C & I		27,802		645		—		—		—		—		27,802		645
Other		4,265		29		—		—		—		—		4,265		29
Residential mortgage loans		9,799		78		—		—		—		—		9,799		78
Home equity installments and lines of credit		82,365		655		—		—		—		—		82,365		655
Consumer loans, other		4,264		71		—		—		—		—		4,264		71
Unallocated		—		109		—		—		—		—		—		109
	$	294,545	$	4,038	$	—	$	—	$	—	$	—	$	294,545	$	4,038

	2011
	Total				Individually Evaluated for Impairment				Loans Acquired with Credit Deterioration				Collectively Evaluated for Impairment
	Unpaid Balance		Allowance for Loan Losses		Unpaid Balance		Allowance for Loan Losses		Unpaid Balance		Allowance for Loan Losses		Unpaid Balance		Allowance for Loan Losses
Commercial loans:
Real estate secured	$	200,860	$	2,180	$	—	$	—	$	—	$	—	$	200,860	$	2,180
C & I		31,482		375		—		—		—		—		31,482		375
Other		8,211		32		—		—		—		—		8,211		32
Residential mortgage loans		12,450		81		—		—		—		—		12,450		81
Home equity installments and lines of credit		84,896		609		—		—		—		—		84,896		609
Consumer loans, other		5,021		85		—		—		—		—		5,021		85
Unallocated		—		51		—		—		—		—		—		51
	$	342,920	$	3,413	$	—	$	—	$	—	$	—	$	342,920	$	3,413

26

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

The following tables summarize the activity by segments of the allowance for loan losses for the years ended December 31, 2012 and 2011 (in thousands):

	2012
	Commercial Loans									Residential Mortgage Loans			Home  Equity Installments and Lines of Credit			Consumer Loans, Other			Unallocated		Total
	Real Estate Secured			C & I			Other
Beginning balance, January 1, 2012	$	2,180		$	375		$	32		$	81		$	609		$	85		$	51	$	3,413
Charge-offs		(18	)		(18	)		—			(19	)		(170	)		(307	)		—		(532	)
Recoveries		—			5			—			—			1			3			—		9
Provisions		289			283			(3	)		16			215			290			58		1,148
Ending balance, December 31, 2012	$	2,451		$	645		$	29		$	78		$	655		$	71		$	109	$	4,038

	2011
	Commercial Loans								Residential Mortgage Loans			Home Equity Installments and Lines of Credit		Consumer Loans, Other			Unallocated		Total
	Real Estate Secured			C & I			Other
Beginning balance, January 1, 2011	$	742		$	54		$	—	$	77		$	123	$	19		$	—	$	1,015
Charge-offs		(40	)		(181	)		—		(30	)		—		(41	)		—		(292	)
Recoveries		4			45			—		—			—		—			—		49
Provisions		1,474			457			32		34			486		107			51		2,641
Ending balance, December 31, 2011	$	2,180		$	375		$	32	$	81		$	609	$	85		$	51	$	3,413

The changes in the allowance for loan losses for the years ended December 31, 2012, 2011 and 2010 are as follows (in thousands):

	2012			2011			2010
Balance, beginning	$	3,413		$	1,015		$	858
Charge-offs		(532	)		(292	)		—
Recoveries		9			49			—
Provision for loan losses		1,148			2,641			157
Balance, ending	$	4,038		$	3,413		$	1,015

27

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2012 and 2011 (in thousands):

	2012
	30-59 Days Past Due		60-89 Days Past Due		>90 Days Past due		Non- Accrual Loans		Total Past Due and Non- Accrual		Current Loans		Total Loans Receivable
Commercial loans:
Real estate secured	$	15	$	—	$	134	$	2,337	$	2,486	$	154,516	$	157,002
C & I		—		14		2		38		54		26,694		26,748
Other		—		—		—		—		—		4,265		4,265
Acquired with credit deterioration		359		374		—		701		1,434		8,668		10,102
Residential mortgage loans:
Residential mortgage loans		78		133		—		379		590		9,151		9,741
Acquired with credit deterioration		—		—		—		58		58		—		58
Home equity loans:
Home equity installments and lines of credit		220		110		—		482		812		81,526		82,338
Acquired with credit deterioration		—		—		—		—		—		27		27
Consumer loans, other		6		18		6		48		78		4,186		4,264
	$	678	$	649	$	142	$	4,043	$	5,512	$	289,033	$	294,545

28

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

	2011
	30-59 Days Past Due		60-89 Days Past Due		>90 Days Past due		Non- Accrual Loans		Total Past Due and Non- Accrual		Current Loans		Total Loans Receivable
Commercial loans:
Real estate secured	$	189	$	369	$	308	$	2,009	$	2,875	$	188,383	$	191,258
C & I		—		13		90		108		211		30,291		30,502
Other		—		—		—		—		—		8,211		8,211
Acquired with credit deterioration		—		82		345		1,374		1,801		8,781		10,582
Residential mortgage loans:
Residential mortgage loans		66		32		—		1,185		1,283		11,123		12,406
Acquired with credit deterioration		—		—		—		—		—		44		44
Home equity loans:
Home equity installments and lines of credit		939		85		42		427		1,493		83,376		84,869
Acquired with credit deterioration		—		—		—		—		—		27		27
Consumer loans, other		177		317		4		—		498		4,523		5,021
	$	1,371	$	898	$	789	$	5,103	$	8,161	$	334,759	$	342,920

The Company identified no loans that were considered troubled debt restructurings during the periods presented, and did not have any troubled debt restructurings as of December 31, 2012 or 2011.

The following table provides activity for the accretable yield of purchased impaired loans for the years ended December 31, 2011 and 2012 (in thousands):

Accretable yield, January 1, 2011	$	—
Acquisition of impaired loans		1,636
Accretable yield amortized to interest income		(811	)
Reclassification from non-accretable difference (1)		978
Accretable yield, December 31, 2011		1,803
Accretable yield amortized to interest income		(3,900	)
Reclassification from non-accretable difference (1)		2,694
Accretable yield, December 31, 2012	$	597

(1) Reclassification from non-accretable difference represents an increase to the estimated cash flows to be collected on the underlying portfolio.

29

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

As of December 31, 2010, the Company had an average investment in impaired loans of $2,894,000 and interest income recognized on impaired loans on the accrual basis of $171,000. No additional funds are committed to be advanced in connection with impaired loans.

6. Property and Equipment

The components of property and equipment at December 31, 2012 and 2011 are as follows (in thousands):

	2012			2011
Land and Land Improvements	$	3,328		$	3,328
Buildings and Improvements		7,414			7,414
Leasehold improvements		1,398			1,362
Furniture, fixtures and equipment		2,562			2,262
Construction and Development		—			3
		14,702			14,369
Accumulated depreciation and amortization		(2,873	)		(2,124	)
	$	11,829		$	12,245

Total depreciation and amortization expense was $1,006,000, $784,000 and $212,000 for the years ended December 31, 2012, 2011, and 2010, respectively.

The Company leases its main office from the Insurance Company. On September 1, 2006, the Company renewed the lease for an additional term of eight years. Lease expense for the years ended December 31, 2012, 2011, and 2010 was $27,000, $25,000, and $24,000 respectively under this related party operating lease.

Future minimum lease payments by year, including payments due under renewal agreements, are as follows (in thousands):

	Lease Obligation		Sublease Income		Net Lease Obligations		Obligation to Related Party
2013	$	800	$	210	$	590	$	28
2014		663		215		448		19
2015		619		219		400		—
2016		669		223		446		—
2017		667		227		440		—
Thereafter		5,057		1,989		3,068		—

30

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

Net rent expense at December 31, 2012, 2011 and 2010 consisted of the following (in thousands):

	2012			2011			2010
Rental expense	$	900		$	614		$	109
Sublease rental income		(342	)		(234	)		—
Net rental expense	$	558		$	380		$	109

7. Deposits

The components of deposits at December 31, 2012 and 2011 are as follows (in thousands):

	2012		2011
Demand, non-interest bearing	$	75,317	$	79,662
Demand, interest bearing		88,941		86,183
Savings and money market		113,780		112,564
Time, $100,000 and over		42,848		50,982
Time, other		101,950		125,185
Total deposits	$	422,836	$	454,576

At December 31, 2012, the scheduled maturities of time deposits are as follows (in thousands):

2013	$	74,005
2014		37,726
2015		22,805
2016		5,613
2017		4,584
Thereafter		65
	$	144,798

8. Borrowings

As of December 31, 2012, the Company has a maximum borrowing capacity of $159,634,200 from the Federal Home Loan Bank, of which $-0- was outstanding as of December 31, 2012. Federal Home Loan Bank advances are secured by qualifying assets of the Company. During 2011, the Company prepaid $11,353,000 of FHLB borrowings with a prepayment penalty of $13,000. As of December 31, 2011, the Company had a maximum borrowing capacity of $164,589,000 from the Federal Home Loan Bank of which $0 was outstanding as of December 31, 2011.

31

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

9. Junior Subordinated Debentures

Through the acquisition of Union National Financial Corporation, the Company acquired three issuances of junior subordinated debentures with a contractual value of $17,341,000 and a fair market value of $7,045,000. The outstanding balance as of December 31, 2012 was $7,387,000 and $7,103,000 at December 31, 2011.

The Bank acquired a junior subordinated debenture issued on July 28, 2006, with a contractual amount of $6,000,000 due September 15, 2021 with a five-year initial fixed rate of 7.17%, and then an annual coupon rate, reset quarterly, based on three-month LIBOR plus 1.65%. The first coupon reset date was September 15, 2011. The outstanding balance as of December 31, 2012 was $3,159,000, the coupon rate was 1.96% and the market yield was 10.07%. The outstanding balance was $2,965,000, the coupon rate was 2.20%, and the market yield was 10.56% at December 31, 2011.

The Company acquired a debenture issued in December 2003 by Union National Capital Trust I (“UNCT 1”) in the amount of $8,248,000. The floating-rate debenture is due January 23, 2034, of which $248,000 is related to the Company’s capital contribution. UNCT I provides for quarterly distributions at a variable annual coupon rate that is reset quarterly, based on three-month LIBOR plus 2.85%. The outstanding balance was $3,263,000, the coupon rate was 3.16%, and the market yield was 10.06% at December 31, 2012. The outstanding balance was $3,198,000, the coupon rate was 3.12%, and the market yield was 9.95% at December 31, 2011.

The Company acquired a debenture issued in October 2004, by Union National Capital Trust II (“UNCT II”) in the amount of $3,093,000. The floating-rate debenture is due November 23, 2034, of which $93,000 is related to the Company’s capital contribution. UNCT II provides for quarterly distributions at a variable annual coupon rate that is reset quarterly, based on three-month LIBOR plus 2.00%. The outstanding balance was $965,000, the coupon rate was 2.31% and the market yield was 10.11% at December 31, 2012. The outstanding balance was $940,000, the coupon rate was 2.26% and the market yield was 9.94% at December 31, 2011.

All of the junior subordinated debentures are callable at the Company’s option beginning at five years from the date of issuance. These debentures do not have to be called in full. UNCT I became callable in December 2008, UNCT II became callable in October 2009, and the Bank’s junior subordinated debenture became callable in September 2011. All three issuances of junior subordinated debentures qualify as a component of risk-based capital for regulatory purposes.

32

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

10. Income Taxes

The components of the income tax expense for the years ended December 31, 2012, 2011, and 2010 are as follows (in thousands):

	2012		2011			2010
Federal:
Current	$	1,287	$	8,347		$	181
Deferred		2,765		(6,455	)		272
		4,052		1,892			453
State, current		691		716			96
Balance, ending	$	4,743	$	2,608		$	549

A reconciliation of the statutory income tax at a rate of 34% to the income tax expense included in the consolidated statement of operations is as follows for 2012, 2011 and 2010.

	2012			2011			2010
Federal income tax at statutory rate		34.0	%		34.0	%		34.0	%
State tax expense, net of federal benefit		3.2			7.0			(789.8	)
Tax exempt income, net of disallowed interest expense		(2.7	)		(2.7	)		—
Bank owned life insurance		(1.0	)		(1.3	)		—
Stock option expense		0.3			—			—
Nondeductible merger costs		—			1.2			(6,068.7	)
Other		(0.3	)		0.1			(4.4	)
Effective income tax rate		33.5	%		38.3	%		(6,828.9	)%

33

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

The components of the net deferred tax asset, included in other assets on the consolidated balance sheet, at December 31, 2012 and 2011 are as follows (in thousands):

	2012			2011
Deferred tax assets:
Allowance for loan loss	$	1,373		$	1,132
State net operating loss carryforward		315			106
Federal net operating loss carryforward		602			1,040
Alternative minimum tax credit carryforward		864			864
Nonaccrual interest		28			82
Purchase accounting adjustments		941			3,407
Low income housing tax credit carryforward		437			519
Other		353			—
		4,913			7,150
Valuation allowance		(315	)		(106	)
Total deferred tax assets, net of valuation allowance		4,598			7,044
Deferred tax liabilities:
Property and equipment		(561	)		(236	)
Unrealized gain on available for sale securities		(1,257	)		(1,029	)
Other		—			(6	)
Net deferred tax liabilities		(1,818	)		(1,271	)
Net deferred tax assets	$	2,780		$	5,773

The valuation allowance at December 31, 2012 and 2011 relates to state net operating loss carryforwards for which realizability is uncertain. At December 31, 2012, 2011, and 2010 the Company had state net operating loss carryforwards of $3,153,000, $1,061,000 and $1,652,000, respectively, which are available to offset future state taxable income, and expire at various dates through 2032. At December 31, 2012 and 2011, the Company had no valuation allowance established against its federal net operating loss carryforward, low income housing tax credit carryforward, or alternative minimum tax credit carryforward, as management believes the Company will generate sufficient future taxable income to fully utilize these deferred tax assets. The federal net operating loss carryforward will expire in 2030, the low income housing credit carryforward will expire between 2021 and 2027, and the alternative minimum tax credit carryforward has no expiration.

34

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible and tax planning strategies, management believes it is more likely than not that the Company will realize the benefits of these deferred tax assets, net of any valuation allowance at December 31, 2012.

11. Transactions with Executive Officers, Directors and Affiliated Companies

The Company has had, and may be expected to have in the future, banking transactions with its executive officers, directors, their immediate families and affiliated companies (commonly referred to as related parties). Deposits of related parties totaled $8,544,000 and $12,043,000 at December 31, 2012 and 2011, respectively. At December 31, 2012 and 2011 related party loans totaled $3,829,000 and $4,316,000, respectively. During 2012, loan advances, repayments and removal from related party status totaled $2,552,000, $2,926,000, and $113,000, respectively.

During 2011 and 2010, Donegal Group Inc. incurred stock based compensation on behalf of employees of the Company in the amounts of $77,000, and $21,000, respectively, without reimbursement. There were no expenses incurred by Donegal Group Inc. for stock based compensation on behalf of the Company in 2012.

The Company also has an operating lease agreement with the Insurance Company as described in Note 6.

12. Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

35

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

At December 31, 2012 and 2011, the following financial instruments were outstanding whose contract amounts represent credit risk (in thousands):

	2012		2011
Commitments to grant loans	$	4,528	$	4,146
Unfunded commitments under lines of credit		96,450		100,040
	$	100,978	$	104,186

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held typically consists of residential or commercial real estate.

13. Concentration of Credit Risk

The concentration of credit by type of loan is set forth in Note 5. The debtors’ ability to honor their contracts is influenced by the region’s economy and financial stability.

14. Employee Benefit Plan

The Company maintains a defined contribution 401(k) retirement Plan that covers eligible employees. The Company’s matching contribution is 100% of each participant’s first 1% of elective contribution and 50% of each participant’s next 5% of elective contributions with a maximum contribution of 3.50% of the participants compensation. The Company’s contributions to the Plan totaled $183,000, $103,000, and $34,000 for the years ended December 31, 2012, 2011, and 2010, respectively.

15. Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Office of the Comptroller of the Currency (OCC). Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors, to be considered “well capitalized.”

36

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to assets. Management believes, as of December 31, 2012, that the Bank meets all capital adequacy requirements to which it is subject.

A comparison of the Bank’s actual capital amounts to the regulatory requirements at December 31, 2012 and 2011 is presented below (dollars in thousands). The Company’s actual capital amounts and ratios are not significantly different from the Bank’s.

	2012
	Actual					For Capital Adequacy Purposes					To be Well Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)	$	83,221		23.18	%	$	28,726		³8.0	%	$	35,908		³10.0	%
Tier 1 capital (to risk-weighted assets)		75,895		21.14			14,363		³4.0			21,545		³6.0
Core (Tier 1) capital (to adjusted total assets)		75,895		15.05			20,176		³4.0			30,264		³6.0
Tangible equity (to adjusted total assets)		75,895		15.05			7,566		³1.5			7,566		³1.5

	2011
	Actual					For Capital Adequacy Purposes					To be Well Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)	$	71,689		17.91	%	$	32,023		³8.0	%	$	40,029		³10.0	%
Tier 1 capital (to risk-weighted assets)		65,187		16.29			16,011		³4.0			24,017		³6.0
Core (Tier 1) capital (to adjusted total assets)		65,187		12.24			21,310		³4.0			31,964		³6.0
Tangible equity (to adjusted total assets)		65,187		12.24			7,991		³1.5			7,991		³1.5

16. Fair Value Measurements

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of year-end and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at year end.

37

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

FASB ASC Topic 820-10, Fair Value Measurements and Disclosures, defines fair value measurement and disclosure guidance as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Additional guidance is provided in determining fair value when the volume and level of activity for the asset or liability has significantly decreased, including guidance on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value.

The guidance further clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability; some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly, considering the circumstances that indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Fair value measurement and disclosure guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

38

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2012 and 2011 are as follows (in thousands):

	2012
	Total		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
U.S. treasuries	$	3,002	$	—	$	3,002	$	—
U.S. government agencies securities		16,705		—		16,705		—
Corporate debt securities		9,870		—		9,870		—
Tax-free municipal securities		43,334		—		43,334		—
Taxable municipal securities		3,841		—		3,841		—
U.S. government sponsored enterprise mortgage-backed securities		71,014		—		71,014		—
Equity securities		291		—		291		—

	2011
	Total		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
U.S. treasuries	$	6,241	$	—	$	6,241	$	—
U.S. government agencies securities		10,768		—		10,768		—
Corporate debt securities		4,874		—		4,874		—
Tax-free municipal securities		20,705		—		20,705		—
Taxable municipal securities		3,705		—		3,705		—
U.S. government sponsored enterprise mortgage-backed securities		50,035		—		50,035		—
Equity securities		41		—		41		—

39

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

The valuation technique used to measure the fair values for the items in the tables above are as follows:

Securities

The fair value of securities available-for-sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used.

The Company did not have any financial assets measured at fair value on a non-recurring basis at December 31, 2012 or 2011.

The estimated fair values of financial instruments as of December 31, 2012 and 2011 are set forth in the tables below (in thousands). The information in the table should not be interpreted as an estimate of the fair value of the Company in its entirety since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

	2012				2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Cash and cash equivalents	$	29,001	$	29,001		52,313		52,313
Interest-bearing time deposits in other banks		6		6		100		100
Securities available-for-sale		148,057		148,057		96,369		96,369
Loans held for sale		4,266		4,379		1,331		1,382
Loans, net		290,507		294,847		339,507		341,684
Restricted investment in bank stocks		2,320		2,320		3,249		3,249
Accrued interest receivable		1,778		1,778		1,714		1,714
Mortgage servicing assets		109		109		150		150
Liabilities:
Demand and savings deposits		278,038		278,038		278,409		278,409
Time deposits		144,798		146,741		176,167		179,049
Junior subordinated debentures		7,387		7,387		7,103		7,103
Accrued interest payable		291		291		426		426
Off-Balance-Sheet Items:
Commitments to extend credit and standby letters of credit		—		—		—		—

40

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at December 31, 2012 and 2011.

Cash and Cash Equivalents

The carrying amounts of cash and short-term investments (U.S. Treasury Bills with a maturity of less than 90 days) approximate their fair values.

Interest-Bearing Time Deposits in Other Banks

The carrying amounts of interest-bearing time deposits in other banks approximate their fair values. The Company generally purchases amounts below the insured limit, limiting the amount of credit risk on these time deposits.

Securities Available-for-Sale

The carrying values of securities available-for-sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used.

Loans Held for Sale

The fair value of mortgage loans held for sale are determined as the par amounts to be received at settlement by establishing the respective buyer and rate in advance.

Loans

For variable-rate loans that reprice frequently and which entail no significant changes in credit risk, carrying value approximates fair value. The fair value of other loans are estimated by calculating the present value of future cash flows, discounted at the interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

Loans purchased were recorded at their acquisition date fair value. In order to record the loans at fair value, management made three different types of fair value adjustments. A market rate adjustment was made to adjust for the movement in market interest rates, irrespective of credit adjustments, compared to the stated rates of the acquired loans. A credit adjustment was made on pools of homogeneous loans representing the changes in credit quality of the underlying borrowers from the loan inception to the acquisition date. A credit adjustment on distressed loans which represents the portion of the loan balance that has been deemed uncollectible based on our expectations of future cash flows for each respective loan.

41

Donegal Financial Services Corporation

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

Restricted Investment in Bank Stocks

The carrying amounts reported in the consolidated balance sheet for restricted investment in bank stocks approximate their fair values.

Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates its fair value.

Mortgage Servicing Assets

The fair value of servicing assets is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and maturity date.

Deposit Liabilities

The fair values of deposits with no stated maturities, such as demand deposits, savings accounts, NOW and money market deposits, equal their carrying amounts, which represent the amount payable on demand. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Junior Subordinated Debentures

For floating-rate debentures, fair value is based on the difference between current interest rates for similar types of borrowing arrangements and the current coupon rate. For debentures that are at a fixed rate for a period of time, the fair value is determined using discounted cash flow analyses, based on current interest rates for similar types of borrowing arrangements.

Accrued Interest Payable

The carrying amount of accrued interest payable approximates its fair value.

Off-Balance-Sheet Instruments

The Company’s off-balance-sheet instruments consist of commitments to extend credit, and financial and performance standby letters of credit. The estimated fair value is based on fees currently charged to enter into similar agreements, taking into account the remaining term of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

42

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
By:	/s/ Donald H. Nikolaus
	Donald H. Nikolaus, President

Date: March 12, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Donald H. Nikolaus	President and a Director (principal executive officer)	March 12, 2013
Donald H. Nikolaus
/s/ Jeffrey D. Miller Jeffrey D. Miller	Senior Vice President and Chief Financial Officer (principal financial and accounting officer)	March 12, 2013
/s/ Robert S. Bolinger	Director	March 12, 2013
Robert S. Bolinger
/s/ Patricia A. Gilmartin	Director	March 12, 2013
Patricia A. Gilmartin
/s/ Philip H. Glatfelter, II	Director	March 12, 2013
Philip H. Glatfelter, II
/s/ Jack L. Hess	Director	March 12, 2013
Jack L. Hess
/s/ Kevin M. Kraft, Sr.	Director	March 12, 2013
Kevin M. Kraft, Sr.
/s/ John J. Lyons	Director	March 12, 2013
John J. Lyons
/s/ Jon M. Mahan	Director	March 12, 2013
Jon M. Mahan
/s/ S. Trezevant Moore, Jr.	Director	March 12, 2013
S. Trezevant Moore, Jr.
/s/ R. Richard Sherbahn	Director	March 12, 2013
R. Richard Sherbahn
/s/ Richard D. Wampler, II	Director	March 12, 2013
Richard D. Wampler, II

-1-

EX-10.34

Exhibit 10.34

THIRD AMENDMENT TO CREDIT AGREEMENT

This THIRD AMENDMENT TO CREDIT AGREEMENT (this “Amendment”) is made as of June 1, 2012, by and between DONEGAL GROUP INC. a Delaware corporation (the “Borrower”) and MANUFACTURERS AND TRADERS TRUST COMPANY, a New York banking corporation (the “Bank”); Witnesseth:

On June 21, 2010, the Borrower and the Bank executed and delivered that certain Credit Agreement (the “Original Credit Agreement”). The Original Credit Agreement was amended pursuant to a First Amendment to Credit Agreement (“First Amendment”) dated October 12, 2010, by and between the Borrower and the Bank. The Original Credit Agreement was amended pursuant to a Second Amendment to Credit Agreement (“Second Amendment”) dated June 1, 2011, by and between the Borrower and the Bank. The Original Credit Agreement as amended pursuant to the First Amendment and the Second Amendment is hereinafter called the “Credit Agreement.” The Borrower and the Bank have agreed to amend a certain provision of the Credit Agreement subject to and in accordance with this Amendment.

NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the Bank and the Borrower agree as follows:

1. Recitals. The Bank and the Borrower acknowledge that the above recitals to this Amendment are true and correct, and agree that the same are incorporated by reference into the body of this Amendment. Unless otherwise specifically defined herein, all terms defined by the provisions of the Credit Agreement shall have the same meanings ascribed to such terms by the provisions of the Credit Agreement when used herein.

2. Amendments to Credit Agreement.

2.1 The Credit Agreement is hereby amended by deleting the definition of the term “Credit Expiration Date” appearing in Article 1 of the Credit Agreement in its entirety and by substituting the following in lieu thereof:

““Credit Expiration Date” means July, 31, 2015.”

2.2 The Credit Agreement is hereby amended by deleting the third to the last sentence in Section 2.1 of the Credit Agreement in its entirety and by substituting the following in lieu thereof:

“If the Bank agrees to so extend the Credit Expiration Date the Borrower agrees to pay to the Bank a renewal fee in the amount of (a) from June 21, 2010, to and including May 31, 2012, .15% of the Credit Amount upon the Bank’s execution and delivery of the amendments described above; and (b) from June 1, 2012, and thereafter, .10% of the Credit Amount upon the Bank’s execution and delivery of the amendments described above .”

2.3 The Credit Agreement is hereby amended by deleting Section 6.15 of the Credit Agreement in its entirety and by substituting the following in lieu thereof:

“Section 6.15. Minimum Interest Coverage Ratio. Calculated on a rolling eight (8) quarter basis, permit as of the end of any fiscal quarter of the Borrower the Interest Coverage Ratio of the Borrower to be less than (a) from June 21, 2010, to and including May 31, 2012, 3 to 1; and (b) from June 1, 2012 and thereafter, 2 to 1.”

3. Representations and Warranties. The Borrower represents and warrants to the Bank that each and all of the representations and warranties of the Borrower in the Credit Agreement and the other Financing Documents are true and correct on the date hereof as if the same were made on the date hereof.

4. Amendment Only. This Amendment is only an agreement amending a certain provision of the Credit Agreement. All of the provisions of the Credit Agreement are incorporated herein by reference and shall continue in full force and effect as amended by this Amendment. The Borrower hereby ratifies and confirms all of its obligations, liabilities and indebtedness under the provisions of the Credit Agreement as amended by this Amendment. The Bank and the Borrower agree it is their intention that nothing herein shall be construed to extinguish, release or discharge or constitute, create or effect a novation of, or an agreement to extinguish, any of the obligations, indebtedness and liabilities of the Borrower or any other party under the provisions of the Credit Agreement or under any of the other Financing Documents.

5. Applicable Law, Etc. This Amendment shall be governed by the laws of the Commonwealth of Pennsylvania and shall be binding upon and inure to the benefit of the Bank and the Borrower and their respective successors and assigns.

2

SIGNATURE PAGE TO THIRD AMENDMENT TO CREDIT AGREEMENT

IN WITNESS WHEREOF, the Borrower and the Bank have executed this Amendment under their respective seals, the day and year first written above.

WITNESS/ATTEST:	DONEGAL GROUP INC.
/s/ Jeffrey D. Miller	By:	/s/ Donald H. Nikolaus	(Seal)
Jeffrey D. Miller		Donald H. Nikolaus
Senior Vice President and Chief Financial Officer		President and Chief Executive Officer
WITNESS:	MANUFACTURERS AND TRADERS TRUST COMPANY
/s/ Abby L. Smith	By:	/s/ Kellie M. Matthews	(Seal)
Abby L. Smith		Kellie M. Matthews, Administrative Vice President

COMMONWEALTH OF PENNSYLVANIA, COUNTY OF Lancaster

On the 3rd day of May, in the year 2012, before me, the undersigned, a Notary Public in and for said Commonwealth, personally appeared Donald H. Nikolaus and Jeffrey D. Miller, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

My Commission Expires:
	Notary Public

COMMONWEALTH OF PENNSYLVANIA, COUNTY OF YORK

On the 3rd day of May, in the year 2012, before me, the undersigned, a Notary Public in and for said Commonwealth, personally appeared Kellie M. Matthews, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

My Commission Expires:
	Notary Public

2

FOURTH AMENDMENT TO CREDIT AGREEMENT

This FOURTH AMENDMENT TO CREDIT AGREEMENT (this “Amendment”) is made as of December 5, 2012, by and between DONEGAL GROUP INC., a Delaware corporation (the “Borrower”) and MANUFACTURERS AND TRADERS TRUST COMPANY, a New York banking corporation (the “Bank”); Witnesseth:

On June 21, 2010, the Borrower and the Bank executed and delivered that certain Credit Agreement (the “Original Credit Agreement”). The Original Credit Agreement was amended pursuant to a First Amendment to Credit Agreement (“First Amendment”) dated October 12, 2010, by and between the Borrower and the Bank. The Original Credit Agreement was amended pursuant to a Second Amendment to Credit Agreement (“Second Amendment”) dated June 1, 2011, by and between the Borrower and the Bank. The Original Credit Agreement was amended pursuant to a Third Amendment to Credit Agreement (“Third Amendment”) dated June 1, 2012, by and between the Borrower and the Bank. The Original Credit Agreement as amended pursuant to the First Amendment, the Second Amendment and the Third Amendment is hereinafter called the “Credit Agreement.” The Borrower and the Bank have agreed to amend certain provisions of the Credit Agreement subject to and in accordance with this Amendment.

NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the Bank and the Borrower agree as follows:

1. Recitals. The Bank and the Borrower acknowledge that the above recitals to this Amendment are true and correct, and agree that the same are incorporated by reference into the body of this Amendment. Unless otherwise specifically defined herein, all terms defined by the provisions of the Credit Agreement shall have the same meanings ascribed to such terms by the provisions of the Credit Agreement when used herein.

2. Amendments to Credit Agreement.

2.1 The Credit Agreement is hereby amended by deleting Section 6.1 of the Credit Agreement in its entirety and by substituting the following in lieu thereof:

“ Section 6.1. Indebtedness. Without the prior written consent of the Bank (subject to the Bank’s sole discretion), create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness of the Borrower under this Agreement and the Note; (b) Capital Lease Obligations in an amount not to exceed Five Million Dollars ($5,000,000); (c) Indebtedness of the Borrower or its Subsidiaries existing as of the date of this Agreement, as the same may be refinanced or extended from time to time, so long as there is no increase in the principal amount outstanding thereunder; and (d) Subordinated Debt of the Borrower, provided the aggregate principal amount of such Subordinated Debt does not exceed Fifty Million Dollars ($50,000,000).”

3

2.2 The Credit Agreement is hereby amended by deleting Section 6.3 of the Credit Agreement in its entirety and by substituting the following in lieu thereof:

“ Section 6.3. Liens. Without the prior written consent of the Bank (subject to the Bank’s sole discretion), create, incur, assume or suffer to exist any Lien, upon or with, respect to any of its real or personal properties, now owned or hereafter acquired, except: (a) Liens for taxes or assessments or other government charges or levies if not yet due and payable or if due and payable, if they are being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained; (b) Liens imposed by law, such as mechanic’s materialmen’s, landlord’s, warehousemen’s and carrier’s Liens, and other similar Liens, securing obligations incurred in the ordinary course of business that are not past due for more than forty-five (45) days, or that are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established; (c) Liens under workers’ compensation, unemployment insurance, social security or similar legislation (other than ERISA); (d) judgments and other similar Liens arising in connection with court proceedings; provided that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings; (e) easements, rights-of-way, restrictions and other similar encumbrances that, in the aggregate, do not materially interfere with the occupation, use and enjoyment by the Borrower or any of its Subsidiaries of the property or assets encumbered thereby in the normal course of its business or materially impair the value of the property subject thereto; (f) Liens consisting of pledges or deposits of property to secure performance in connection with operating leases made in the ordinary course of business to which the Borrower or any Subsidiary is a party as lessee, provided the aggregate value of all such pledges and deposits in connection with any such lease does not at any time exceed fifteen percent (15%) of the annual fixed rentals payable under such lease, and (g) deposits the Insurance Subsidiaries are required to maintain with state insurance departments in the states in which they do business.”

3. Representations and Warranties. The Borrower represents and warrants to the Bank that each and all of the representations and warranties of the Borrower in the Credit Agreement and the other Financing Documents are true and correct on the date hereof as if the same were made on the date hereof.

4. Amendment Only. This Amendment is only an agreement amending certain provisions of the Credit Agreement. All of the provisions of the Credit Agreement are incorporated herein by reference and shall continue in full force and effect as amended by this Amendment. The Borrower hereby ratifies and confirms all of its obligations, liabilities and indebtedness under the provisions of the Credit Agreement as amended by this Amendment. The Bank and the Borrower agree it is their intention that nothing herein shall be construed to extinguish, release or discharge or constitute, create or effect a novation of, or an agreement to extinguish, any of the obligations, indebtedness and liabilities of the Borrower or any other party under the provisions of the Credit Agreement or under any of the other Financing Documents.

5. Amendment Fee. In consideration for the Bank agreeing to the amendment to the Credit Agreement set forth herein, the Borrower agrees to pay to the Bank an amendment fee in the amount of $2,500.00.

6. Applicable Law, Etc. This Amendment shall be governed by the laws of the Commonwealth of Pennsylvania and shall be binding upon and inure to the benefit of the Bank and the Borrower and their respective successors and assigns.

4

SIGNATURE PAGE TO FOURTH AMENDMENT TO CREDIT AGREEMENT

IN WITNESS WHEREOF, the Borrower and the Bank have executed this Amendment under their respective seals, the day and year first written above.

WITNESS/ATTEST:	DONEGAL GROUP INC.
/s/ Jeffrey D. Miller	By:	/s/ Donald H. Nikolaus	(Seal)
Jeffrey D. Miller		Donald H. Nikolaus
Senior Vice President and Chief Financial Officer		President and Chief Executive Officer
WITNESS:	MANUFACTURERS AND TRADERS TRUST COMPANY
/s/ Abby L. Smith	By:	/s/ Kellie M. Matthews	(Seal)
Abby L. Smith		Kellie M. Matthews, Administrative Vice President

COMMONWEALTH OF PENNSYLVANIA, COUNTY OF LANCASTER

On the 3rd day of December, in the year 2012, before me, the undersigned, a Notary Public in and for said Commonwealth, personally appeared Donald H. Nikolaus and Jeffrey D. Miller, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

My Commission Expires:
	Notary Public

COMMONWEALTH OF PENNSYLVANIA, COUNTY OF YORK

On the 3rd day of December, in the year 2012, before me, the undersigned, a Notary Public in and for said Commonwealth, personally appeared Kellie M. Matthews, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

My Commission Expires:
	Notary Public

5

EX-21

EXHIBIT 21

SUBSIDIARIES OF REGISTRANT

Registrant owned 100% of the outstanding stock of the following companies as of December 31, 2012, except as noted:

Name	State of Formation
Atlantic States Insurance Company	Pennsylvania
Southern Insurance Company of Virginia	Virginia
Le Mars Insurance Company	Iowa
The Peninsula Insurance Company	Maryland
Peninsula Indemnity Company*	Maryland
Donegal Financial Services Corporation**	Delaware
Union Community Bank FSB***	U.S.
Sheboygan Falls Insurance Company	Wisconsin
Michigan Insurance Company	Michigan

* Wholly owned by The Peninsula Insurance Company.

** Registrant owns 48.2%. Donegal Mutual Insurance Company owns 51.8%.

*** Wholly owned by Donegal Financial Services Corporation.

EX-23.1

EXHIBIT 23.1

REPORT AND CONSENT OF

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Donegal Group Inc.:

The audits referred to in our audit report dated March 12, 2013 with respect to the consolidated financial statements of Donegal Group Inc. and subsidiaries (Company) included the related financial statement schedule as of December 31, 2012 and 2011, and for each of the years in the three-year period ended December 31, 2012, included in the annual report on Form 10-K. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We consent to the incorporation by reference in the registration statements (Nos. 333-93785, 333-94301, 333-89644, 333-142614 and 333-174612) on Form S-8 and registration statements (Nos. 333-59828 and 333-174594) on Form S-3 of Donegal Group Inc. of our reports dated March 12, 2013, with respect to the consolidated balance sheets of Donegal Group Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2012, and the related financial statement schedule and the effectiveness of internal control over financial reporting as of December 31, 2012, which reports appear in the December 31, 2012 annual report on Form 10-K of Donegal Group Inc.

/s/ KPMG LLP

Philadelphia, Pennsylvania

March 12, 2013

EX-23.2

EXHIBIT 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Donegal Group Inc.:

We consent to the incorporation by reference in the registration statements (Nos. 333-93785, 333-94301, 333-89644, 333-142614 and 333-174612) on Form S-8 and registration statements (Nos. 333-59828 and 333-174594) on Form S-3 of Donegal Group Inc. of our report dated March 8, 2013, with respect to the consolidated balance sheets of Donegal Financial Services Corporation and subsidiary as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2012, which reports appear as a schedule to the December 31, 2012 annual report on Form 10-K of Donegal Group Inc.

/s/ ParenteBeard LLC

Lancaster, Pennsylvania

March 12, 2013

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Donald H. Nikolaus, certify that:

1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2012 of Donegal Group Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15a-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Donald H. Nikolaus

Donald H. Nikolaus, President

Date: March 12, 2013

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Jeffrey D. Miller, certify that:

1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2012 of Donegal Group Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15a-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Jeffrey D. Miller

Jeffrey D. Miller, Senior Vice President

and Chief Financial Officer

Date: March 12, 2013

EX-32.1

EXHIBIT 32.1

Statement of President

Pursuant to Section 1350 of Title 18 of the United States Code

Pursuant to Section 1350 of Title 18 of the United States Code, I, Donald H. Nikolaus, the President of Donegal Group Inc. (the “Company”), hereby certify that, to the best of my knowledge:

1. The Company’s Form 10-K Annual Report for the period ended December 31, 2012 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Donald H. Nikolaus

Donald H. Nikolaus, President

Date: March 12, 2013

EX-32.2

EXHIBIT 32.2

Statement of Chief Financial Officer

Pursuant to Section 1350 of Title 18 of the United States Code

Pursuant to Section 1350 of Title 18 of the United States Code, I, Jeffrey D. Miller, the Senior Vice President and Chief Financial Officer of Donegal Group Inc. (the “Company”), hereby certify that, to the best of my knowledge:

1. The Company’s Form 10-K Annual Report for the period ended December 31, 2012 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Jeffrey D. Miller

Jeffrey D. Miller, Senior Vice President

and Chief Financial Officer

Date: March 12, 2013

XML

Borrowings (Tables)

12 Months Ended

Dec. 31, 2012

Borrowings [Abstract]

Amount of FHLB of Indianapolis/Pittsburgh stock purchased, collateral pledged and assets related to MICO's/Atlantic States agreement

FHLB stock purchased and owned as part of the agreement	$	252,100
Collateral pledged, at par (carrying value $3,946,091)		4,450,000
Borrowing capacity currently available		3,493,664

FHLB stock purchased and owned as part of the agreement	$	256,400
Collateral pledged, at par		—
Borrowing capacity currently available		—

XML

Transactions With Affiliates (Details 3) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Ceded reinsurance transactions with unaffiliated reinsurers
Premiums earned	$ 258,064,301	$ 242,186,814	$ 144,554,336
Prepaid reinsurance premiums	111,156,162	106,450,018
Donegal Mutual [Member]
Ceded reinsurance transactions with unaffiliated reinsurers
Premiums earned	33,046,914	22,123,229	4,516,313
Losses and loss expenses	22,569,557	16,038,590	3,463,112
Prepaid reinsurance premiums	15,457,605	14,181,338	4,590,424
Liability for losses and loss expenses	$ 18,285,182	$ 11,868,641	$ 4,006,231

XML

Segment Information (Tables)

12 Months Ended

Dec. 31, 2012

Segment Information [Abstract]

Summary of financial data by segment

	2012			2011			2010
	(in thousands)
Revenues:
Premiums earned:
Commercial lines	$	174,735		$	152,247		$	117,755
Personal lines		300,272			282,498			260,900
SAP premiums earned		475,007			434,745			378,655
GAAP adjustments		(5	)		(3,275	)		(625	)
GAAP premiums earned		475,002			431,470			378,030
Net investment income		20,169			20,858			19,950
Realized investment gains		6,859			12,281			4,396
Equity in earnings (loss) of DFSC		4,533			2,023			(269	)
Other		8,420			8,386			6,442
Total revenues	$	514,983		$	475,018		$	408,549

	2012			2011			2010
	(in thousands)
Income before income taxes:
Underwriting income (loss):
Commercial lines	$	5,251		$	(6,560	)	$	2,252
Personal lines		(18,236	)		(40,739	)		(22,526	)
SAP underwriting loss		(12,985	)		(47,299	)		(20,274	)
GAAP adjustments		5,545			1,532			2,458
GAAP underwriting loss		(7,440	)		(45,767	)		(17,816	)
Net investment income		20,169			20,858			19,950
Realized investment gains		6,859			12,281			4,396
Equity in earnings (loss) of DFSC		4,533			2,023			(269	)
Other		3,737			3,866			3,583
Income (loss) before income taxes	$	27,858		$	(6,739	)	$	9,844

XML

Investments (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Schedule of Investments [Line Items]
Additional capital	$ 20,600,000
Investments (Textual) [Abstract]
Amortized cost of fixed maturities on deposit with various regulatory authorities	10,565,116	10,629,319
Percentage of which the company held security of any issuer	10.00%	10.00%
Percentage decrease in value of individual equity security to assume other than temporary decline in value	20.00%
Time period for which individual security should be in unrealized position of twenty percentage or more to assume it as other than temporary decline	More than six months
Percentage of ownership interest	48.20%
Additional equity investment in DFSC	100,000	20,570,000
Unrealized holding gain (loss) arising during the period, net of income tax (benefit) of $4,833,143, $12,237,669 and ($1,976,358)	9,171,817	23,077,997	(3,544,783)
Impairment losses	0	0	0
Sales or transfers, held to maturity	0	0	0
Derivative instruments or hedging activities	0	0	0
Donegal Mutual [Member]
Schedule of Investments [Line Items]
Additional capital	22,100,000	20,600,000
Equity securities [Member]
Schedule of Investments [Line Items]
Number of fixed maturity securities classified as available for sale	7
Debt Securities [Member]
Schedule of Investments [Line Items]
Number of fixed maturity securities classified as available for sale	46
General obligation bonds [Member] | Obligations of states and political subdivisions [Member]
Schedule of Investments [Line Items]
Aggregate fair value of bond held	358,500,000	372,200,000
Amortized cost of bond held	332,400,000	348,400,000
Special revenue bond [Member]
Schedule of Investments [Line Items]
Aggregate fair value of bond held	101,000,000	86,500,000
Amortized cost of bond held	$ 93,900,000	$ 81,000,000
Education bonds [Member]
Schedule of Investments [Line Items]
Percentage of investments in special revenue bonds	54.00%	59.00%
Water and sewer utility bonds [Member]
Schedule of Investments [Line Items]
Percentage of investments in special revenue bonds	19.00%	17.00%

XML

Transactions With Affiliates (Details 4) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Ceded reinsurance transactions with unaffiliated reinsurers
Premiums earned	$ 258,064,301	$ 242,186,814	$ 144,554,336
Insurance Subsidiaries [Member]
Ceded reinsurance transactions with unaffiliated reinsurers
Premiums earned	12,460,511	12,953,452	8,110,268
Losses and loss expenses	10,787,850	20,770,637	6,649,775
Liability for losses and loss expenses	$ 2,206,786	$ 3,980,024	$ 3,441,447

XML

Borrowings (Details Textual) (USD $)	12 Months Ended			1 Months Ended					12 Months Ended						12 Months Ended							1 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012 Lines of Credit [Member]	May 31, 2004 Subordinated Debentures [Member]	Oct. 31, 2003 Subordinated Debentures [Member]	Dec. 31, 2012 Subordinated Debentures [Member]	Dec. 31, 2010 Subordinated Debentures [Member]	Dec. 31, 2012 Three-month LIBOR rate plus 3.85% [Member] Subordinated Debentures [Member]	Dec. 31, 2012 Subordinated Debentures 2034 [Member]	Dec. 31, 2012 Subordinated Debentures 2034 [Member] Subordinated Debentures [Member]	Dec. 31, 2012 Subordinated Debentures October 29, 2033 [Member]	Dec. 31, 2011 Subordinated Debentures October 29, 2033 [Member]	Dec. 31, 2012 Subordinated Debentures May 24, 2034 [Member]	Dec. 31, 2011 Subordinated Debentures May 24, 2034 [Member]	Dec. 31, 2012 Subordinated Debentures 2033 [Member]	Dec. 31, 2012 Atlantic States [Member]	Dec. 31, 2012 Atlantic States [Member] Pittsburgh [Member]	Dec. 31, 2011 Atlantic States [Member] Pittsburgh [Member]	Jun. 30, 2012 Manufacturers and Traders Trust Company [Member] Lines of Credit [Member]	Mar. 31, 2011 Michigan [Member] Lines of Credit [Member]	Dec. 31, 2010 Michigan [Member] Lines of Credit [Member]	May 31, 2011 Union National Financial Corporation [Member] Lines of Credit [Member]	Dec. 31, 2012 West Bend Mutual Insurance Company [Member] Subordinated Debentures [Member]	Dec. 31, 2012 MICO [Member] Indianapolis [Member]	Dec. 31, 2011 MICO [Member] Indianapolis [Member]	Dec. 31, 2012 MICO [Member] Lines of Credit [Member] Indianapolis [Member]	Dec. 31, 2012 Maximum [Member]
Line of Credit Facility [Line Items]
Right to request for extension of credit agreement with Manufacturers and Traders Trust Company																			$ 60,000,000							$ 3,493,664
Line of credit that expires date			2015-07
Borrowings																				3,500,000	35,000,000
Right to request for extension of credit agreement																						19,000,000
Outstanding borrowings			52,000,000
Line of credit facility remaining borrowing capacity			8,000,000
Debt instrument interest rate effective percentage						3.85%		3.85%																			2.25%
Interest rate on Borrowings			2.46%
Federal home loan bank borrowing amount outstanding																	0	0						0	0
Collateral Pledged at carrying value																										3,946,091
Debt issued to FHLB in exchange of advance cash																15,000,000
Net proceeds from the issuance of subordinated debentures				5,000,000	10,000,000
Line of credit, interest rate related to Libor rate description			interest rate equal to M&T’s current prime rate or the then current LIBOR rate plus 2.25%.
Debt instrument interest rate									4.16%	4.16%
Debt Instrument basis spread on variable rate							5.00%
Investment in statutory trust											310,000	310,000	155,000	155,000
Investment in subordinated debentures	20,465,000	20,465,000									10,300,000	10,300,000	5,200,000	5,200,000
Purchase of surplus note																							5,000,000
Payment date of subordinated debentures and liquidated investment in the statutory trust									Feb. 25, 2013						Jan. 28, 2013
Borrowings (Textual) [Abstract]
Percentage commitment fee	0.20%
Revolving credit facility, borrowing interest rate	The credit agreement requires our compliance with certain covenants, which include minimum levels of our net worth, leverage ratio and statutory surplus and the A.M. Best ratings of our insurance subsidiaries. We complied with all requirements of the credit agreement during the year ended December 31, 2012
Revolving line of credit expiration date	Oct. 29, 2033
Debentures mature date	May 24, 2034
Interest paid	$ 250,000	$ 250,000
Debt instrument, description	On October 29, 2003, we received $10.0 million in net proceeds from the issuance of subordinated debentures. The debentures were scheduled to mature on October 29, 2033 and were callable at our option, at par. The debentures carried an interest rate equal to the three-month LIBOR rate plus 3.85%. At December 31, 2012, the interest rate on these debentures was 4.16%.
Debentures, interest rate related to Libor rate description	interest rate equal to the three-month LIBOR rate plus 3.85%

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Guaranty Fund and Other Insurance-Related Assessments (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Guaranty Fund and Other Insurance-Related Assessments (Textual) [Abstract]
Insurance subsidiaries' liabilities for guaranty fund and other insurance	$ 1,403,829	$ 1,812,078
Surcharges collected by insurance subsidiaries	$ 433,994	$ 548,644

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Earnings Per Share (Tables)

12 Months Ended

Dec. 31, 2012

Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items]

Summary of reconciliation of the numerators and denominators used in the basic and diluted per share computations

	Year Ended December 31,
(dollars in thousands, except per share data)	2012		2011		2010
Basic earnings per share:
Numerator:
Allocation of net income	$	18,455	$	390	$	9,183
Denominator:
Weighted-average shares outstanding		20,031,455		19,997,146		19,961,274
Basic earnings per share	$	0.92	$	0.02	$	0.46
Diluted earnings per share:
Numerator:
Allocation of net income	$	18,455	$	390	$	9,183
Denominator:
Number of shares used in basic computation		20,031,455		19,997,146		19,961,274
Weighted-average effect of dilutive securities
Add: Director and employee stock options		274,103		36,499		17,794
Number of shares used in per share computations		20,305,558		20,033,645		19,979,068
Diluted earnings per share	$	0.91	$	0.02	$	0.46

	Year Ended December 31,
(dollars in thousands, except per share data)	2012		2011		2010
Basic and diluted earnings per share:
Numerator:
Allocation of net income	$	4,638	$	63	$	2,284
Denominator:
Weighted-average shares outstanding		5,576,775		5,576,775		5,576,775
Basic and diluted earnings per share	$	0.83	$	0.01	$	0.41

Reconciliation of diluted shares outstanding

	2012		2011		2010
Options excluded from diluted earnings per share		1,209,000		1,238,000		2,219,167

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Business Combinations (Tables)

12 Months Ended

Dec. 31, 2012

Business Combinations [Abstract]

Estimated fair value of net assets

(in thousands)
Assets acquired:
Investments	$	68,693
Premiums receivable		27,803
Prepaid reinsurance premiums		25,054
Reinsurance receivable		83,818
Goodwill		4,703
Other intangible assets		958
Other		2,801
Total assets acquired		213,830
Liabilities assumed:
Losses and loss expenses		104,815
Unearned premiums		33,688
Reinsurance balances payable		16,899
Accrued expenses		9,990
Other		6,142
Total liabilities assumed		171,534
Net assets acquired	$	42,296

Unaudited pro forma historical results

	Year Ended December 31,
	2010			2009
	(in thousands, except per share data)
Total revenues	$	458,231		$	423,184
Income before income tax benefit		13,619			15,232
Income tax benefit		(741	)		(146	)
Net income		14,360			15,378
Class A earnings per share - basic and diluted		0.58			0.62
Class B earnings per share - basic and diluted		0.52			0.55

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Reinsurance (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Ceded reinsurance transactions with unaffiliated reinsurers
Premiums earned	$ 258,064,301	$ 242,186,814	$ 144,554,336
Prepaid reinsurance premiums	111,156,162	106,450,018
Unaffiliated Entity [Member]
Ceded reinsurance transactions with unaffiliated reinsurers
Premiums written	76,736,510	80,265,127	24,357,938
Premiums earned	79,680,782	88,297,408	26,551,687
Losses and loss expenses	56,179,284	82,836,893	19,764,441
Prepaid reinsurance premiums	25,126,276	28,054,302	26,991,912
Liability for losses and loss expenses	$ 103,775,940	$ 106,231,527	$ 92,945,915

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Property and Equipment (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Property, Plant and Equipment [Line Items]
Property and equipment, Gross	$ 18,948,050	$ 17,792,050
Accumulated depreciation	(12,994,217)	(11,637,667)
Property and equipment, Net	5,953,833	6,154,383
Office Equipment [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, Gross	8,863,377	8,347,493
Office Equipment [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Lease office equipment and automobiles range	5 years
Office Equipment [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Lease office equipment and automobiles range	15 years
Automobiles [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, Gross	2,010,762	2,111,218
Lease office equipment and automobiles range	3 years
Real Estate [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, Gross	5,356,705	5,016,722
Real Estate [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Lease office equipment and automobiles range	15 years
Real Estate [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Lease office equipment and automobiles range	50 years
Software [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, Gross	$ 2,717,206	$ 2,316,617
Lease office equipment and automobiles range	5 years

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Stock Compensation Plans (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Information regarding activity in our stock option plans
Number of Options, Outstanding beginning balance	5,309,000	3,998,667	3,290,099
Number of Options, Granted	1,593,600	2,321,000	1,787,500
Number of Options, Exercised	(82,102)
Number of Options, Forfeited	(109,673)	(52,000)	(15,500)
Number of Options, Expired	(10,000)	(958,667)	(1,063,432)
Number of Options, Outstanding ending balance	6,700,825	5,309,000	3,998,667
Weighted-Average Exercise Price Per Share, Outstanding Beginning balance	$ 14.18	$ 16.80	$ 17.98
Weighted-Average Exercise Price Per Share, Granted	$ 14.50	$ 12.52	$ 14.00
Weighted-Average Exercise Price Per Share, Exercised	$ 13.01
Weighted-Average Exercise Price Per Share, Forfeited	$ 13.84	$ 15.63	$ 15.69
Weighted-Average Exercise Price Per Share, Expired	$ 21.00	$ 21.00	$ 15.76
Weighted-Average Exercise Price Per Share, Outstanding Ending balance	$ 14.27	$ 14.18	$ 16.80
Number of Options, Exercisable	3,072,970	1,821,333	1,805,751
Weighted-Average Exercise Price Per Share, Exercisable	$ 15.03	$ 16.42	$ 18.13

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Transactions With Affiliates (Details 6) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Schedule of reinsurance transactions on net losses and loss expenses insurance subsidiaries incurred
Assumed	$ 207,036,480	$ 221,890,575	$ 172,856,442
Ceded	(125,816,554)	(133,940,073)	(91,316,512)
Net	$ 81,219,926	$ 87,950,502	$ 81,539,930

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Liability for Losses and Loss Expenses (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Liability for Losses and Loss Expenses (Textual) [Abstract]
Increase (Decrease) in liability for losses and loss expenses of prior years			$ 26,960,063
Percentage of 2010 development	3.10%		1.60%
Insurance Subsidiaries [Member]
Liability for Losses and Loss Expenses (Textual) [Abstract]
Increase (Decrease) in liability for losses and loss expenses of prior years	$ 7,600,000	$ (168,460)	$ (2,900,000)

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Income Taxes (Details 2) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Deferred tax assets:
Unearned premium	$ 17,613,415	$ 16,113,291
Loss reserves	7,275,091	7,339,644
Net operating loss carryforward	1,942,128	4,473,462
Alternative minimum tax credit carryforward	7,964,853	4,294,879
Other	1,413,285	634,885
Total gross deferred assets	38,005,966	35,047,693
Less valuation allowance	(440,778)	(440,778)
Net deferred tax assets	37,565,188	34,606,915
Deferred tax liabilities:
Deferred policy acquisition costs	14,042,594	12,750,631
Net unrealized gains	14,212,465	11,711,531
Other	3,042,593	225,033
Total gross deferred tax liabilities	31,297,652	24,687,195
Net deferred tax asset	6,267,536	9,919,720
Le Mars [Member]
Deferred tax assets:
Net operating loss carryforward	$ 1,797,194	$ 2,191,532

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Reinsurance (Details 2) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Amounts represent the effect of reinsurance on premiums written
Direct	$ 419,811,847	$ 397,810,566	$ 279,627,255
Assumed	339,389,274	306,416,861	262,574,572
Ceded	(262,754,201)	(250,176,390)	(150,679,539)
Net premiums written	$ 496,446,920	$ 454,051,037	$ 391,522,288

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Income Taxes (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Income Taxes (Textual) [Abstract]
Operating loss carryforwards	$ 5,500,000
Operating loss carryforwards expiration period	2031
Income Taxes (Additional Textual) [Abstract]
Percentage of amount computed at the statutory federal rate	35.00%	35.00%	35.00%
Deferred tax asset, net	37,565,188	34,606,915
Deferred tax asset, net	6,267,536	9,919,720
Alternative minimum tax credit carryforward	8,000,000
Le Mars [Member]
Income Taxes (Textual) [Abstract]
Valuation allowance related to the portion of operating loss carryforwards	440,778	440,778
Operating loss carryforwards	5,100,000
Operating loss carryforwards annual limitations in amount on use	$ 376,000
Operating loss carryforwards expiration period	2020

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Borrowings (Details) (Lines of Credit [Member], USD $)	Dec. 31, 2012
Atlantic States [Member] | Pittsburgh [Member]
Amount of FHLB of Indianapolis/Pittsburgh stock purchased, collateral pledged and assets related to MICO's/Atlantic States agreement
FHLB stock purchased and owned as part of the agreement	$ 256,400
MICO [Member] | Indianapolis [Member]
Amount of FHLB of Indianapolis/Pittsburgh stock purchased, collateral pledged and assets related to MICO's/Atlantic States agreement
FHLB stock purchased and owned as part of the agreement	252,100
Collateral pledged, at par	4,450,000
Borrowing capacity currently available	$ 3,493,664

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Fair Value Measurements (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	$ 703,267,079	$ 654,035,716
Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	703,267,079	654,035,716
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	5,365,721	6,178,136
Significant Other Observable Inputs (Level 2) [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	697,901,358	647,857,580
Significant Unobservable Inputs (Level 3) [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure
U.S. Treasury securities and obligations of U.S. government corporations and agencies [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	71,311,103	60,977,557
U.S. Treasury securities and obligations of U.S. government corporations and agencies [Member] | Significant Other Observable Inputs (Level 2) [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	71,311,103	60,977,557
U.S. Treasury securities and obligations of U.S. government corporations and agencies [Member] | Significant Unobservable Inputs (Level 3) [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure
Obligations of states and political subdivisions [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	416,986,963	398,876,582
Obligations of states and political subdivisions [Member] | Significant Other Observable Inputs (Level 2) [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	416,986,963	398,876,582
Obligations of states and political subdivisions [Member] | Significant Unobservable Inputs (Level 3) [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure
Corporate securities [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	77,355,777	64,113,649
Corporate securities [Member] | Significant Other Observable Inputs (Level 2) [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	77,355,777	64,113,649
Corporate securities [Member] | Significant Unobservable Inputs (Level 3) [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure
Residential mortgage-backed securities [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	128,855,978	122,630,390
Residential mortgage-backed securities [Member] | Significant Other Observable Inputs (Level 2) [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	128,855,978	122,630,390
Residential mortgage-backed securities [Member] | Significant Unobservable Inputs (Level 3) [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure
Equity securities [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	8,757,258	7,437,538
Equity securities [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	5,365,721	6,178,136
Equity securities [Member] | Significant Other Observable Inputs (Level 2) [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure	3,391,537	1,259,402
Equity securities [Member] | Significant Unobservable Inputs (Level 3) [Member] | Assets and liabilities on recurring basis [Member]
Fair value measurements for investments in available-for-sale fixed maturity and equity securities
Available-for-sale Securities, Fair Value Disclosure

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Earnings Per Share

12 Months Ended

Dec. 31, 2012

Earnings Per Share [Abstract]

Earnings Per Share

18 - Earnings Per Share

We have two classes of common stock, which we refer to as Class A common stock and Class B common stock. Our Class A common stock is entitled to be paid cash dividends that are at least 10% higher than the cash we pay on our Class B common stock. Accordingly, we use the two-class method for the computation of earnings per common share. The two-class method is an earnings allocation formula that determines earnings per share separately for each class of common stock based on dividends declared and an allocation of remaining undistributed earnings using a participation percentage reflecting the dividend rights of each class.

We present below a reconciliation of the numerators and denominators we used in the basic and diluted per share computations for our Class A common stock:

	Year Ended December 31,
(dollars in thousands, except per share data)	2012		2011		2010
Basic earnings per share:
Numerator:
Allocation of net income	$	18,455	$	390	$	9,183
Denominator:
Weighted-average shares outstanding		20,031,455		19,997,146		19,961,274
Basic earnings per share	$	0.92	$	0.02	$	0.46
Diluted earnings per share:
Numerator:
Allocation of net income	$	18,455	$	390	$	9,183
Denominator:
Number of shares used in basic computation		20,031,455		19,997,146		19,961,274
Weighted-average effect of dilutive securities
Add: Director and employee stock options		274,103		36,499		17,794
Number of shares used in per share computations		20,305,558		20,033,645		19,979,068
Diluted earnings per share	$	0.91	$	0.02	$	0.46

We used the following information in the basic and diluted per share computations for our Class B common stock:

	Year Ended December 31,
(dollars in thousands, except per share data)	2012		2011		2010
Basic and diluted earnings per share:
Numerator:
Allocation of net income	$	4,638	$	63	$	2,284
Denominator:
Weighted-average shares outstanding		5,576,775		5,576,775		5,576,775
Basic and diluted earnings per share	$	0.83	$	0.01	$	0.41

During 2012, 2011 and 2010, we did not include certain options to purchase shares of our Class A common stock in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of our Class A common stock. The following table reflects such options that remained outstanding at December 31, 2012, 2011 and 2010:

	2012		2011		2010
Options excluded from diluted earnings per share		1,209,000		1,238,000		2,219,167

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Summary of Significant Accounting Policies (Details) (USD $)	12 Months Ended
	Dec. 31, 2012 Segment Offices	Dec. 31, 2011	Dec. 31, 2010
Business Acquisition [Line Items]
Percentage of share in results of pooled business owned by third party	20.00%
Percentage of quota-share agreement with third-party reinsurers	50.00%
Capital contribution to facilitate merging	$ 20,600,000
Summary of Significant Accounting Policies (Textual) [Abstract]
Number of operating segments	4
Number of banking offices	13
Outstanding stock percentage	48.20%
Stock ownership percentage owned by third party	51.80%
Voting power percentage of outstanding common stock	66.00%
Acquiring Cost			42,300,000
Depreciation of original cost's value	20.00%
Guarantee in excess	1,000,000
Accumulated other comprehensive income and increased retained earnings	1,800,000
Share-based compensation	52,422	0	0
Percentage of excess dividend paid to class A common stock compared to class B common stock	10.00%
Donegal Mutual [Member]
Business Acquisition [Line Items]
Percentage of quota-share agreement with third-party reinsurers	25.00%
Capital contribution to facilitate merging	$ 22,100,000	$ 20,600,000
West Bend [Member]
Business Acquisition [Line Items]
Percentage of quota-share agreement with third-party reinsurers	75.00%
Subsidiaries [Member]
Business Acquisition [Line Items]
Percentage of share in results of pooled business	80.00%
Common Class A [Member]
Business Acquisition [Line Items]
Stock ownership percentage held by major shareholder	39.00%
Common Class B [Member]
Business Acquisition [Line Items]
Stock ownership percentage held by major shareholder	76.00%

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Stock Compensation Plans (Tables)

12 Months Ended

Dec. 31, 2012

Stock Compensation Plans [Abstract]

Information regarding activity in our stock option plans

	Number of Options			Weighted-Average Exercise Price Per Share
Outstanding at December 31, 2009		3,290,099		$	17.98
Granted - 2010		1,787,500			14.00
Forfeited - 2010		(15,500	)		15.69
Expired - 2010		(1,063,432	)		15.76
Outstanding at December 31, 2010		3,998,667			16.80
Granted - 2011		2,321,000			12.52
Forfeited - 2011		(52,000	)		15.63
Expired - 2011		(958,667	)		21.00
Outstanding at December 31, 2011		5,309,000			14.18
Granted - 2012		1,593,600			14.50
Exercised - 2012		(82,102	)		13.01
Forfeited - 2012		(109,673	)		13.84
Expired - 2012		(10,000	)		21.00
Outstanding at December 31, 2012		6,700,825		$	14.27
Exercisable at:
December 31, 2010		1,805,751		$	18.13
December 31, 2011		1,821,333		$	16.42
December 31, 2012		3,072,970		$	15.03

Summary of information about fixed stock options

Exercise Price	Number of Options Outstanding		Weighted-Average Remaining Contractual Life	Number of Options Exercisable
$12.50		2,184,542	9.0 years		728,181
14.00		1,710,683	3.0 years		1,133,789
14.50		1,593,600	10.0 years		—
15.00		3,000	3.0 years		2,000
17.50		1,198,500	0.5 years		1,198,500
18.70		3,000	0.5 years		3,000
21.00		7,500	0.5 years		7,500
Total		6,700,825			3,072,970

Summary of plan activity

	Shares Issued
	Price		Shares
January 1, 2010	$	12.85		11,717
July 1, 2010		10.45		12,403
January 1, 2011		11.02		13,243
July 1, 2011		10.88		11,371
January 1, 2012		11.91		10,523
July 1, 2012		11.29		19,031

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Liability for Losses and Loss Expenses (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Liability for Losses and Loss Expenses [Abstract]
Balance at January 1	$ 442,407,615	$ 383,318,672	$ 263,598,844
Less reinsurance recoverable		(199,392,836)	(165,422,373)	(83,336,726)
Net balance at January 1	243,014,779	217,896,299	180,262,118
Acquisition of MICO			26,960,063
Incurred related to:
Current year	325,275,882	340,671,237	277,193,930
Prior years	7,595,702	(168,460)	(2,885,072)
Total incurred	332,871,584	340,502,777	274,308,858
Paid related to:
Current year	205,876,331	219,183,102	179,069,304
Prior years	119,074,197	96,201,195	84,565,436
Total paid	324,950,528	315,384,297	263,634,740
Net balance at December 31	250,935,835	243,014,779	217,896,299
Plus reinsurance recoverable	207,891,560	199,392,836	165,422,373
Balance at December 31	$ 458,827,395	$ 442,407,615	$ 383,318,672

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Earnings Per Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Common Class A [Member]
Numerator:
Allocation of net income									$ 18,455	$ 390	$ 9,183
Denominator:
Weighted-average shares outstanding									20,031,455	19,997,146	19,961,274
Basic earnings per share	$ 0.25	$ 0.27	$ 0.08	$ 0.32					$ 0.92	$ 0.02	$ 0.46
Basic and diluted earnings per share					$ (0.03)	$ 0.03	$ (0.07)	$ 0.09
Numerator:
Allocation of net income									18,455	390	9,183
Denominator:
Number of shares used in basic computation									20,031,455	19,997,146	19,961,274
Weighted-average effect of dilutive securities
Add: Director and employee stock options									274,103	36,499	17,794
Number of shares used in per share computations									20,305,558	20,033,645	19,979,068
Diluted earnings per share	$ 0.25	$ 0.27	$ 0.08	$ 0.31					$ 0.91	$ 0.02	$ 0.46
Common Class B [Member]
Numerator:
Allocation of net income									$ 4,638	$ 63	$ 2,284
Denominator:
Weighted-average shares outstanding									5,576,775	5,576,775	5,576,775
Basic earnings per share									$ 0.83	$ 0.01	$ 0.41
Basic and diluted earnings per share	$ 0.22	$ 0.25	$ 0.07	$ 0.29	$ (0.03)	$ 0.03	$ (0.06)	$ 0.08	$ 0.83	$ 0.01	$ 0.41
Denominator:
Number of shares used in basic computation									5,576,775	5,576,775	5,576,775
Weighted-average effect of dilutive securities
Diluted earnings per share									$ 0.83	$ 0.01	$ 0.41

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Property and Equipment (Tables)

12 Months Ended

Dec. 31, 2012

Property and Equipment [Abstract]

Property and equipment

	2012			2011			Estimated Useful Life
Office equipment	$	8,863,377		$	8,347,493		5-15 years
Automobiles		2,010,762			2,111,218		3 years
Real estate		5,356,705			5,016,722		15-50 years
Software		2,717,206			2,316,617		5 years
		18,948,050			17,792,050
Accumulated depreciation		(12,994,217	)		(11,637,667	)
	$	5,953,833		$	6,154,383

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Transactions With Affiliates (Details 1) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Schedule of reinsurance Atlantic States assumed from the pool
Premiums earned	$ 258,064,301	$ 242,186,814	$ 144,554,336
Atlantic States assumed [Member] | Affiliated Entity [Member]
Schedule of reinsurance Atlantic States assumed from the pool
Premiums earned	298,803,060	266,687,610	238,308,846
Losses and loss expenses	187,415,893	206,907,170	160,256,348
Unearned premiums	157,140,642	141,880,039	125,322,884
Liability for losses and loss expenses	$ 162,863,045	$ 156,941,512	$ 134,580,026

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Investments (Details 5) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of gross realized gains and losses from investments before applicable income taxes
Gross realized gains	$ 7,656,384	$ 13,720,218	$ 5,928,040
Gross realized losses	796,945	1,438,951	1,532,320
Net realized investment gains	6,859,439	12,281,267	4,395,720
Fixed maturities [Member]
Summary of gross realized gains and losses from investments before applicable income taxes
Gross realized gains	6,730,331	4,959,707	4,136,455
Gross realized losses	42,135	163,316	533,918
Equity securities [Member]
Summary of gross realized gains and losses from investments before applicable income taxes
Gross realized gains	926,053	8,760,511	1,791,585
Gross realized losses	$ 754,810	$ 1,275,635	$ 998,402

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Business Combinations (Details Textual) (USD $)	1 Months Ended	3 Months Ended								12 Months Ended
	Dec. 30, 2010	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009	Dec. 31, 2008	Nov. 30, 2010
Restructuring Cost and Reserve [Line Items]
Stockholders' equity		$ 400,034,094				$ 383,451,592				$ 400,034,094	$ 383,451,592	$ 380,102,810	$ 385,505,699
Total assets		1,336,889,187				1,290,793,478				1,336,889,187	1,290,793,478
Business Combinations (Textual) [Abstract]
Stockholders' equity price												122.00%
Stockholders' equity price in cash															42,300,000
Equity Amount paid to MICO's stockholders												35,100,000
Additional amount payable												7,200,000
Property and casualty insurance premiums												105,400,000	106,600,000
Net premiums earned/Premiums earned		121,824,349	120,916,960	117,569,122	114,691,791	114,176,695	108,506,809	104,991,401	103,795,279	475,002,222	431,470,184	378,030,129	27,000,000
Goodwill		4,700,000								4,700,000
Other intangible assets		958,000								958,000
Losses and loss expenses															1,000,000
Business combinations redundancy reserves description										less than 1.0
Return of any redundancy in excess												50.00%
Final actuarial review of the development of such reserves												3 years
Reinsurance agreements												75.00%		80.00%
Obligations of West Bend		5,000,000								5,000,000
Obligations under the reinsurance agreements		22,600,000								22,600,000
Fair value of assets		26,300,000								26,300,000
Reinsurance agreement with third-party reinsurers												50.00%
Reinsurance agreement with Donegal Mutual												25.00%
Total revenues related to the operations of MICO and Atlantic States	2,400,000
Pro forma income statement adjustments													3,800,000
MICO [Member]
Restructuring Cost and Reserve [Line Items]
Stockholders' equity													32,000,000
Total assets													224,500,000
Business Combinations (Textual) [Abstract]
Goodwill		4,703,000								4,703,000
Other intangible assets		$ 958,000								$ 958,000

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Condensed Financial Information of Parent Company (Tables)

12 Months Ended

Dec. 31, 2012

Condensed Financial Information of Parent Company [Abstract]

Summary of condensed balance sheets

December 31,	2012		2011
Assets
Investment in subsidiaries/affiliates (equity method)	$	470,565	$	445,795
Short-term investments		326		9,258
Cash		805		684
Property and equipment		883		1,224
Other		304		381
Total assets	$	472,883	$	457,342
Liabilities and Stockholders’ Equity
Liabilities
Cash dividends declared to stockholders	$	3,067	$	2,996
Borrowings under line of credit		52,000		54,500
Subordinated debentures		15,465		15,465
Other		2,316		930
Total liabilities		72,848		73,891
Stockholders’ equity		400,035		383,451
Total liabilities and stockholders’ equity	$	472,883	$	457,342

Summary of condensed statements of income and comprehensive income

Year Ended December 31,	2012		2011			2010
Statements of Income
Revenues
Dividends from subsidiaries	$	7,000	$	16,000		$	12,000
Other		5,487		2,995			701
Total revenues		12,487		18,995			12,701
Expenses
Operating expenses		2,323		2,392			2,060
Interest		2,118		1,864			778
Total expenses		4,441		4,256			2,838
Income before income tax expense (benefit) and equity in undistributed net income (loss) of subsidiaries		8,046		14,739			9,863
Income tax expense (benefit)		378		372			(487	)
Income before equity in undistributed net income (loss) of subsidiaries		7,668		14,367			10,350
Equity in undistributed net income (loss) of subsidiaries		15,425		(13,914	)		1,117
Net income	$	23,093	$	453		$	11,467
Statements of Comprehensive Income
Net income	$	23,093	$	453		$	11,467
Other comprehensive income (loss), net of tax
Unrealized gain (loss) - subsidiaries		4,644		14,972			(6,446	)
Other comprehensive income (loss), net of tax		4,644		14,972			(6,446	)
Comprehensive income	$	27,737	$	15,425		$	5,021

Summary of condensed statements of cash flows

Year Ended December 31,	2012			2011			2010
Cash flows from operating activities:
Net income	$	23,093		$	453		$	11,467
Adjustments:
Equity in undistributed net (income) loss of subsidiaries		(15,425	)		13,914			(1,117	)
Other		(2,624	)		(396	)		547
Net adjustments		(18,049	)		13,518			(570	)
Net cash provided		5,044			13,971			10,897
Cash flows from investing activities:
Net sale (purchase) of short-term investments		8,932			6,437			(249	)
Net purchase of property and equipment		(147	)		(380	)		(492	)
Investment in subsidiaries		(100	)		(27,777	)		(35,088	)
Other		44			43			20
Net cash used		8,729			(21,677	)		(35,809	)
Cash flows from financing activities:
Cash dividends paid		(12,208	)		(11,874	)		(11,405	)
Issuance of common stock		2,983			1,461			1,199
Payments on line of credit		(6,000	)		(3,000	)		—
Borrowings under line of credit		3,500			22,500			35,000
Repurchase of treasury stock		(1,927	)		(1,538	)		(146	)
Net cash provided (used)		(13,652	)		7,549			24,648
Net change in cash		121			(157	)		(264	)
Cash at beginning of year		684			841			1,105
Cash at end of year	$	805		$	684		$	841

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Impact of New Accounting Standards

12 Months Ended

Dec. 31, 2012

Impact of New Accounting Standards [Abstract]

Impact of New Accounting Standards

2 - Impact of New Accounting Standards

In October 2010, the Financial Accounting Standards Board (the “FASB”) issued updated guidance to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must relate directly to the successful acquisition of a new or renewal insurance contract to qualify for deferral. If the application of this guidance would result in the capitalization of acquisition costs that a reporting entity had not previously capitalized, the entity may elect not to capitalize those costs. The updated guidance is effective for periods beginning after December 15, 2011. We adopted this new guidance prospectively in 2012. The amount of acquisition costs we capitalized during 2012 did not change materially from the amount of acquisition costs that we would have capitalized had we applied our previous policy during the period. Our adoption of this new guidance did not have a material impact on our financial position, results of operations or cash flows.

In May 2011, the FASB issued guidance that eliminates the concepts of in-use and in-exchange when measuring the fair value of all financial instruments. The fair value of a financial asset should be measured on a standalone basis and cannot be measured as part of a group. The new guidance requires several new disclosures including the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy and additional disclosures regarding Level 3 assets. This guidance is effective for interim and annual periods beginning on or after December 15, 2011. We adopted this new guidance in 2012. Our adoption of this new guidance did not impact our financial position, results of operations or cash flows.

In June 2011, the FASB issued new guidance related to the presentation of other comprehensive income. The new guidance provides entities with an option to either replace the income statement with a statement of comprehensive income, which would display both the components of net income and comprehensive in a combined statement, or to present a separate statement of comprehensive income immediately following the income statement. The new guidance does not affect the components of other comprehensive income or the calculation of earnings per share. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The new guidance is to be applied retrospectively with early adoption permitted. We adopted this new guidance in 2012. Our adoption of this new guidance did not impact our financial position, results of operations or cash flows.

In September 2011, the FASB issued new guidance related to evaluating goodwill for impairment. The new guidance provides entities with the option to perform a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the quantitative two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it is not required to perform the quantitative two-step goodwill impairment test. Entities also have the option of bypassing the assessment of qualitative factors for any reporting unit in any period and proceed directly to performing the first step of the quantitative two-step goodwill impairment test, as was required prior to the issuance of this new guidance. An entity may begin or resume performing the qualitative assessment in any subsequent period. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We adopted this new guidance in 2011. Our adoption of this new guidance did not impact our financial position, results of operations or cash flows.

In July 2012, the FASB issued guidance related to evaluating indefinite-lived intangible assets for impairment. The new guidance provides entities with the option of performing a qualitative assessment of whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If an entity concludes that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value, it is not required to perform the quantitative impairment test. Entities also have the option of bypassing the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. Entities are able to resume performing the qualitative assessment in any subsequent period. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We adopted this new guidance in 2012. Our adoption of this new guidance did not impact our financial position, results of operations or cash flows.

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Investments (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Held to Maturity
Held to maturity, at amortized cost	$ 42,100,196	$ 58,489,619
Held to Maturity, Gross Unrealized Gains	1,635,543	2,932,737
Held to Maturity, Gross Unrealized Losses		9
Total Held to Maturity, Estimated Fair Value	43,735,739	61,422,347
Available for Sale
Available for Sale, Amortized Cost	663,836,989	621,537,657
Available for Sale, Gross Unrealized Gains	40,362,006	33,516,410
Available for Sale, Gross Unrealized Losses	931,916	1,018,351
Available for Sale, Estimated Fair Value	703,267,079	654,035,716
U.S. Treasury securities and obligations of U.S. government corporations and agencies [Member]
Held to Maturity
Held to maturity, at amortized cost	1,000,000	1,000,000
Held to Maturity, Gross Unrealized Gains	11,510	53,990
Total Held to Maturity, Estimated Fair Value	1,011,510	1,053,990
Available for Sale
Available for Sale, Amortized Cost	70,253,846	59,431,789
Available for Sale, Gross Unrealized Gains	1,101,208	1,545,768
Available for Sale, Gross Unrealized Losses	43,951
Available for Sale, Estimated Fair Value	71,311,103	60,977,557
Obligations of states and political subdivisions [Member]
Held to Maturity
Held to maturity, at amortized cost	40,909,132	56,965,959
Held to Maturity, Gross Unrealized Gains	1,609,211	2,857,005
Total Held to Maturity, Estimated Fair Value	42,518,343	59,822,964
Available for Sale
Available for Sale, Amortized Cost	385,371,983	372,663,210
Available for Sale, Gross Unrealized Gains	32,221,045	26,252,161
Available for Sale, Gross Unrealized Losses	606,065	38,789
Available for Sale, Estimated Fair Value	416,986,963	398,876,582
Corporate securities [Member]
Held to Maturity
Held to maturity, at amortized cost		249,850
Held to Maturity, Gross Unrealized Gains		2,756
Total Held to Maturity, Estimated Fair Value		252,606
Available for Sale
Available for Sale, Amortized Cost	73,941,532	62,836,703
Available for Sale, Gross Unrealized Gains	3,522,954	1,805,109
Available for Sale, Gross Unrealized Losses	108,709	528,163
Available for Sale, Estimated Fair Value	77,355,777	64,113,649
Residential mortgage-backed securities [Member]
Held to Maturity
Held to maturity, at amortized cost	191,064	273,810
Held to Maturity, Gross Unrealized Gains	14,822	18,986
Held to Maturity, Gross Unrealized Losses		9
Total Held to Maturity, Estimated Fair Value	205,886	292,787
Available for Sale
Available for Sale, Amortized Cost	125,606,445	119,367,152
Available for Sale, Gross Unrealized Gains	3,315,976	3,306,932
Available for Sale, Gross Unrealized Losses	66,443	43,694
Available for Sale, Estimated Fair Value	128,855,978	122,630,390
Fixed maturities [Member]
Available for Sale
Available for Sale, Amortized Cost	655,173,806	614,298,854
Available for Sale, Gross Unrealized Gains	40,161,183	32,909,970
Available for Sale, Gross Unrealized Losses	825,168	610,646
Available for Sale, Estimated Fair Value	694,509,821	646,598,178
Equity securities [Member]
Available for Sale
Available for Sale, Amortized Cost	8,663,183	7,238,803
Available for Sale, Gross Unrealized Gains	200,823	606,440
Available for Sale, Gross Unrealized Losses	106,748	407,705
Available for Sale, Estimated Fair Value	$ 8,757,258	$ 7,437,538

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Statutory Net Income, Capital and Surplus and Dividend Restrictions (Tables)

12 Months Ended

Dec. 31, 2012

Statutory Net Income, Capital and Surplus and Dividend Restrictions [Abstract]

Statutory net income, capital and surplus and dividend

	2012			2011			2010
Atlantic States:
Statutory capital and surplus	$	180,465,658		$	173,505,872		$	191,775,057
Statutory unassigned surplus		124,924,794			113,497,280			131,817,978
Statutory net income (loss)		12,507,540			(7,729,040	)		11,002,447
Southern:
Statutory capital and surplus		58,841,059			60,876,093			63,609,630
Statutory unassigned surplus		7,843,473			9,364,037			12,612,044
Statutory net (loss) income		(1,539,943	)		1,795,195			(2,083,206	)
Le Mars:
Statutory capital and surplus		26,803,140			24,720,327			25,539,580
Statutory unassigned surplus		14,210,400			11,373,158			12,485,531
Statutory net income (loss)		2,423,225			(1,661,327	)		(3,166,242	)
Peninsula:
Statutory capital and surplus		42,471,092			40,744,215			41,932,367
Statutory unassigned surplus		24,671,678			22,601,043			23,580,784
Statutory net income		1,478,823			1,210,247			2,336,947
Sheboygan:
Statutory capital and surplus		10,944,235			10,800,499			11,671,405
Statutory unassigned (deficit) surplus		(1,087,936	)		(1,437,493	)		(479,140	)
Statutory net loss		(33,316	)		(1,237,478	)		(286,613	)
MICO:
Statutory capital and surplus		42,443,200			39,264,423			37,343,663
Statutory unassigned surplus		16,440,388			12,689,880			10,240,870
Statutory net income		2,698,257			2,889,619			3,026,178

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Interim Financial Data (Unaudited)

12 Months Ended

Dec. 31, 2012

Interim Financial Data [Abstract]

Interim Financial Data (unaudited)

22 - Interim Financial Data (unaudited)

	2012
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Net premiums earned	$	114,691,791	$	117,569,122	$	120,916,960	$	121,824,349
Total revenues		125,348,162		127,299,190		130,431,531		131,903,702
Net losses and loss expenses		76,609,219		86,385,353		82,105,094		87,771,918
Net income		8,010,147		2,023,067		6,839,384		6,220,022
Net earnings per common share:
Class A common stock - basic		0.32		0.08		0.27		0.25
Class A common stock - diluted		0.31		0.08		0.27		0.25
Class B common stock - basic and diluted		0.29		0.07		0.25		0.22

	2011
	First Quarter		Second Quarter			Third Quarter		Fourth Quarter
Net premiums earned	$	103,795,279	$	104,991,401		$	108,506,809	$	114,176,695
Total revenues		111,583,442		117,054,498			119,164,471		127,215,208
Net losses and loss expenses		73,079,565		84,195,796			89,411,543		93,815,873
Net income (loss)		2,205,936		(1,693,989	)		819,926		(878,920	)
Net earnings (loss) per common share:
Class A common stock - basic and diluted		0.09		(0.07	)		0.03		(0.03	)
Class B common stock - basic and diluted		0.08		(0.06	)		0.03		(0.03	)

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Guaranty Fund and Other Insurance-Related Assessments

12 Months Ended

Dec. 31, 2012

Guaranty Fund and Other Insurance-Related Assessments [Abstract]

Guaranty Fund and Other Insurance-Related Assessments

21 - Guaranty Fund and Other Insurance-Related Assessments

Our insurance subsidiaries’ liabilities for guaranty fund and other insurance-related assessments were $1,403,829 and $1,812,078 at December 31, 2012 and 2011, respectively. These liabilities included $433,994 and $548,644 related to surcharges collected by our insurance subsidiaries on behalf of regulatory authorities for 2012 and 2011, respectively.

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Condensed Financial Information of Parent Company (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Assets
Cash	$ 19,801,290	$ 13,245,378	$ 16,342,212	$ 12,923,898
Property and equipment	5,953,833	6,154,383
Other	1,154,388	1,285,089
Total assets	1,336,889,187	1,290,793,478
Liabilities
Cash dividends declared to stockholders	3,066,532	2,996,076
Borrowings under line of credit	52,000,000	54,500,000
Subordinated debentures	20,465,000	20,465,000
Other	2,298,891	2,104,702
Total liabilities	936,855,093	907,341,886
Stockholders' equity	400,034,094	383,451,592	380,102,810	385,505,699
Total liabilities and stockholders' equity	1,336,889,187	1,290,793,478
Parent Company [Member]
Assets
Investment in subsidiaries/affiliates (equity method)	470,565,000	445,795,000
Short-term investments	326,000	9,258,000
Cash	805,000	684,000
Property and equipment	883,000	1,224,000
Other	304,000	381,000
Total assets	472,883,000	457,342,000
Liabilities
Cash dividends declared to stockholders	3,067,000	2,996,000
Borrowings under line of credit	52,000,000	54,500,000
Subordinated debentures	15,465,000	15,465,000
Other	2,316,000	930,000
Total liabilities	72,848,000	73,891,000
Stockholders' equity	400,035,000	383,451,000
Total liabilities and stockholders' equity	$ 472,883,000	$ 457,342,000

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Transactions With Affiliates (Details 5) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Schedule of affiliated reinsurance transactions on net premiums, insurance subsidiaries earned
Assumed	$ 320,992,459	$ 284,445,019	$ 252,825,747
Ceded	(178,383,519)	(153,889,406)	(118,002,649)
Net	$ 142,608,940	$ 130,555,613	$ 134,823,098

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Reconciliation of Statutory Filings to Amounts Reported Herein (Tables)

12 Months Ended

Dec. 31, 2012

Reconciliation of Statutory Filings to Amounts Reported Herein [Abstract]

Reconciliations of statutory net income and capital and surplus

	Year Ended December 31,
	2012			2011			2010
Statutory net income (loss) of insurance subsidiaries	$	17,534,586		$	(4,732,784	)	$	9,163,680
Increases (decreases):
Deferred policy acquisition costs		3,696,742			1,979,376			1,601,400
Deferred federal income taxes		(1,151,250	)		5,922,490			2,380,430
Salvage and subrogation recoverable		772,600			1,273,000			748,000
Amortization of MICO fair value adjustments		(5,416	)		(3,275,777	)		(597,643	)
Consolidating eliminations and adjustments		(5,421,779	)		(15,080,164	)		(12,178,977	)
Parent-only net income		7,667,137			14,366,812			10,350,289
Net income as reported herein	$	23,092,620		$	452,953		$	11,467,179

	Year Ended December 31,
	2012			2011			2010
Statutory capital and surplus of insurance subsidiaries	$	361,968,384		$	349,911,429		$	371,871,702
Increases (decreases):
Deferred policy acquisition costs		40,121,697			36,424,955			34,445,579
Deferred federal income taxes		(25,682,004	)		(21,007,223	)		(14,834,855	)
Salvage and subrogation recoverable		12,000,600			11,228,000			9,955,000
Non-admitted assets and other adjustments, net		2,005,603			1,478,988			4,889,231
Fixed maturities		39,607,340			33,165,065			4,430,879
Parent-only equity and other adjustments		(29,987,526	)		(27,749,622	)		(30,654,726	)
Stockholders’ equity as reported herein	$	400,034,094		$	383,451,592		$	380,102,810

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Supplementary Insurance Information

12 Months Ended

Dec. 31, 2012

Supplementary Insurance Information [Abstract]

SUPPLEMENTARY INSURANCE INFORMATION

SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION

Years Ended December 31, 2012, 2011 and 2010

($ in thousands)

Segment	Net Earned Premiums		Net Investment Income		Net Losses And Loss Expenses		Amortization of Deferred Policy Acquisition Costs		Other Underwriting Expenses		Net Premiums Written
Year Ended December 31, 2012
Personal lines	$	300,269	$	—	$	218,502	$	46,977	$	46,725	$	308,571
Commercial lines		174,733		—		114,370		27,337		27,190		187,876
Investments		—		20,169		—		—		—		—
	$	475,002	$	20,169	$	332,872	$	74,314	$	73,915	$	496,447
Year Ended December 31, 2011
Personal lines	$	280,370	$	—	$	232,141	$	44,558	$	43,487	$	291,065
Commercial lines		151,100		—		108,362		24,013		23,437		162,986
Investments		—		20,858		—		—		—		—
	$	431,470	$	20,858	$	340,503	$	68,571	$	66,924	$	454,051
Year Ended December 31, 2010
Personal lines	$	260,469	$	—	$	196,008	$	45,719	$	37,596	$	268,047
Commercial lines		117,561		—		78,301		20,635		16,969		123,475
Investments		—		19,950		—		—		—		—
	$	378,030	$	19,950	$	274,309	$	66,354	$	54,565	$	391,522

	At December 31,
Segment	Deferred Policy Acquisition Costs		Liability For Losses And Loss Expenses		Unearned Premiums		Other Policy Claims and Benefits Payable
2012
Personal lines	$	24,956	$	201,884	$	225,841	$	—
Commercial lines		15,166		256,943		137,247		—
Investments		—		—		—		—
	$	40,122	$	458,827	$	363,088	$	—
2011
Personal lines	$	23,385	$	207,047	$	216,314	$	—
Commercial lines		13,040		235,361		120,623		—
Investments		—		—		—		—
	$	36,425	$	442,408	$	336,937	$	—

See accompanying Report and Consent of Independent Registered Public Accounting Firm.

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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2012

Summary of Significant Accounting Policies [Abstract]

Organization and Business

Organization and Business

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 personal and commercial lines of property and casualty coverages exclusively through a network of independent insurance agents in certain Mid-Atlantic, Midwestern, New England and Southern states. We acquired MICO on December 1, 2010, and we have included MICO’s results of operations in our consolidated results of operations since that date. We also own 48.2% of the outstanding stock of Donegal Financial Services Corporation (“DFSC”), a grandfathered unitary savings and loan holding company that owns Union Community Bank FSB (“UCB”), a federal savings bank. UCB has 13 banking offices, all of which are located in Lancaster County, Pennsylvania. Donegal Mutual owns the remaining 51.8% of the outstanding stock of DFSC.

We have four segments: our investment function, our personal lines of insurance, our commercial lines of insurance and our investment in DFSC. 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 December 31, 2012, Donegal Mutual held approximately 39% of our outstanding Class A common stock and approximately 76% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately 66% 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, our insurance subsidiaries and Donegal Mutual 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 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 versus 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, as 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 pool. Pooled business represents the predominant percentage of the net underwriting activity of both Donegal Mutual and Atlantic States. We refer to Note 3 - Transactions with Affiliates for more information regarding the pooling agreement.

In December 2010, we acquired MICO, which had been a majority owned subsidiary of West Bend Mutual Insurance Company (“West Bend”), for $42.3 million in cash. Effective on December 1, 2010, MICO entered into a 50% quota-share agreement with third-party reinsurers and a 25% quota-share reinsurance agreement with Donegal Mutual to replace the 75% quota-share reinsurance agreement MICO maintained with West Bend through November 30, 2010.

In May 2011, DFSC and Union National Financial Corporation (“UNNF”) merged, 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 use the equity method of accounting for our investment in DFSC. Under the equity method, we record our investment at cost, with adjustments for our share of DFSC’s earnings and losses as well as changes in DFSC’s equity due to unrealized gains and losses.

Basis of Consolidation

Basis of Consolidation

Our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America, include our accounts and those of our wholly owned subsidiaries. We have eliminated all significant inter-company accounts and transactions in consolidation. The terms “we,” “us,” “our” or the “Company” as used herein refer to the consolidated entity.

Use of Estimates

Use of Estimates

In preparing our consolidated financial statements, our management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.

We make estimates and assumptions that can have a significant effect on amounts and disclosures we report in our consolidated financial statements. The most significant estimates relate to our insurance subsidiaries’ reserves for property and casualty insurance unpaid losses and loss expenses, valuation of investments and determination of other-than-temporary impairment and our insurance subsidiaries’ policy acquisition costs. While we believe our estimates and the estimates of our insurance subsidiaries are appropriate, the ultimate amounts may differ from the estimates provided. We regularly review our methods for making these estimates as well as the continuing appropriateness of the estimated amounts, and we reflect any adjustment we consider necessary in our current results of operations.

Reclassification

Reclassification

During 2012, we recorded an entry that reduced Accumulated Other Comprehensive Income and increased Retained Earnings by $1.8 million to correct an immaterial error related to prior years.

Investments

Investments

We classify our debt and equity securities into the following categories:

Held to Maturity - Debt securities that we have the positive intent and ability to hold to maturity; reported at amortized cost.

Available for Sale - Debt and equity securities not classified as held to maturity; reported at fair value, with unrealized gains and losses excluded from income and reported as a separate component of stockholders’ equity (net of tax effects).

Short-term investments carried at amortized cost, which approximates fair value.

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 of our 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. 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 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 for mortgage-backed debt securities using anticipated prepayments.

We account for investments in affiliates using the equity method of accounting. Under the equity method, we record our investment at cost, with adjustments for our share of the affiliate’s earnings and losses as well as changes in the affiliate’s equity due to unrealized gains and losses.

Fair Values of Financial Instruments

Fair Values of Financial Instruments

We use the following methods and assumptions in estimating our fair value disclosures:

Investments - We present our investments in available-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 for our fixed maturity and equity investments. We generally obtain one price per security. The 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 determine if the estimates obtained are representative of fair values based upon their 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 monitor the market and are familiar with current trading ranges for similar securities and 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, coupon rates, security type and recent trading activity. Our investment personnel review documentation with respect to the pricing services’ pricing methodology that they obtain periodically to determine if the primary pricing sources, market inputs and pricing frequency for various security types are reasonable. We refer to Note 6 - Fair Value Measurements for more information regarding our methods and assumptions in estimating fair values.

Cash and Short-Term Investments - The carrying amounts reported in the balance sheet for these instruments approximate their fair values.

Premiums and Reinsurance Receivables and Payables - The carrying amounts reported in the balance sheet for these instruments related to premiums and paid losses and loss expenses approximate their fair values.

Subordinated Debentures - The carrying amounts reported in the balance sheet for these instruments approximate their fair values.

Revenue Recognition

Revenue Recognition

Our insurance subsidiaries recognize insurance premiums as income over the terms of the policies they issue. Our insurance subsidiaries calculate unearned premiums on a daily pro-rata basis. We recorded an unearned premium liability for the fair value of the net unexpired portion of the insurance policies we acquired in connection with our acquisition of MICO. We recognized this unearned premium liability as income over the terms of MICO’s policies.

Policy Acquisition Costs

Policy Acquisition Costs

We defer our insurance subsidiaries’ policy acquisition costs, consisting primarily of commissions, premium taxes and certain other underwriting costs, reduced by ceding commissions, that vary with and relate directly to the production of business. We amortize these deferred policy acquisition costs over the period in which our insurance subsidiaries earn the premiums. The method we follow in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss expenses and certain other costs we expect to incur as our insurance subsidiaries earn the premium. Estimates in the calculation of policy acquisition costs have not shown material variability because of uncertainties in applying accounting principles or as a result of sensitivities to changes in key assumptions.

Property and Equipment

Property and Equipment

We report property and equipment at depreciated cost that we compute using the straight-line method based upon estimated useful lives of the assets.

Losses and Loss Expenses

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 policyholder claims based on facts and circumstances then known. 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 and expected claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, our insurance subsidiaries may learn additional facts regarding certain claims, and consequently, it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates of liability. We reflect any adjustments to our insurance subsidiaries’ liabilities for losses and loss expenses in our operating results in the period in which our insurance subsidiaries record the changes in 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 a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss their 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 closely monitor their liabilities 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.

We recorded a liability for the fair value of the net loss and loss expense reserves we assumed in connection with our acquisition of MICO. We incorporated various factors in determining the fair value of those reserve estimates, including the guarantee against any deficiency in excess of $1.0 million we discuss in Note 4-Business Combinations.

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 as to our insurance subsidiaries’ internal operations. For example, our insurance subsidiaries have experienced a decrease in claims frequency on workers’ compensation claims during the past several years while claims severity has gradually increased. These trend changes give rise to greater uncertainty as to the pattern of future loss settlements on workers’ compensation 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 collectibility of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries attempt to make appropriate adjustments for such changes in their reserves. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded.

Our insurance subsidiaries seek to enhance their underwriting results by carefully selecting the product lines they underwrite. Our insurance subsidiaries’ personal lines products include standard and preferred risks in private passenger automobile and homeowners lines. Our insurance subsidiaries’ commercial lines products primarily include business offices, wholesalers, service providers, contractors, artisans and light manufacturing operations. Our insurance subsidiaries have limited exposure to asbestos and other environmental liabilities. Our insurance subsidiaries write no medical malpractice liability risks.

Income Taxes

Income Taxes

We currently file a consolidated federal income tax return.

We account for income taxes using the asset and liability method. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when we realize or settle such amounts.

Credit Risk

Credit Risk

Our objective is to earn competitive returns by investing in a diversified portfolio of securities. Our portfolio of fixed maturity securities and, to a lesser extent, short-term investments is subject to credit risk. We define this risk as the potential loss in fair value resulting from adverse changes in the borrower’s ability to repay the debt. We manage this risk by performing an analysis of prospective investments and through regular reviews of our portfolio by our investment staff. We also limit the amount of our total investment portfolio that we invest in any one security.

Our insurance subsidiaries provide property and liability insurance coverages through independent insurance agencies located throughout their operating areas. Our insurance subsidiaries bill the majority of this business directly to their policyholders, although our insurance subsidiaries bill a portion of their commercial business through their agents, to whom they extend credit in the normal course of business.

Our insurance subsidiaries have reinsurance agreements with Donegal Mutual and with a number of major unaffiliated reinsurers.

Reinsurance Accounting and Reporting

Reinsurance Accounting and Reporting

Our insurance subsidiaries rely upon reinsurance agreements to limit their maximum net loss from large single risks or risks in concentrated areas and to increase their capacity to write insurance. Reinsurance does not relieve our insurance subsidiaries from liability to their respective policyholders. To the extent that a reinsurer cannot pay losses for which it is liable under the terms of a reinsurance agreement with one of our insurance subsidiaries, our insurance subsidiaries retain continued liability for such losses. However, in an effort to reduce the risk of non-payment, our insurance subsidiaries require all of their reinsurers to have an A.M. Best rating of A- or better or, with respect to foreign reinsurers, to have a financial condition that, in the opinion of management, is equivalent to a company with an A.M. Best rating of A- or better. We refer to Note 11 - Reinsurance for more information regarding our reinsurance agreements.

Stock-Based Compensation

Stock-Based Compensation

We measure all share-based payments to employees, including grants of stock options, using a fair-value-based method and record such 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 other than Donegal Mutual, 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, expected term, dividend yield and expected volatility.

In 2012, we realized $52,422 in tax benefits upon the exercise of stock options. We did not realize any tax benefits upon the exercise of stock options in 2011 or 2010.

Earnings per Share

Earnings per Share

We calculate basic earnings per share by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

We have two classes of common stock, which we refer to as Class A common stock and Class B common stock. Our Class A common stock is entitled to cash dividends that are at least 10% higher than those declared and paid on our Class B common stock. Accordingly, we use the two-class method for the computation of earnings per common share. The two-class method is an earnings allocation formula that determines earnings per share separately for each class of common stock based on dividends declared and an allocation of remaining undistributed earnings using a participation percentage that reflects the dividend rights of each class.

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the underlying fair value of acquired entities. When completing acquisitions, we seek also to identify separately identifiable intangible assets that we have acquired. We assess goodwill and intangible assets with an indefinite useful life for impairment annually. We also assess goodwill and other intangible assets for impairment upon the occurrence of certain events. In making our assessment, we consider a number of factors including operating results, business plans, economic projections, anticipated future cash flows and current market data. Inherent uncertainties exist with respect to these factors and to our judgment in applying them when we make our assessment. Impairment of goodwill and other intangible assets could result from changes in economic and operating conditions in future periods.

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Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2012

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

1 - Summary of Significant Accounting Policies

Organization and Business

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 personal and commercial lines of property and casualty coverages exclusively through a network of independent insurance agents in certain Mid-Atlantic, Midwestern, New England and Southern states. We acquired MICO on December 1, 2010, and we have included MICO’s results of operations in our consolidated results of operations since that date. We also own 48.2% of the outstanding stock of Donegal Financial Services Corporation (“DFSC”), a grandfathered unitary savings and loan holding company that owns Union Community Bank FSB (“UCB”), a federal savings bank. UCB has 13 banking offices, all of which are located in Lancaster County, Pennsylvania. Donegal Mutual owns the remaining 51.8% of the outstanding stock of DFSC.

We have four segments: our investment function, our personal lines of insurance, our commercial lines of insurance and our investment in DFSC. 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 December 31, 2012, Donegal Mutual held approximately 39% of our outstanding Class A common stock and approximately 76% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately 66% 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, our insurance subsidiaries and Donegal Mutual 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 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 versus 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, as 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 pool. Pooled business represents the predominant percentage of the net underwriting activity of both Donegal Mutual and Atlantic States. We refer to Note 3 - Transactions with Affiliates for more information regarding the pooling agreement.

In December 2010, we acquired MICO, which had been a majority owned subsidiary of West Bend Mutual Insurance Company (“West Bend”), for $42.3 million in cash. Effective on December 1, 2010, MICO entered into a 50% quota-share agreement with third-party reinsurers and a 25% quota-share reinsurance agreement with Donegal Mutual to replace the 75% quota-share reinsurance agreement MICO maintained with West Bend through November 30, 2010.

In May 2011, DFSC and Union National Financial Corporation (“UNNF”) merged, 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 use the equity method of accounting for our investment in DFSC. Under the equity method, we record our investment at cost, with adjustments for our share of DFSC’s earnings and losses as well as changes in DFSC’s equity due to unrealized gains and losses.

Basis of Consolidation

Our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America, include our accounts and those of our wholly owned subsidiaries. We have eliminated all significant inter-company accounts and transactions in consolidation. The terms “we,” “us,” “our” or the “Company” as used herein refer to the consolidated entity.

Use of Estimates

In preparing our consolidated financial statements, our management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.

We make estimates and assumptions that can have a significant effect on amounts and disclosures we report in our consolidated financial statements. The most significant estimates relate to our insurance subsidiaries’ reserves for property and casualty insurance unpaid losses and loss expenses, valuation of investments and determination of other-than-temporary impairment and our insurance subsidiaries’ policy acquisition costs. While we believe our estimates and the estimates of our insurance subsidiaries are appropriate, the ultimate amounts may differ from the estimates provided. We regularly review our methods for making these estimates as well as the continuing appropriateness of the estimated amounts, and we reflect any adjustment we consider necessary in our current results of operations.

Reclassification

During 2012, we recorded an entry that reduced Accumulated Other Comprehensive Income and increased Retained Earnings by $1.8 million to correct an immaterial error related to prior years.

Investments

We classify our debt and equity securities into the following categories:

Held to Maturity - Debt securities that we have the positive intent and ability to hold to maturity; reported at amortized cost.

Available for Sale - Debt and equity securities not classified as held to maturity; reported at fair value, with unrealized gains and losses excluded from income and reported as a separate component of stockholders’ equity (net of tax effects).

Short-term investments carried at amortized cost, which approximates fair value.

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 of our 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. 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 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 for mortgage-backed debt securities using anticipated prepayments.

We account for investments in affiliates using the equity method of accounting. Under the equity method, we record our investment at cost, with adjustments for our share of the affiliate’s earnings and losses as well as changes in the affiliate’s equity due to unrealized gains and losses.

Fair Values of Financial Instruments

We use the following methods and assumptions in estimating our fair value disclosures:

Investments - We present our investments in available-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 for our fixed maturity and equity investments. We generally obtain one price per security. The 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 determine if the estimates obtained are representative of fair values based upon their 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 monitor the market and are familiar with current trading ranges for similar securities and 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, coupon rates, security type and recent trading activity. Our investment personnel review documentation with respect to the pricing services’ pricing methodology that they obtain periodically to determine if the primary pricing sources, market inputs and pricing frequency for various security types are reasonable. We refer to Note 6 - Fair Value Measurements for more information regarding our methods and assumptions in estimating fair values.

Cash and Short-Term Investments - The carrying amounts reported in the balance sheet for these instruments approximate their fair values.

Premiums and Reinsurance Receivables and Payables - The carrying amounts reported in the balance sheet for these instruments related to premiums and paid losses and loss expenses approximate their fair values.

Subordinated Debentures - The carrying amounts reported in the balance sheet for these instruments approximate their fair values.

Revenue Recognition

Our insurance subsidiaries recognize insurance premiums as income over the terms of the policies they issue. Our insurance subsidiaries calculate unearned premiums on a daily pro-rata basis. We recorded an unearned premium liability for the fair value of the net unexpired portion of the insurance policies we acquired in connection with our acquisition of MICO. We recognized this unearned premium liability as income over the terms of MICO’s policies.

Policy Acquisition Costs

We defer our insurance subsidiaries’ policy acquisition costs, consisting primarily of commissions, premium taxes and certain other underwriting costs, reduced by ceding commissions, that vary with and relate directly to the production of business. We amortize these deferred policy acquisition costs over the period in which our insurance subsidiaries earn the premiums. The method we follow in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss expenses and certain other costs we expect to incur as our insurance subsidiaries earn the premium. Estimates in the calculation of policy acquisition costs have not shown material variability because of uncertainties in applying accounting principles or as a result of sensitivities to changes in key assumptions.

Property and Equipment

We report property and equipment at depreciated cost that we compute using the straight-line method based upon estimated useful lives of the assets.

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 policyholder claims based on facts and circumstances then known. 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 and expected claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, our insurance subsidiaries may learn additional facts regarding certain claims, and consequently, it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates of liability. We reflect any adjustments to our insurance subsidiaries’ liabilities for losses and loss expenses in our operating results in the period in which our insurance subsidiaries record the changes in 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 a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss their 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 closely monitor their liabilities 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.

We recorded a liability for the fair value of the net loss and loss expense reserves we assumed in connection with our acquisition of MICO. We incorporated various factors in determining the fair value of those reserve estimates, including the guarantee against any deficiency in excess of $1.0 million we discuss in Note 4-Business Combinations.

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 as to our insurance subsidiaries’ internal operations. For example, our insurance subsidiaries have experienced a decrease in claims frequency on workers’ compensation claims during the past several years while claims severity has gradually increased. These trend changes give rise to greater uncertainty as to the pattern of future loss settlements on workers’ compensation 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 collectibility of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries attempt to make appropriate adjustments for such changes in their reserves. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded.

Our insurance subsidiaries seek to enhance their underwriting results by carefully selecting the product lines they underwrite. Our insurance subsidiaries’ personal lines products include standard and preferred risks in private passenger automobile and homeowners lines. Our insurance subsidiaries’ commercial lines products primarily include business offices, wholesalers, service providers, contractors, artisans and light manufacturing operations. Our insurance subsidiaries have limited exposure to asbestos and other environmental liabilities. Our insurance subsidiaries write no medical malpractice liability risks.

Income Taxes

We currently file a consolidated federal income tax return.

We account for income taxes using the asset and liability method. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when we realize or settle such amounts.

Credit Risk

Our objective is to earn competitive returns by investing in a diversified portfolio of securities. Our portfolio of fixed maturity securities and, to a lesser extent, short-term investments is subject to credit risk. We define this risk as the potential loss in fair value resulting from adverse changes in the borrower’s ability to repay the debt. We manage this risk by performing an analysis of prospective investments and through regular reviews of our portfolio by our investment staff. We also limit the amount of our total investment portfolio that we invest in any one security.

Our insurance subsidiaries provide property and liability insurance coverages through independent insurance agencies located throughout their operating areas. Our insurance subsidiaries bill the majority of this business directly to their policyholders, although our insurance subsidiaries bill a portion of their commercial business through their agents, to whom they extend credit in the normal course of business.

Our insurance subsidiaries have reinsurance agreements with Donegal Mutual and with a number of major unaffiliated reinsurers.

Reinsurance Accounting and Reporting

Our insurance subsidiaries rely upon reinsurance agreements to limit their maximum net loss from large single risks or risks in concentrated areas and to increase their capacity to write insurance. Reinsurance does not relieve our insurance subsidiaries from liability to their respective policyholders. To the extent that a reinsurer cannot pay losses for which it is liable under the terms of a reinsurance agreement with one of our insurance subsidiaries, our insurance subsidiaries retain continued liability for such losses. However, in an effort to reduce the risk of non-payment, our insurance subsidiaries require all of their reinsurers to have an A.M. Best rating of A- or better or, with respect to foreign reinsurers, to have a financial condition that, in the opinion of management, is equivalent to a company with an A.M. Best rating of A- or better. We refer to Note 11 - Reinsurance for more information regarding our reinsurance agreements.

Stock-Based Compensation

We measure all share-based payments to employees, including grants of stock options, using a fair-value-based method and record such 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 other than Donegal Mutual, 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, expected term, dividend yield and expected volatility.

In 2012, we realized $52,422 in tax benefits upon the exercise of stock options. We did not realize any tax benefits upon the exercise of stock options in 2011 or 2010.

Earnings per Share

We calculate basic earnings per share by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

We have two classes of common stock, which we refer to as Class A common stock and Class B common stock. Our Class A common stock is entitled to cash dividends that are at least 10% higher than those declared and paid on our Class B common stock. Accordingly, we use the two-class method for the computation of earnings per common share. The two-class method is an earnings allocation formula that determines earnings per share separately for each class of common stock based on dividends declared and an allocation of remaining undistributed earnings using a participation percentage that reflects the dividend rights of each class.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the underlying fair value of acquired entities. When completing acquisitions, we seek also to identify separately identifiable intangible assets that we have acquired. We assess goodwill and intangible assets with an indefinite useful life for impairment annually. We also assess goodwill and other intangible assets for impairment upon the occurrence of certain events. In making our assessment, we consider a number of factors including operating results, business plans, economic projections, anticipated future cash flows and current market data. Inherent uncertainties exist with respect to these factors and to our judgment in applying them when we make our assessment. Impairment of goodwill and other intangible assets could result from changes in economic and operating conditions in future periods.

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Transactions with Affiliates (Tables)

12 Months Ended

Dec. 31, 2012

Transactions with Affiliates [Abstract]

Schedule of reinsurance Atlantic States ceded to the pool

	2012		2011		2010
Premiums earned	$	132,876,094	$	118,812,725	$	105,376,068
Losses and loss expenses		92,459,147		97,130,846		81,203,625
Prepaid reinsurance premiums		70,572,281		64,214,378		57,783,435
Liability for losses and loss expenses		83,623,652		77,312,645		65,028,781

Schedule of reinsurance Atlantic States assumed from the pool

	2012		2011		2010
Premiums earned	$	298,803,060	$	266,687,610	$	238,308,846
Losses and loss expenses		187,415,893		206,907,170		160,256,348
Unearned premiums		157,140,642		141,880,039		125,322,884
Liability for losses and loss expenses		162,863,045		156,941,512		134,580,026

Schedule of Southern and Le Mars assumed from Donegal Mutual pursuant to the quota-share reinsurance agreements

	2012		2011		2010
Premiums earned	$	22,189,399	$	17,757,409	$	14,516,901
Losses and loss expenses		19,620,587		14,983,405		12,600,094
Unearned premiums		9,926,381		10,225,922		8,124,069
Liability for losses and loss expenses		8,873,592		7,770,053		7,316,879

Schedule of reinsurance ceded to Donegal Mutual pursuant to these quota-share reinsurance agreements

	2012		2011		2010
Premiums earned	$	33,046,914	$	22,123,229	$	4,516,313
Losses and loss expenses		22,569,557		16,038,590		3,463,112
Prepaid reinsurance premiums		15,457,605		14,181,338		4,590,424
Liability for losses and loss expenses		18,285,182		11,868,641		4,006,231

Schedule of insurance subsidiaries ceded to Donegal Mutual pursuant to these reinsurance agreements

	2012		2011		2010
Premiums earned	$	12,460,511	$	12,953,452	$	8,110,268
Losses and loss expenses		10,787,850		20,770,637		6,649,775
Liability for losses and loss expenses		2,206,786		3,980,024		3,441,447

Schedule of affiliated reinsurance transactions on net premiums our insurance subsidiaries earned

	2012			2011			2010
Assumed	$	320,992,459		$	284,445,019		$	252,825,747
Ceded		(178,383,519	)		(153,889,406	)		(118,002,649	)
Net	$	142,608,940		$	130,555,613		$	134,823,098

Schedule of reinsurance transactions on net losses and loss expenses our insurance subsidiaries incurred

	2012			2011			2010
Assumed	$	207,036,480		$	221,890,575		$	172,856,442
Ceded		(125,816,554	)		(133,940,073	)		(91,316,512	)
Net	$	81,219,926		$	87,950,502		$	81,539,930

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Reinsurance (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Ceded Credit Risk [Line Items]
Excess of loss reinsured under an agreement	$ 1,000,000
Percentage of accumulation of losses	50.00%
Quota share reinsurance percentage		50.00%	75.00%
Reinsurance (Textual) [Abstract]
Natural disasters, over a set retention	5,000,000
Workers' compensation insurance	10,000,000
Percentage of reinsurer coverage	36.00%
Donegal Mutual [Member]
Ceded Credit Risk [Line Items]
Percentage of accumulation of losses	25.00%
Maximum amount of loss coverage under reinsurance agreement of property catastrophe	135,000,000
Insurance Subsidiaries [Member]
Ceded Credit Risk [Line Items]
Excess of loss reinsured under an agreement	5,000,000
Excess of loss treaties	40,000,000
Minimum [Member]
Ceded Credit Risk [Line Items]
Percentage of accumulation of losses	90.00%
Quota share reinsurance reduced percentage	30.00%	40.00%
Maximum [Member]
Ceded Credit Risk [Line Items]
Percentage of accumulation of losses	100.00%
Quota share reinsurance reduced percentage	40.00%	50.00%
Catastrophe Reinsurance [Member]
Ceded Credit Risk [Line Items]
Excess of loss reinsured under an agreement	$ 750,000

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Reinsurance (Tables)

12 Months Ended

Dec. 31, 2012

Deferred Policy Acquisition Costs / Reinsurance [Abstract]

Ceded reinsurance transactions with unaffiliated reinsurers

	2012		2011		2010
Premiums written	$	76,736,510	$	80,265,127	$	24,357,938
Premiums earned		79,680,782		88,297,408		26,551,687
Losses and loss expenses		56,179,284		82,836,893		19,764,441
Prepaid reinsurance premiums		25,126,276		28,054,302		26,991,912
Liability for losses and loss expenses		103,775,940		106,231,527		92,945,915

Total ceded reinsurance transactions with both affiliated and unaffiliated reinsurers

	2012		2011		2010
Premiums earned	$	258,064,301	$	242,186,814	$	144,554,336
Losses and loss expenses		181,995,838		216,776,966		111,080,953
Prepaid reinsurance premiums		111,156,162		106,450,018		89,365,771
Liability for losses and loss expenses		207,891,560		199,392,836		165,442,373

Amounts represent the effect of reinsurance on premiums written

	2012			2011			2010
Direct	$	419,811,847		$	397,810,566		$	279,627,255
Assumed		339,389,274			306,416,861			262,574,572
Ceded		(262,754,201	)		(250,176,390	)		(150,679,539	)
Net premiums written	$	496,446,920		$	454,051,037		$	391,522,288

Amounts represent the effect of reinsurance on premiums earned

	2012			2011			2010
Direct	$	408,846,530		$	385,737,801		$	269,394,549
Assumed		324,219,993			287,919,197			253,189,916
Ceded		(258,064,301	)		(242,186,814	)		(144,554,336	)
Net premiums earned	$	475,002,222		$	431,470,184		$	378,030,129

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Transactions With Affiliates (Details 2) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Schedule of Southern and Le Mars assumed from Donegal Mutual pursuant to the quota-share reinsurance agreements
Premiums earned	$ 324,219,993	$ 287,919,197	$ 253,189,916
Southern And Le Mars [Member]
Schedule of Southern and Le Mars assumed from Donegal Mutual pursuant to the quota-share reinsurance agreements
Premiums earned	22,189,399	17,757,409	14,516,901
Losses and loss expenses	19,620,587	14,983,405	12,600,094
Unearned premiums	9,926,381	10,225,922	8,124,069
Liability for losses and loss expenses	$ 8,873,592	$ 7,770,053	$ 7,316,879

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Deferred Policy Acquisition Costs (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Changes in insurance subsidiaries' deferred policy acquisition costs
Balance, January 1	$ 36,424,955	$ 34,445,579	$ 32,844,179
Acquisition costs deferred	78,010,742	70,550,376	67,955,400
Amortization charged to earnings	(74,314,000)	(68,571,000)	(66,354,000)
Balance, December 31	$ 40,121,697	$ 36,424,955	$ 34,445,579

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Consolidated Balance Sheets (USD $)	Dec. 31, 2012	Dec. 31, 2011
Fixed maturities
Held to maturity, at amortized cost (fair value $43,735,739 and $61,422,347)	$ 42,100,196	$ 58,489,619
Available for sale, at fair value (amortized cost $655,173,806 and $614,298,854)	694,509,821	646,598,178
Equity securities, available for sale, at fair value (cost $8,663,183 and $7,238,803)	8,757,258	7,437,538
Investments in affiliates	37,235,530	32,322,246
Short-term investments, at cost, which approximates fair value	23,826,227	40,461,410
Total investments	806,429,032	785,308,991
Cash	19,801,290	13,245,378
Accrued investment income	6,332,085	6,713,038
Premiums receivable	117,196,478	104,715,327
Reinsurance receivable	215,893,322	209,823,907
Deferred policy acquisition costs	40,121,697	36,424,955
Deferred tax asset, net	6,267,536	9,919,720
Prepaid reinsurance premiums	111,156,162	106,450,018
Property and equipment, net	5,953,833	6,154,383
Accounts receivable - securities		1,507,500
Federal income taxes recoverable		2,661,808
Goodwill	5,625,354	5,625,354
Other intangible assets	958,010	958,010
Other	1,154,388	1,285,089
Total assets	1,336,889,187	1,290,793,478
Liabilities
Losses and loss expenses	458,827,395	442,407,615
Unearned premiums	363,088,103	336,937,261
Accrued expenses	17,140,832	20,956,549
Reinsurance balances payable	13,941,337	20,039,339
Borrowings under line of credit	52,000,000	54,500,000
Cash dividends declared to stockholders	3,066,532	2,996,076
Subordinated debentures	20,465,000	20,465,000
Federal income taxes payable	583,977
Due to affiliate	4,579,437	5,386,391
Drafts payable	863,589	1,548,953
Other	2,298,891	2,104,702
Total liabilities	936,855,093	907,341,886
Stockholders' Equity
Preferred stock, $1.00 par value, authorized 2,000,000 shares; none issued
Additional paid-in capital	176,416,585	170,836,943
Accumulated other comprehensive income	26,394,577	23,533,447
Retained earnings	209,670,214	199,604,700
Treasury stock, at cost	(12,713,193)	(10,787,520)
Total stockholders' equity	400,034,094	383,451,592
Total liabilities and stockholders' equity	1,336,889,187	1,290,793,478
Common Class A
Stockholders' Equity
Common stock value	209,419	207,530
Total stockholders' equity	209,419	207,530
Common Class B
Stockholders' Equity
Common stock value	56,492	56,492
Total stockholders' equity	$ 56,492	$ 56,492

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Supplementary Cash Flow Information (Tables)

12 Months Ended

Dec. 31, 2012

Supplementary Cash Flow Information [Abstract]

Net income taxes and interest paid

	2012		2011		2010
Income taxes	$	1,626,965	$	324,291	$	1,100,000
Interest		2,128,693		1,793,366		705,210

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Supplementary Cash Flow Information (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of net income taxes and interest paid
Income taxes	$ 1,626,965	$ 324,291	$ 1,100,000
Interest	$ 2,128,693	$ 1,793,366	$ 705,210

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Consolidated Statements of Stockholders' Equity (USD $)	Total	Additional Paid-In Capital	Accumulated Other Comprehensive Income	Retained Earnings	Treasury Stock	Common Class A	Common Class B
Beginning balance at Dec. 31, 2009	$ 385,505,699	$ 164,585,214	$ 15,007,044	$ 214,755,495	$ (9,104,246)	$ 205,700	$ 56,492
Beginning balance, shares at Dec. 31, 2009						20,569,930	5,649,240
Issuance of common stock (stock compensation plans)	1,199,422	1,198,556				866
Issuance of common stock (stock compensation plans), shares						86,597
Net income	11,467,179			11,467,179
Cash dividends	(11,477,845)			(11,477,845)
Grant of stock options		1,309,734		(1,309,734)
Purchase of treasury stock	(145,687)				(145,687)
Other comprehensive income (loss)	(6,445,958)		(6,445,958)
Ending balance at Dec. 31, 2010	380,102,810	167,093,504	8,561,086	213,435,095	(9,249,933)	206,566	56,492
Ending balance, shares at Dec. 31, 2010						20,656,527	5,649,240
Issuance of common stock (stock compensation plans)	1,460,543	1,459,579				964
Issuance of common stock (stock compensation plans), shares						96,472
Net income	452,953			452,953
Cash dividends	(11,999,488)			(11,999,488)
Grant of stock options		2,283,860		(2,283,860)
Purchase of treasury stock	(1,537,587)				(1,537,587)
Other comprehensive income (loss)	14,972,361		14,972,361
Ending balance at Dec. 31, 2011	383,451,592	170,836,943	23,533,447	199,604,700	(10,787,520)	207,530	56,492
Ending balance, shares at Dec. 31, 2011						20,752,999	5,649,240
Issuance of common stock (stock compensation plans)	2,997,511	2,995,622				1,889
Issuance of common stock (stock compensation plans), shares						188,822
Net income	23,092,620			23,092,620
Cash dividends	(12,278,965)			(12,278,965)
Grant of stock options		2,531,598		(2,531,598)
Tax benefit on exercise of stock options	52,422	52,422
Purchase of treasury stock	(1,925,673)				(1,925,673)
Other comprehensive income (loss)	4,644,587		4,644,587
Other			(1,783,457)	1,783,457
Ending balance at Dec. 31, 2012	$ 400,034,094	$ 176,416,585	$ 26,394,577	$ 209,670,214	$ (12,713,193)	$ 209,419	$ 56,492
Ending balance, shares at Dec. 31, 2012						20,941,821	5,649,240

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Statutory Net Income, Capital and Surplus and Dividend Restrictions (Details Textual) (USD $) In Millions, unless otherwise specified	Dec. 31, 2012
Statutory Net Income, Capital and Surplus and Dividend Restrictions (Textual) [Abstract]
Amounts available for distribution as dividends	$ 29.2
Atlantic States [Member]
Statutory Net Income, Capital and Surplus and Dividend Restrictions (Textual) [Abstract]
Amounts available for distribution as dividends	18.0
Southern [Member]
Statutory Net Income, Capital and Surplus and Dividend Restrictions (Textual) [Abstract]
Amounts available for distribution as dividends	0
Le Mars [Member]
Statutory Net Income, Capital and Surplus and Dividend Restrictions (Textual) [Abstract]
Amounts available for distribution as dividends	2.7
Peninsula [Member]
Statutory Net Income, Capital and Surplus and Dividend Restrictions (Textual) [Abstract]
Amounts available for distribution as dividends	4.3
Sheboygan [Member]
Statutory Net Income, Capital and Surplus and Dividend Restrictions (Textual) [Abstract]
Amounts available for distribution as dividends	0
MICO [Member]
Statutory Net Income, Capital and Surplus and Dividend Restrictions (Textual) [Abstract]
Amounts available for distribution as dividends	$ 4.2

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Business Combinations (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
Assets acquired:
Goodwill	$ 4,700
Other intangible assets	958
MICO [Member]
Assets acquired:
Investments	68,693
Premiums receivable	27,803
Prepaid reinsurance premiums	25,054
Reinsurance receivable	83,818
Goodwill	4,703
Other intangible assets	958
Other	2,801
Total assets acquired	213,830
Liabilities assumed:
Losses and loss expenses	104,815
Unearned premiums	33,688
Reinsurance balances payable	16,899
Accrued expenses	9,990
Other	6,142
Total liabilities assumed	171,534
Net assets acquired	$ 42,296

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Earnings Per Share (Details Textual) (Common Class A [Member])	12 Months Ended
	Dec. 31, 2012
Common Class A [Member]
Earnings Per Share (Textual) [Abstract]
Common stock payable interest rate	10.00%

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Fair Value Measurements (Tables)

12 Months Ended

Dec. 31, 2012

Fair Value Measurements [Abstract]

Fair value measurements for investments in available-for-sale fixed maturity and equity securities

	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)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	71,311,103	$	—	$	71,311,103	$	—
Obligations of states and political subdivisions		416,986,963		—		416,986,963		—
Corporate securities		77,355,777		—		77,355,777		—
Residential mortgage-backed securities		128,855,978		—		128,855,978		—
Equity securities		8,757,258		5,365,721		3,391,537		—
Totals	$	703,267,079	$	5,365,721	$	697,901,358	$	—

	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)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	60,977,557	$	—	$	60,977,557	$	—
Obligations of states and political subdivisions		398,876,582		—		398,876,582		—
Corporate securities		64,113,649		—		64,113,649		—
Residential mortgage-backed securities		122,630,390		—		122,630,390		—
Equity securities		7,437,538		6,178,136		1,259,402		—
Totals	$	654,035,716	$	6,178,136	$	647,857,580	$	—

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Investments (Details 3) (Donegal Financial Services Corporation [Member], USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Donegal Financial Services Corporation [Member]
Balance sheets:
Total assets	$ 509,670,100	$ 532,938,460
Total liabilities	433,490,583	466,940,425
Stockholders equity	76,179,517	65,998,035
Total liabilities and stockholders equity	509,670,100	532,938,460
Income statements:
Net income (loss)	$ 9,401,001	$ 4,196,054	$ (556,528)

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Statutory Net Income, Capital and Surplus and Dividend Restrictions

12 Months Ended

Dec. 31, 2012

Statutory Net Income, Capital and Surplus and Dividend Restrictions [Abstract]

Statutory Net Income, Capital and Surplus and Dividend Restrictions

15 - Statutory Net Income, Capital and Surplus and Dividend Restrictions

The following table presents selected information, as filed with insurance regulatory authorities, for our insurance subsidiaries as determined in accordance with accounting practices prescribed or permitted by such insurance regulatory authorities:

	2012			2011			2010
Atlantic States:
Statutory capital and surplus	$	180,465,658		$	173,505,872		$	191,775,057
Statutory unassigned surplus		124,924,794			113,497,280			131,817,978
Statutory net income (loss)		12,507,540			(7,729,040	)		11,002,447
Southern:
Statutory capital and surplus		58,841,059			60,876,093			63,609,630
Statutory unassigned surplus		7,843,473			9,364,037			12,612,044
Statutory net (loss) income		(1,539,943	)		1,795,195			(2,083,206	)
Le Mars:
Statutory capital and surplus		26,803,140			24,720,327			25,539,580
Statutory unassigned surplus		14,210,400			11,373,158			12,485,531
Statutory net income (loss)		2,423,225			(1,661,327	)		(3,166,242	)
Peninsula:
Statutory capital and surplus		42,471,092			40,744,215			41,932,367
Statutory unassigned surplus		24,671,678			22,601,043			23,580,784
Statutory net income		1,478,823			1,210,247			2,336,947
Sheboygan:
Statutory capital and surplus		10,944,235			10,800,499			11,671,405
Statutory unassigned (deficit) surplus		(1,087,936	)		(1,437,493	)		(479,140	)
Statutory net loss		(33,316	)		(1,237,478	)		(286,613	)
MICO:
Statutory capital and surplus		42,443,200			39,264,423			37,343,663
Statutory unassigned surplus		16,440,388			12,689,880			10,240,870
Statutory net income		2,698,257			2,889,619			3,026,178

Our principal source of cash for payment of dividends is dividends from our insurance subsidiaries. State insurance laws require our insurance subsidiaries to maintain certain minimum capital and surplus amounts on a statutory basis. 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 may further impact their ability to pay dividends. Our insurance subsidiaries’ statutory capital and surplus at December 31, 2012 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin. Amounts available for distribution to us as dividends from our insurance subsidiaries without prior approval of insurance regulatory authorities in 2013 are $18.0 million from Atlantic States, $0 from Southern, $2.7 million from Le Mars, $4.3 million from Peninsula, $0 from Sheboygan and $4.2 million from MICO, or a total of approximately $29.2 million.

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Deferred Policy Acquisition Costs (Tables)

12 Months Ended

Dec. 31, 2012

Deferred Policy Acquisition Costs / Reinsurance [Abstract]

Changes in insurance subsidiaries' deferred policy acquisition costs

	2012			2011			2010
Balance, January 1	$	36,424,955		$	34,445,579		$	32,844,179
Acquisition costs deferred		78,010,742			70,550,376			67,955,400
Amortization charged to earnings		(74,314,000	)		(68,571,000	)		(66,354,000	)
Balance, December 31	$	40,121,697		$	36,424,955		$	34,445,579

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Earnings Per Share (Details 1)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Basic and diluted net income per share
Options excluded from diluted earnings per share	1,209,000	1,238,000	2,219,167

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Supplementary Cash Flow Information

12 Months Ended

Dec. 31, 2012

Supplementary Cash Flow Information [Abstract]

Supplementary Cash Flow Information

17 - Supplementary Cash Flow Information

The following table reflects net income taxes and interest paid during 2012, 2011 and 2010:

	2012		2011		2010
Income taxes	$	1,626,965	$	324,291	$	1,100,000
Interest		2,128,693		1,793,366		705,210

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Investments (Details 6) (USD $)	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of change in difference between fair value and cost of investments
Totals	$ 5,634,846	$ 22,187,231	$ (10,023,707)
Fixed maturities [Member]
Summary of change in difference between fair value and cost of investments
Fixed maturities	5,739,506	29,646,545	(11,571,194)
Equity securities [Member]
Summary of change in difference between fair value and cost of investments
Equity securities	$ (104,660)	$ (7,459,314)	$ 1,547,487

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Consolidated Statements of Cash Flows (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Cash Flows from Operating Activities:
Net income	$ 23,092,620	$ 452,953	$ 11,467,179
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,950,693	4,106,561	3,143,767
Net realized investment gains	(6,859,439)	(12,281,267)	(4,395,720)
Equity in (earnings) loss of DFSC	(4,533,257)	(2,023,127)	268,341
Changes in Assets and Liabilities:
Losses and loss expenses	16,419,780	59,088,943	14,904,770
Unearned premiums	26,150,842	39,665,100	21,762,781
Accrued expenses	(3,815,717)	(330,857)	718,956
Premiums receivable	(12,481,151)	(8,247,378)	(7,478,337)
Deferred policy acquisition costs	(3,696,742)	(1,979,376)	(1,601,400)
Deferred income taxes	1,151,250	(5,922,491)	(2,380,430)
Reinsurance receivable	(6,069,415)	(35,987,161)	(5,348,447)
Accrued investment income	380,953	652,133	(489,244)
Amounts due to affiliate	(806,954)	2,460,287	(887,190)
Reinsurance balances payable	(6,098,002)	899,017	(320,278)
Prepaid reinsurance premiums	(4,706,144)	(17,084,247)	(8,270,621)
Current income taxes	3,245,785	(1,713,483)	(368,145)
Other, net	(360,477)	(674,296)	1,278,821
Net adjustments	1,872,005	20,628,358	10,537,624
Net cash provided by operating activities	24,964,625	21,081,311	22,004,803
Purchases of fixed maturities:
Available for sale	(241,343,085)	(189,111,596)	(195,198,227)
Purchase of equity securities:	(31,254,324)	(23,857,802)	(59,191,998)
Sales of fixed maturities
Available for sale	90,484,097	122,873,102	72,092,788
Maturity of fixed maturities:
Held to maturity	16,061,587	5,888,236	8,649,275
Available for sale	115,501,507	53,763,701	80,116,222
Sales of equity securities	30,001,187	27,036,422	70,029,195
Purchase of MICO		(7,207,471)	(35,088,228)
Net increase in investment in affiliates	(100,000)	(20,570,000)
Net purchases of property and equipment	(744,082)	(238,538)	(651,160)
Net sales of short-term investments	16,635,183	314,583	16,052,089
Net cash used in investing activities	(4,757,930)	(31,109,363)	(43,190,044)
Cash Flows from Financing Activities:
Issuance of common stock	2,983,399	1,460,543	1,199,422
Cash dividends paid	(12,208,509)	(11,874,367)	(11,405,268)
Purchase of treasury stock	(1,925,673)	(1,537,587)	(145,687)
Payments on line of credit	(6,000,000)	(3,617,371)
Borrowings under line of credit	3,500,000	22,500,000	34,955,088
Net cash (used in) provided by financing activities	(13,650,783)	6,931,218	24,603,555
Net increase (decrease) in cash	6,555,912	(3,096,834)	3,418,314
Cash at beginning of year	13,245,378	16,342,212	12,923,898
Cash at end of year	$ 19,801,290	$ 13,245,378	$ 16,342,212

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Consolidated Balance Sheets (Parenthetical) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Held to maturity, fair value	$ 43,735,739	$ 61,422,347
Available for sale, amortized cost	655,173,806	614,298,854
Equity securities, available for sale, at cost	$ 8,663,183	$ 7,238,803
Preferred stock, par value	$ 1.00	$ 1.00
Preferred stock, shares authorized	2,000,000	2,000,000
Preferred stock, shares issued
Common Class A
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	30,000,000	30,000,000
Common stock, shares issued	20,941,821	20,752,999
Common stock, shares outstanding	20,025,199	19,971,441
Common Class B
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares issued	5,649,240	5,649,240
Common stock, shares outstanding	5,576,775	5,576,775

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Borrowings

12 Months Ended

Dec. 31, 2012

Borrowings [Abstract]

Borrowings

10 - Borrowings

Lines of Credit

In June 2012, we renewed our existing credit agreement with Manufacturers and Traders Trust Company (“M&T”) relating to a $60.0 million unsecured, revolving line of credit that expires in July 2015. We have the right to request a one-year extension of the credit agreement as of each anniversary date of the agreement. In December 2010 and March 2011, we borrowed $35.0 million and $3.5 million, respectively, in connection with our acquisition of MICO. In May 2011, we borrowed $19.0 million in connection with the merger of UNNF with and into DFSC. At December 31, 2012, we had $52.0 million in outstanding borrowings and had the ability to borrow an additional $8.0 million at an interest rate equal to M&T’s current prime rate or the then current LIBOR rate plus 2.25%, depending on our leverage ratio. The interest rate on our outstanding borrowings is adjustable quarterly. At December 31, 2012 , the interest rate on our outstanding borrowings was 2.46%. We pay a fee of 0.2% per annum on the loan commitment amount regardless of usage. The credit agreement requires our compliance with certain covenants, which include minimum levels of our net worth, leverage ratio and statutory surplus and the A.M. Best ratings of our insurance subsidiaries. We complied with all requirements of the credit agreement during the year ended December 31, 2012.

MICO has an agreement with the Federal Home Loan Bank (“FHLB”) of Indianapolis. Through its membership, MICO has the ability to issue debt to the FHLB of Indianapolis in exchange for cash advances. There were no outstanding borrowings at December 31, 2012 or 2011. The table below presents the amount of FHLB of Indianapolis stock MICO purchased, collateral pledged and assets related to MICO’s agreement at December 31, 2012.

FHLB stock purchased and owned as part of the agreement	$	252,100
Collateral pledged, at par (carrying value $3,946,091)		4,450,000
Borrowing capacity currently available		3,493,664

Atlantic States has an agreement with 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. There were no outstanding borrowings at December 31, 2012 or 2011. The table below presents the amount of FHLB of Pittsburgh stock Atlantic States purchased, collateral pledged and assets related to Atlantic States’ agreement at December 31, 2012.

FHLB stock purchased and owned as part of the agreement	$	256,400
Collateral pledged, at par		—
Borrowing capacity currently available		—

During 2013, Atlantic States issued secured debt in the principal amount of $15.0 million to the FHLB of Pittsburgh in exchange for cash advances in the amount of $15.0 million. Atlantic States then provided intercompany loans to us in the principal amount of $15.0 million to fund our prepayment of our subordinated debentures, as we discuss below.

Subordinated Debentures

On October 29, 2003, we received $10.0 million in net proceeds from the issuance of subordinated debentures. The debentures were scheduled to mature on October 29, 2033 and were callable at our option, at par. The debentures carried an interest rate equal to the three-month LIBOR rate plus 3.85%. At December 31, 2012, the interest rate on these debentures was 4.16%. At December 31, 2012 and 2011, our consolidated balance sheets included an investment in a statutory trust of $310,000 and subordinated debentures of $10.3 million related to this transaction. On January 28, 2013, we prepaid these subordinated debentures in full and liquidated our investment in the statutory trust.

On May 24, 2004, we received $5.0 million in net proceeds from the issuance of subordinated debentures. The debentures were scheduled to mature on May 24, 2034 and were callable at our option, at par. The debentures carried an interest rate equal to the three-month LIBOR rate plus 3.85%. At December 31, 2012, the interest rate on these debentures was 4.16%. At December 31, 2012 and 2011, our consolidated balance sheets included an investment in a statutory trust of $155,000 and subordinated debentures of $5.2 million related to this transaction. On February 25, 2013, we prepaid these subordinated debentures in full and liquidated our investment in the statutory trust.

In January 2002, West Bend purchased a surplus note from MICO for $5.0 million to increase MICO’s statutory surplus. On December 1, 2010, Donegal Mutual purchased the surplus note from West Bend at face value. The surplus note carries an interest rate of 5.00%, and any repayment of principal or interest requires prior insurance regulatory approval. Upon receipt of regulatory approval, MICO paid $250,000 in interest to Donegal Mutual during each of 2012 and 2011.

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Segment Information (Details) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Revenues
Net premiums earned/Premiums earned	$ 121,824,349	$ 120,916,960	$ 117,569,122	$ 114,691,791	$ 114,176,695	$ 108,506,809	$ 104,991,401	$ 103,795,279	$ 475,002,222	$ 431,470,184	$ 378,030,129	$ 27,000,000
GAAP adjustments									(5,000)	(3,275,000)	(625,000)
GAAP premiums earned									475,002,000	431,470,000	378,030,000
Net investment income									20,168,919	20,858,179	19,949,714
Realized investment gains									6,859,439	12,281,267	4,395,720
Equity in earnings (loss) of DFSC									4,533,257	2,023,127	(268,341)
Other									8,420,000	8,386,000	6,442,000
Total revenues	131,903,702	130,431,531	127,299,190	125,348,162	127,215,208	119,164,471	117,054,498	111,583,442	514,982,585	475,017,619	408,549,446
Underwriting income (loss):
SAP underwriting loss									(12,985,000)	(47,299,000)	(20,274,000)
GAAP adjustments									5,545,000	1,532,000	2,458,000
GAAP underwriting loss									(7,440,000)	(45,767,000)	(17,816,000)
Net investment income									20,168,919	20,858,179	19,949,714
Realized investment gains									6,859,439	12,281,267	4,395,720
Equity in earnings (loss) of DFSC									4,533,257	2,023,127	(268,341)
Other									3,737,000	3,866,000	3,583,000
Income (loss) before income taxes									27,858,260	(6,739,313)	9,844,149
Commercial Lines [Member]
Revenues
Net premiums earned/Premiums earned									174,735,000	152,247,000	117,755,000
Underwriting income (loss):
GAAP underwriting loss									5,251,000	(6,560,000)	2,252,000
Personal Lines [Member]
Revenues
Net premiums earned/Premiums earned									300,272,000	282,498,000	260,900,000
Underwriting income (loss):
GAAP underwriting loss									$ (18,236,000)	$ (40,739,000)	$ (22,526,000)

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Statutory Net Income, Capital and Surplus and Dividend Restrictions (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Statutory net income, capital and surplus and dividend restrictions
Statutory capital and surplus	$ 361,968,384	$ 349,911,429	$ 371,871,702
Statutory net income (loss)	17,534,586	(4,732,784)	9,163,680
Atlantic States [Member]
Statutory net income, capital and surplus and dividend restrictions
Statutory capital and surplus	180,465,658	173,505,872	191,775,057
Statutory unassigned (deficit) surplus	124,924,794	113,497,280	131,817,978
Statutory net income (loss)	12,507,540	(7,729,040)	11,002,447
Southern [Member]
Statutory net income, capital and surplus and dividend restrictions
Statutory capital and surplus	58,841,059	60,876,093	63,609,630
Statutory unassigned (deficit) surplus	7,843,473	9,364,037	12,612,044
Statutory net income (loss)	(1,539,943)	1,795,195	(2,083,206)
Le Mars [Member]
Statutory net income, capital and surplus and dividend restrictions
Statutory capital and surplus	26,803,140	24,720,327	25,539,580
Statutory unassigned (deficit) surplus	14,210,400	11,373,158	12,485,531
Statutory net income (loss)	2,423,225	(1,661,327)	(3,166,242)
Peninsula [Member]
Statutory net income, capital and surplus and dividend restrictions
Statutory capital and surplus	42,471,092	40,744,215	41,932,367
Statutory unassigned (deficit) surplus	24,671,678	22,601,043	23,580,784
Statutory net income (loss)	1,478,823	1,210,247	2,336,947
Sheboygan [Member]
Statutory net income, capital and surplus and dividend restrictions
Statutory capital and surplus	10,944,235	10,800,499	11,671,405
Statutory unassigned (deficit) surplus	(1,087,936)	(1,437,493)	(479,140)
Statutory net income (loss)	(33,316)	(1,237,478)	(286,613)
MICO [Member]
Statutory net income, capital and surplus and dividend restrictions
Statutory capital and surplus	42,443,200	39,264,423	37,343,663
Statutory unassigned (deficit) surplus	16,440,388	12,689,880	10,240,870
Statutory net income (loss)	$ 2,698,257	$ 2,889,619	$ 3,026,178

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Stock Compensation Plans (Details 2) (USD $)	1 Months Ended
	Jan. 31, 2010 Issue Date One [Member]	Jul. 31, 2010 Issue Date Two [Member]	Jan. 31, 2011 Issue Date Three [Member]	Jul. 31, 2011 Issue Date Four [Member]	Jan. 31, 2012 Issue Date Five [Member]	Jul. 31, 2012 Issue Date Six [Member]
Summary of plan activity
Shares Issued, Price	$ 12.85	$ 10.45	$ 11.02	$ 10.88	$ 11.91	$ 11.29
Shares Issued, Shares	11,717	12,403	13,243	11,371	10,523	19,031

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Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2012	Jun. 30, 2012	Mar. 01, 2013 Common Class A	Mar. 01, 2013 Common Class B
Entity Registrant Name	DONEGAL GROUP INC
Entity Central Index Key	0000800457
Document Type	10-K
Document Period End Date	Dec. 31, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	FY
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Public Float		$ 176,019,297
Entity Common Stock, Shares Outstanding			20,050,649	5,576,775

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Reinsurance

12 Months Ended

Dec. 31, 2012

Deferred Policy Acquisition Costs / Reinsurance [Abstract]

Reinsurance

11 - Reinsurance

Unaffiliated Reinsurers

Our insurance subsidiaries and Donegal Mutual purchase certain third-party reinsurance on a combined basis. Le Mars, MICO, Peninsula and Sheboygan also have separate third-party reinsurance programs that provide certain coverage that is commensurate with their relative size and exposures. Our insurance subsidiaries use several different reinsurers, all of which, consistent with the requirements of our insurance subsidiaries and Donegal Mutual, have an A.M. Best rating of A- (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 an A- rating from A.M. Best. The external reinsurance our insurance subsidiaries and Donegal Mutual purchase includes “excess of loss reinsurance,” under which their losses are automatically reinsured, through a series of contracts, over a set retention (generally $1.0 million for 2012 and $750,000 prior to 2012), and “catastrophic reinsurance,” under which they recover, through a series of contracts, 90% to 100% of an accumulation of many losses resulting from a single event, including natural disasters, over a set retention (generally $5.0 million). For property insurance, our insurance subsidiaries had excess of loss treaties that provided for coverage up to $5.0 million per loss. For liability insurance, our insurance subsidiaries had excess of loss treaties that provided for coverage up to $40.0 million per occurrence. For workers’ compensation insurance, our insurance subsidiaries had excess of loss treaties that provided for coverage up to $10.0 million on any one life. Our insurance subsidiaries and Donegal Mutual had property catastrophe coverage through a series of layered treaties up to aggregate losses of $135.0 million for any single event. As many as 20 reinsurers provided coverage on any one treaty with no reinsurer taking more than 36.0% of any one treaty. The amount of coverage provided under each of these types of reinsurance depends upon the amount, nature, size and location of the risks being reinsured. Donegal Mutual and our insurance subsidiaries also purchased facultative reinsurance to cover exposures from losses that exceeded the limits provided by the treaty reinsurance Donegal Mutual and our insurance subsidiaries purchased. In order to write automobile insurance in the State of Michigan, MICO is required to be a member of the Michigan Catastrophic Claims Association (“MCCA”). The MCCA provides reinsurance to MICO for personal automobile and commercial automobile personal injury claims in the State of Michigan over a set retention.

Through December 1, 2010, MICO and West Bend were parties to quota-share reinsurance agreements whereby MICO ceded 75% of its business to West Bend. MICO and West Bend agreed to terminate the reinsurance agreement in effect at November 30, 2010 on a run-off basis. West Bend’s obligations related to all past reinsurance agreements with MICO remain in effect for all policies effective prior to December 1, 2010 as we discuss in Note 4-Business Combinations.

MICO maintains a quota-share reinsurance agreement with third-party reinsurers to reduce its net exposures. Effective from December 1, 2010 to December 31, 2011, the quota-share reinsurance percentage was 50%. Effective January 1, 2012, MICO reduced the quota-share reinsurance percentage from 50% to 40%. Effective January 1, 2013, MICO reduced the quota-share reinsurance percentage from 40% to 30%.

The following amounts represent ceded reinsurance transactions with unaffiliated reinsurers during 2012, 2011 and 2010:

	2012		2011		2010
Premiums written	$	76,736,510	$	80,265,127	$	24,357,938
Premiums earned		79,680,782		88,297,408		26,551,687
Losses and loss expenses		56,179,284		82,836,893		19,764,441
Prepaid reinsurance premiums		25,126,276		28,054,302		26,991,912
Liability for losses and loss expenses		103,775,940		106,231,527		92,945,915

Total Reinsurance

The following amounts represent our total ceded reinsurance transactions with both affiliated and unaffiliated reinsurers during 2012, 2011 and 2010:

	2012		2011		2010
Premiums earned	$	258,064,301	$	242,186,814	$	144,554,336
Losses and loss expenses		181,995,838		216,776,966		111,080,953
Prepaid reinsurance premiums		111,156,162		106,450,018		89,365,771
Liability for losses and loss expenses		207,891,560		199,392,836		165,442,373

The following amounts represent the effect of reinsurance on premiums written for 2012, 2011 and 2010:

	2012			2011			2010
Direct	$	419,811,847		$	397,810,566		$	279,627,255
Assumed		339,389,274			306,416,861			262,574,572
Ceded		(262,754,201	)		(250,176,390	)		(150,679,539	)
Net premiums written	$	496,446,920		$	454,051,037		$	391,522,288

The following amounts represent the effect of reinsurance on premiums earned for 2012, 2011 and 2010:

	2012			2011			2010
Direct	$	408,846,530		$	385,737,801		$	269,394,549
Assumed		324,219,993			287,919,197			253,189,916
Ceded		(258,064,301	)		(242,186,814	)		(144,554,336	)
Net premiums earned	$	475,002,222		$	431,470,184		$	378,030,129

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Reinsurance (Details 1) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Total ceded reinsurance transactions with both affiliated and unaffiliated reinsurers
Premiums earned	$ 258,064,301	$ 242,186,814	$ 144,554,336
Prepaid reinsurance premiums	111,156,162	106,450,018
Affiliated Entity and Unaffiliated Entity [Member]
Total ceded reinsurance transactions with both affiliated and unaffiliated reinsurers
Premiums earned	258,064,301	242,186,814	144,554,336
Losses and loss expenses	181,995,838	216,776,966	111,080,953
Prepaid reinsurance premiums	111,156,162	106,450,018	89,365,771
Liability for losses and loss expenses	$ 207,891,560	$ 199,392,836	$ 165,442,373

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Stock Compensation Plans (Details 1) (USD $)	12 Months Ended
	Dec. 31, 2012
Summary of information about fixed stock options
Number of Options Outstanding	6,700,825
Number of Options Exercisable	3,072,970
Exercise Price 1 [Member]
Summary of information about fixed stock options
Exercise Price	$ 12.50
Number of Options Outstanding	2,184,542
Weighted-Average Remaining Contractual Life	9 years
Number of Options Exercisable	728,181
Exercise Price 2 [Member]
Summary of information about fixed stock options
Exercise Price	$ 14.00
Number of Options Outstanding	1,710,683
Weighted-Average Remaining Contractual Life	3 years
Number of Options Exercisable	1,133,789
Exercise Price 3 [Member]
Summary of information about fixed stock options
Exercise Price	$ 14.50
Number of Options Outstanding	1,593,600
Weighted-Average Remaining Contractual Life	10 years
Exercise Price 4 [Member]
Summary of information about fixed stock options
Exercise Price	$ 15.00
Number of Options Outstanding	3,000
Weighted-Average Remaining Contractual Life	3 years
Number of Options Exercisable	2,000
Exercise Price 5 [Member]
Summary of information about fixed stock options
Exercise Price	$ 17.50
Number of Options Outstanding	1,198,500
Weighted-Average Remaining Contractual Life	6 months
Number of Options Exercisable	1,198,500
Exercise Price 6 [Member]
Summary of information about fixed stock options
Exercise Price	$ 18.70
Number of Options Outstanding	3,000
Weighted-Average Remaining Contractual Life	6 months
Number of Options Exercisable	3,000
Exercise Price 7 [Member]
Summary of information about fixed stock options
Exercise Price	$ 21.00
Number of Options Outstanding	7,500
Weighted-Average Remaining Contractual Life	6 months
Number of Options Exercisable	7,500

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Consolidated Statements of Income and Comprehensive Income (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Revenues
Net premiums earned (includes affiliated reinsurance of $142,608,940, $130,555,613 and $134,823,098 - see note 3)	$ 475,002,222	$ 431,470,184	$ 378,030,129
Investment income, net of investment expenses	20,168,919	20,858,179	19,949,714
Installment payment fees	7,465,532	7,427,509	5,519,287
Lease income	953,216	957,353	922,937
Net realized investment gains	6,859,439	12,281,267	4,395,720
Equity in earnings (loss) of DFSC	4,533,257	2,023,127	(268,341)
Total revenues	514,982,585	475,017,619	408,549,446
Expenses
Net losses and loss expenses (includes affiliated reinsurance of $81,219,926, $87,950,502 and $81,539,930 - see note 3)	332,871,584	340,502,777	274,308,858
Amortization of deferred policy acquisition costs	74,314,000	68,571,000	66,354,000
Other underwriting expenses	73,914,514	66,923,764	54,564,500
Policyholder dividends	1,342,582	1,240,079	619,158
Interest	2,358,711	2,126,784	799,578
Other	2,322,934	2,392,528	2,059,203
Total expenses	487,124,325	481,756,932	398,705,297
Income (loss) before income tax expense (benefit)	27,858,260	(6,739,313)	9,844,149
Income tax expense (benefit)	4,765,640	(7,192,266)	(1,623,030)
Net income	23,092,620	452,953	11,467,179
Unrealized gains (losses) on securities:
Unrealized holding gain (loss) arising during the period, net of income tax (benefit) of $4,833,143, $12,237,669 and ($1,976,358)	9,171,817	23,077,997	(3,544,783)
Reclassification adjustment for gains included in net income, net of income tax of $2,332,209, $4,175,631 and $1,494,545	(4,527,230)	(8,105,636)	(2,901,175)
Other comprehensive income (loss)	4,644,587	14,972,361	(6,445,958)
Comprehensive income	$ 27,737,207	$ 15,425,314	$ 5,021,221
Common Class A
Earnings per common share:
Earnings per share, Basic	$ 0.92	$ 0.02	$ 0.46
Earnings per share, Diluted	$ 0.91	$ 0.02	$ 0.46
Common Class B
Earnings per common share:
Earnings per share, Basic	$ 0.83	$ 0.01	$ 0.41
Earnings per share, Diluted	$ 0.83	$ 0.01	$ 0.41

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Investments

12 Months Ended

Dec. 31, 2012

Investments [Abstract]

Investments

5 - Investments

The amortized cost and estimated fair values of fixed maturities and equity securities at December 31, 2012 and 2011 are as follows:

	2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Held to Maturity
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	1,000,000	$	11,510	$	—	$	1,011,510
Obligations of states and political subdivisions		40,909,132		1,609,211		—		42,518,343
Residential mortgage-backed securities		191,064		14,822		—		205,886
Totals	$	42,100,196	$	1,635,543	$	—	$	43,735,739

	2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	70,253,846	$	1,101,208	$	43,951	$	71,311,103
Obligations of states and political subdivisions		385,371,983		32,221,045		606,065		416,986,963
Corporate securities		73,941,532		3,522,954		108,709		77,355,777
Residential mortgage-backed securities		125,606,445		3,315,976		66,443		128,855,978
Fixed maturities		655,173,806		40,161,183		825,168		694,509,821
Equity securities		8,663,183		200,823		106,748		8,757,258
Totals	$	663,836,989	$	40,362,006	$	931,916	$	703,267,079

	2011
	Amortized Cost		Gross Unrealized   Gains		Gross Unrealized  Losses		Estimated Fair   Value
Held to Maturity
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
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale
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

At December 31, 2012, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $358.5 million and an amortized cost of $332.4 million. Our holdings also included special revenue bonds with an aggregate fair value of $101.0 million and an amortized cost of $93.9 million. With respect to both categories, we held no securities of any issuer that comprised more than 10% of the category at December 31, 2012. Education bonds and water and sewer utility bonds represented 54% and 19%, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, 2012. Many of the issuers of the special revenue bonds we held at December 31, 2012 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.

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 are similar to general obligation bonds.

We set forth below the amortized cost and estimated fair value of fixed maturities at December 31, 2012 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	$	1,000,000	$	1,011,510
Due after one year through five years		31,815,724		32,965,749
Due after five years through ten years		9,093,408		9,552,594
Due after ten years		—		—
Residential mortgage-backed securities		191,064		205,886
Total held to maturity	$	42,100,196	$	43,735,739
Available for sale
Due in one year or less	$	8,942,472	$	9,003,925
Due after one year through five years		62,233,761		64,199,249
Due after five years through ten years		181,558,392		192,859,072
Due after ten years		276,832,736		299,591,597
Residential mortgage-backed securities		125,606,445		128,855,978
Total available for sale	$	655,173,806	$	694,509,821

The amortized cost of fixed maturities on deposit with various regulatory authorities at December 31, 2012 and 2011 amounted to $10,565,116 and $10,629,319, respectively.

Investments in affiliates consisted of the following at December 31, 2012 and 2011:

	2012		2011
DFSC	$	36,770,530	$	31,857,246
Other		465,000		465,000
Total	$	37,235,530	$	32,322,246

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 made an additional equity investment in DFSC in the amount of $100,000 during 2012.

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, 2012 and 2011 from the financial statements of DFSC.

	December 31,
	2012		2011
Balance sheets:
Total assets	$	509,670,100	$	532,938,460
Total liabilities	$	433,490,583	$	466,940,425
Stockholders’ equity		76,179,517		65,998,035
Total liabilities and stockholders’ equity	$	509,670,100	$	532,938,460

	Year Ended December 31,
	2012		2011		2010
Income statements:
Net income (loss)	$	9,401,001	$	4,196,054	$	(556,528	)

Other comprehensive income (loss) in our statements of comprehensive income includes net unrealized gains (losses) of $138,771, $479,401 and ($32,129) for 2012, 2011 and 2010, 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:

	2012			2011			2010
Fixed maturities	$	24,642,897		$	25,044,316		$	23,995,220
Equity securities		85,905			162,934			42,869
Short-term investments		34,482			57,296			91,665
Other		44,874			48,588			46,095
Investment income		24,808,158			25,313,134			24,175,849
Investment expenses		(4,639,239	)		(4,454,955	)		(4,226,135	)
Net investment income	$	20,168,919		$	20,858,179		$	19,949,714

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

	2012			2011			2010
Gross realized gains:
Fixed maturities	$	6,730,331		$	4,959,707		$	4,136,455
Equity securities		926,053			8,760,511			1,791,585
		7,656,384			13,720,218			5,928,040
Gross realized losses:
Fixed maturities		42,135			163,316			533,918
Equity securities		754,810			1,275,635			998,402
		796,945			1,438,951			1,532,320
Net realized gains	$	6,859,439		$	12,281,267		$	4,395,720
Change in difference between fair value and cost of investments:
Fixed maturities	$	5,739,506		$	29,646,545		$	(11,571,194	)
Equity securities		(104,660	)		(7,459,314	)		1,547,487
Totals	$	5,634,846		$	22,187,231		$	(10,023,707	)

We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at December 31, 2012 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	$	12,308,333	$	43,951	$	—	$	—
Obligations of states and political subdivisions		22,134,226		606,065		—		—
Corporate securities		12,271,750		79,136		2,958,520		29,573
Residential mortgage-backed securities		22,491,562		66,443		—		—
Equity securities		2,226,050		106,748		—		—
Totals	$	71,431,921	$	902,343	$	2,958,520	$	29,573

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 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 seven equity securities that were in an unrealized loss position at December 31, 2012. 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 46 debt securities that were in an unrealized loss position at December 31, 2012. 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 2012, 2011 or 2010. We had no sales or transfers from the held to maturity portfolio in 2012, 2011 or 2010. We have no derivative instruments or hedging activities.

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Business Combinations

12 Months Ended

Dec. 31, 2012

Business Combinations [Abstract]

Business Combinations

4 - Business Combinations

On December 1, 2010, we acquired all of the outstanding stock of MICO. We accounted for this acquisition as a business combination.

We acquired MICO from West Bend and its other stockholders for a price equal to 122% of MICO’s stockholders’ equity at November 30, 2010, or approximately $42.3 million in cash. We paid $35.1 million to MICO’s stockholders in December 2010 and recorded an additional amount payable at December 31, 2010 of $7.2 million, which we paid pursuant to the terms of our acquisition agreement in the first quarter of 2011. The acquisition of MICO enabled us to extend our insurance business to the state of Michigan. MICO writes various lines of property and casualty insurance and had direct written premiums of $105.4 million and $106.6 million and net premiums earned of $26.9 million and $27.0 million for the years ended December 31, 2010 and 2009, respectively. MICO’s stockholders’ equity and total assets at December 31, 2009 were $32.0 million and $224.5 million, respectively. We recorded goodwill of approximately $4.7 million and other intangible assets of approximately $958,000, none of which are deductible for federal income tax purposes. Pursuant to the terms of our acquisition agreement with West Bend, West Bend has guaranteed us against any deficiency in excess of $1.0 million in the loss and loss expenses of MICO at November 30, 2010. Conversely, we have agreed to return 50% of any redundancy in excess of $1.0 million. Any such deficiency or redundancy will be based on a final actuarial review of the development of such reserves to be conducted three years after November 30, 2010. Based upon a preliminary actuarial review at November 30, 2012, the redundancy in the reserves of MICO at November 30, 2010 was less than $1.0 million. Through December 1, 2010, MICO and West Bend were parties to quota-share reinsurance agreements whereby MICO ceded 75% (80% prior to 2008) of its business to West Bend. MICO and West Bend agreed to terminate the reinsurance agreement in effect at November 30, 2010 on a run-off basis. West Bend’s obligations related to all past reinsurance agreements with MICO remain in effect for all policies effective prior to December 1, 2010. West Bend and MICO entered into a trust agreement on December 1, 2010. Under the terms of the trust agreement, for the sole benefit of MICO, West Bend placed into trust assets with a fair value equal to the amount of unearned premiums and unpaid losses and loss adjustment expenses, reduced by any net premium balances not yet paid by MICO, that West Bend had assumed pursuant to such reinsurance agreements at November 30, 2010. The amount of assets required to be held in trust is adjustable monthly based upon the remaining net obligations of West Bend. West Bend may terminate the trust agreement on the earlier of December 1, 2020 or the date when the obligations of West Bend are equal to or less than $5.0 million. At December 31, 2012, West Bend’s net obligations under the reinsurance agreements were approximately $22.6 million, and the fair value of assets held in trust was approximately $26.3 million.

We recorded the MICO assets that we acquired and the MICO liabilities that we assumed at their estimated acquisition date fair value. The following table summarizes the estimated fair value of the net assets we acquired at the date of the MICO acquisition based on purchase price allocations:

(in thousands)
Assets acquired:
Investments	$	68,693
Premiums receivable		27,803
Prepaid reinsurance premiums		25,054
Reinsurance receivable		83,818
Goodwill		4,703
Other intangible assets		958
Other		2,801
Total assets acquired		213,830
Liabilities assumed:
Losses and loss expenses		104,815
Unearned premiums		33,688
Reinsurance balances payable		16,899
Accrued expenses		9,990
Other		6,142
Total liabilities assumed		171,534
Net assets acquired	$	42,296

We recorded goodwill of $4.7 million in connection with the MICO acquisition. The goodwill consists largely of economies of scale we expect to realize from integrating the operations of MICO with the operations of the Donegal Insurance Group and benefits we expect to derive from MICO’s relationships with its independent agents and policyholders. We have evaluated the goodwill for impairment during 2012. We will evaluate the goodwill for impairment annually or upon the occurrence of certain future events.

We operate MICO as a subsidiary and intend to continue to maintain its trade name for the foreseeable future. We have therefore established a trade name intangible asset in the amount of $958,000, which represents the estimated value of the future benefits we will derive from the continued use of the trade name. We will not amortize the trade name intangible asset because we have determined that the trade name intangible asset has an indefinite life. We have evaluated the trade name intangible asset for impairment during 2012. We will evaluate the trade name intangible asset for impairment annually or upon the occurrence of certain future events.

Our consolidated financial statements for the year ended December 31, 2010 included the operations of MICO from December 1, 2010, the date we acquired it. Effective on December 1, 2010, MICO entered into a 50% quota-share reinsurance agreement with third-party reinsurers and a 25% quota-share reinsurance agreement with Donegal Mutual to replace the 75% quota-share reinsurance agreement MICO maintained with West Bend through November 30, 2010. Our total revenues related to the operations of MICO and Atlantic States’ allocation with respect to Donegal Mutual’s quota-share reinsurance agreement for the period December 1, 2010 through December 31, 2010 were approximately $2.4 million. MICO’s results of operations for the period December 1, 2010 through December 31, 2010 did not significantly impact our consolidated net income for 2010.

The following table presents our unaudited pro forma historical results for the years ended December 31, 2010 and 2009 as if we had acquired MICO at January 1, 2009 and MICO had entered into a 25% quota-share reinsurance agreement with Donegal Mutual on that date:

	Year Ended December 31,
	2010			2009
	(in thousands, except per share data)
Total revenues	$	458,231		$	423,184
Income before income tax benefit		13,619			15,232
Income tax benefit		(741	)		(146	)
Net income		14,360			15,378
Class A earnings per share - basic and diluted		0.58			0.62
Class B earnings per share - basic and diluted		0.52			0.55

Significant pro forma income statement adjustments for the year ended December 31, 2009 included a $3.8 million decrease in premiums earned related to the recognition of the pro forma fair value adjustment associated with the net unearned premium liability at January 1, 2009. We have prepared the unaudited pro forma results above for comparative purposes only. These unaudited pro forma results are not necessarily indicative of the results of operations that actually would have resulted had the acquisition occurred at January 1, 2009, nor are the pro forma results necessarily indicative of future operating results.

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Reconciliation of Statutory Filings to Amounts Reported Herein

12 Months Ended

Dec. 31, 2012

Reconciliation of Statutory Filings to Amounts Reported Herein [Abstract]

Reconciliation of Statutory Filings to Amounts Reported Herein

16 - Reconciliation of Statutory Filings to Amounts Reported Herein

Our insurance subsidiaries must file financial statements with state insurance regulatory authorities using accounting principles and practices prescribed or permitted by those authorities. We refer to these accounting principles and practices as statutory accounting principles (“SAP”). Accounting principles used to prepare these SAP financial statements differ from those used to prepare financial statements on the basis of generally accepted accounting principles (“GAAP”).

Reconciliations of statutory net income and capital and surplus, as determined using SAP, to the amounts included in the accompanying GAAP financial statements are as follows:

	Year Ended December 31,
	2012			2011			2010
Statutory net income (loss) of insurance subsidiaries	$	17,534,586		$	(4,732,784	)	$	9,163,680
Increases (decreases):
Deferred policy acquisition costs		3,696,742			1,979,376			1,601,400
Deferred federal income taxes		(1,151,250	)		5,922,490			2,380,430
Salvage and subrogation recoverable		772,600			1,273,000			748,000
Amortization of MICO fair value adjustments		(5,416	)		(3,275,777	)		(597,643	)
Consolidating eliminations and adjustments		(5,421,779	)		(15,080,164	)		(12,178,977	)
Parent-only net income		7,667,137			14,366,812			10,350,289
Net income as reported herein	$	23,092,620		$	452,953		$	11,467,179

	Year Ended December 31,
	2012			2011			2010
Statutory capital and surplus of insurance subsidiaries	$	361,968,384		$	349,911,429		$	371,871,702
Increases (decreases):
Deferred policy acquisition costs		40,121,697			36,424,955			34,445,579
Deferred federal income taxes		(25,682,004	)		(21,007,223	)		(14,834,855	)
Salvage and subrogation recoverable		12,000,600			11,228,000			9,955,000
Non-admitted assets and other adjustments, net		2,005,603			1,478,988			4,889,231
Fixed maturities		39,607,340			33,165,065			4,430,879
Parent-only equity and other adjustments		(29,987,526	)		(27,749,622	)		(30,654,726	)
Stockholders’ equity as reported herein	$	400,034,094		$	383,451,592		$	380,102,810

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Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

Income Taxes

12 - Income Taxes

Our provision for income tax consists of the following:

	2012		2011			2010
Current	$	3,614,390	$	(1,269,775	)	$	757,400
Deferred		1,151,250		(5,922,491	)		(2,380,430	)
Federal tax (benefit) provision	$	4,765,640	$	(7,192,266	)	$	(1,623,030	)

Our effective tax rate is different from the amount computed at the statutory federal rate of 35% for 2012, 2011 and 2010. The reasons for such difference and the related tax effects are as follows:

	2012			2011			2010
Income (loss) before income taxes	$	27,858,260		$	(6,739,313	)	$	9,844,149
Computed “expected” taxes (benefit)		9,750,391			(2,358,760	)		3,445,452
Tax-exempt interest		(5,824,281	)		(6,038,463	)		(6,183,795	)
Proration		869,551			905,326			923,071
Other, net		(30,021	)		299,631			192,242
Federal income tax (benefit) provision	$	4,765,640		$	(7,192,266	)	$	(1,623,030	)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 are as follows:

	2012			2011
Deferred tax assets:
Unearned premium	$	17,613,415		$	16,113,291
Loss reserves		7,275,091			7,339,644
Net operating loss carryforward		1,942,128			4,473,462
Net operating loss carryforward - Le Mars		1,797,194			2,191,532
Alternative minimum tax credit carryforward		7,964,853			4,294,879
Other		1,413,285			634,885
Total gross deferred assets		38,005,966			35,047,693
Less valuation allowance		(440,778	)		(440,778	)
Net deferred tax assets		37,565,188			34,606,915
Deferred tax liabilities:
Deferred policy acquisition costs		14,042,594			12,750,631
Net unrealized gains		14,212,465			11,711,531
Other		3,042,593			225,033
Total gross deferred tax liabilities		31,297,652			24,687,195
Net deferred tax asset	$	6,267,536		$	9,919,720

We provide a valuation allowance when we believe it is more likely than not that we will not realize some portion of the tax asset. At December 31, 2012 and 2011, we established a valuation allowance of $440,778, related to a portion of the net operating loss carryforward of Le Mars that we acquired on January 1, 2004. We determined that we were not required to establish a valuation allowance for the other net deferred tax assets of $37.6 million and $34.6 million at December 31, 2012 and 2011, respectively, since it is more likely than not that we will realize these deferred tax assets through reversals of existing temporary differences, future taxable income, carrybacks to taxable income in prior years and the implementation of tax-planning strategies.

Tax years 2009 through 2012 remained open for examination at December 31, 2012. At December 31, 2012, we had a net operating loss carryforward of $5.5 million, which is available to offset our future taxable income. This amount will expire in 2031 if not utilized. The net operating loss carryforward of $5.1 million from Le Mars will begin to expire in 2020 if not utilized and is subject to an annual limitation of approximately $376,000. We also had an alternative minimum tax credit carryforward of $8.0 million with an indefinite life.

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Income Taxes (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Provision for income tax
Current	$ 3,614,390	$ (1,269,775)	$ 757,400
Deferred	1,151,250	(5,922,491)	(2,380,430)
Federal tax (benefit) provision	$ 4,765,640	$ (7,192,266)	$ (1,623,030)

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Property and Equipment

12 Months Ended

Dec. 31, 2012

Property and Equipment [Abstract]

Property and Equipment

8 - Property and Equipment

Property and equipment at December 31, 2012 and 2011 consisted of the following:

	2012			2011			Estimated Useful Life
Office equipment	$	8,863,377		$	8,347,493		5-15 years
Automobiles		2,010,762			2,111,218		3 years
Real estate		5,356,705			5,016,722		15-50 years
Software		2,717,206			2,316,617		5 years
		18,948,050			17,792,050
Accumulated depreciation		(12,994,217	)		(11,637,667	)
	$	5,953,833		$	6,154,383

Depreciation expense for 2012, 2011 and 2010 amounted to $944,632, $1.0 million and $1.2 million, respectively.

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Business Combinations (Details 1) (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2010	Dec. 31, 2009
Unaudited pro forma historical results
Total revenues	$ 458,231	$ 423,184
Income before income tax benefit	13,619	15,232
Income tax benefit	(741)	(146)
Net income	$ 14,360	$ 15,378
Common Class A [Member]
Unaudited pro forma historical results
Earnings per share - basic and diluted	$ 0.58	$ 0.62
Common Class B [Member]
Unaudited pro forma historical results
Earnings per share - basic and diluted	$ 0.52	$ 0.55

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Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

6 - Fair Value Measurements

We account for financial assets using a framework that establishes a hierarchy that ranks the quality and reliability of inputs, or assumptions, used 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. 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 residential mortgage-backed securities.

We present our investments in available-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. We generally obtain one price per security. The 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 determine if the estimates we obtain are representative of fair values based upon their 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 monitor the market and are familiar with current trading ranges for similar securities and 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, coupon rates, security type and recent trading activity. Our investment personnel review documentation with respect to the pricing services’ pricing methodology that they obtain periodically to determine if the primary pricing sources, market inputs and pricing frequency for various security types are reasonable. At December 31, 2012 and 2011, we received one estimate per security from one of 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 December 31, 2012 and 2011, we did not identify any 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. The carrying values in the 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 reported in the balance sheet for our subordinated debentures and borrowings under line of credit approximate their fair values. We classify these items as Level 3. We evaluate our assets and liabilities on a recurring basis to determine the appropriate level at which to classify them for each reporting period.

We evaluate our assets and liabilities on a regular basis to determine the appropriate level at which to classify them for each reporting period. Based on our review of the methodology and summary of inputs used by the pricing services, we have concluded that our Level 1 and Level 2 investments were classified properly at December 31, 2012 and 2011.

The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at December 31, 2012:

	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)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	71,311,103	$	—	$	71,311,103	$	—
Obligations of states and political subdivisions		416,986,963		—		416,986,963		—
Corporate securities		77,355,777		—		77,355,777		—
Residential mortgage-backed securities		128,855,978		—		128,855,978		—
Equity securities		8,757,258		5,365,721		3,391,537		—
Totals	$	703,267,079	$	5,365,721	$	697,901,358	$	—

The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities at December 31, 2011:

	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)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	60,977,557	$	—	$	60,977,557	$	—
Obligations of states and political subdivisions		398,876,582		—		398,876,582		—
Corporate securities		64,113,649		—		64,113,649		—
Residential mortgage-backed securities		122,630,390		—		122,630,390		—
Equity securities		7,437,538		6,178,136		1,259,402		—
Totals	$	654,035,716	$	6,178,136	$	647,857,580	$	—

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Deferred Policy Acquisition Costs

12 Months Ended

Dec. 31, 2012

Deferred Policy Acquisition Costs / Reinsurance [Abstract]

Deferred Policy Acquisition Costs

7 - Deferred Policy Acquisition Costs

Changes in our insurance subsidiaries’ deferred policy acquisition costs are as follows:

	2012			2011			2010
Balance, January 1	$	36,424,955		$	34,445,579		$	32,844,179
Acquisition costs deferred		78,010,742			70,550,376			67,955,400
Amortization charged to earnings		(74,314,000	)		(68,571,000	)		(66,354,000	)
Balance, December 31	$	40,121,697		$	36,424,955		$	34,445,579

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Liability for Losses and Loss Expenses

12 Months Ended

Dec. 31, 2012

Liability for Losses and Loss Expenses [Abstract]

Liability for Losses and Loss Expenses

9 - 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 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 estimates have exceeded their actual liabilities. Changes in our insurance subsidiaries’ estimate of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received since the prior reporting date.

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

	2012			2011			2010
Balance at January 1	$	442,407,615		$	383,318,672		$	263,598,844
Less reinsurance recoverable		(199,392,836	)		(165,422,373	)		(83,336,726	)
Net balance at January 1		243,014,779			217,896,299			180,262,118
Acquisition of MICO		—			—			26,960,063
Incurred related to:
Current year		325,275,882			340,671,237			277,193,930
Prior years		7,595,702			(168,460	)		(2,885,072	)
Total incurred		332,871,584			340,502,777			274,308,858
Paid related to:
Current year		205,876,331			219,183,102			179,069,304
Prior years		119,074,197			96,201,195			84,565,436
Total paid		324,950,528			315,384,297			263,634,740
Net balance at December 31		250,935,835			243,014,779			217,896,299
Plus reinsurance recoverable		207,891,560			199,392,836			165,422,373
Balance at December 31	$	458,827,395		$	442,407,615		$	383,318,672

Our insurance subsidiaries recognized an increase (decrease) in their liability for losses and loss expenses of prior years of $7.6 million, ($168,460) and ($2.9) million in 2012, 2011 and 2010, respectively. Our insurance subsidiaries made no significant changes in their reserving philosophy, key reserving assumptions or claims management personnel, and have made no significant offsetting changes in estimates that increased or decreased their loss and loss expense reserves in these years. The 2012 development represented 3.1% of the December 31, 2011 net carried reserves and resulted primarily from higher-than-expected severity in the private passenger automobile liability and workers’ compensation lines of business in accident years prior to 2012. The majority of the 2012 development related to increases in the liability for losses and loss expenses of prior years for Atlantic States and Southern. The 2011 development represented an immaterial percentage of the December 31, 2010 net carried reserves. The 2010 development represented 1.6% of the December 31, 2009 net carried reserves and resulted primarily from lower-than-expected severity in the private passenger automobile liability and homeowners lines of business in accident years prior to 2009.

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Investments (Details 2) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Summary of Investments in affiliates
Total	$ 37,235,530	$ 32,322,246
DFSC [Member]
Summary of Investments in affiliates
Total	36,770,530	31,857,246
Other [Member]
Summary of Investments in affiliates
Total	$ 465,000	$ 465,000

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Income Taxes (Details 1) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Reconciliation of federal income tax rate
Income (loss) before income taxes	$ 27,858,260	$ (6,739,313)	$ 9,844,149
Computed "expected" taxes (benefit)	9,750,391	(2,358,760)	3,445,452
Tax-exempt interest	(5,824,281)	(6,038,463)	(6,183,795)
Proration	869,551	905,326	923,071
Other, net	(30,021)	299,631	192,242
Federal income tax (benefit) provision	$ 4,765,640	$ (7,192,266)	$ (1,623,030)

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Investments (Details 4) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of Net investment income, consisting primarily of interest and dividends
Investment income	$ 24,808,158	$ 25,313,134	$ 24,175,849
Investment expenses	(4,639,239)	(4,454,955)	(4,226,135)
Net investment income	20,168,919	20,858,179	19,949,714
Fixed maturities [Member]
Summary of Net investment income, consisting primarily of interest and dividends
Investment income	24,642,897	25,044,316	23,995,220
Equity securities [Member]
Summary of Net investment income, consisting primarily of interest and dividends
Investment income	85,905	162,934	42,869
Short-term Investments [Member]
Summary of Net investment income, consisting primarily of interest and dividends
Investment income	34,482	57,296	91,665
Other [Member]
Summary of Net investment income, consisting primarily of interest and dividends
Investment income	$ 44,874	$ 48,588	$ 46,095

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Condensed Financial Information of Parent Company (Details 2) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Cash flows from operating activities:
Net income	$ 6,220,022	$ 6,839,384	$ 2,023,067	$ 8,010,147	$ (878,920)	$ 819,926	$ (1,693,989)	$ 2,205,936	$ 23,092,620	$ 452,953	$ 11,467,179
Adjustments:
Net adjustments									1,872,005	20,628,358	10,537,624
Net cash provided by operating activities									24,964,625	21,081,311	22,004,803
Cash flows from investing activities:
Net sale (purchase) of short-term investments									16,635,183	314,583	16,052,089
Net increase in investment in affiliates									(100,000)	(20,570,000)
Net cash used in investing activities									(4,757,930)	(31,109,363)	(43,190,044)
Cash flows from financing activities:
Cash dividends paid									(12,208,509)	(11,874,367)	(11,405,268)
Issuance of common stock									2,983,399	1,460,543	1,199,422
Payments on line of credit									(6,000,000)	(3,617,371)
Borrowings under line of credit									3,500,000	22,500,000	34,955,088
Purchase of treasury stock									(1,925,673)	(1,537,587)	(145,687)
Net cash (used in) provided by financing activities									(13,650,783)	6,931,218	24,603,555
Net change in cash									6,555,912	(3,096,834)	3,418,314
Parent Company [Member]
Cash flows from operating activities:
Net income									23,093,000	453,000	11,467,000
Adjustments:
Equity in undistributed net (income) loss of subsidiaries									(15,425,000)	13,914,000	(1,117,000)
Other									(2,624,000)	(396,000)	547,000
Net adjustments									(18,049,000)	13,518,000	(570,000)
Net cash provided by operating activities									5,044,000	13,971,000	10,897,000
Cash flows from investing activities:
Net sale (purchase) of short-term investments									8,932,000	6,437,000	(249,000)
Net purchase of property and equipment									(147,000)	(380,000)	(492,000)
Net increase in investment in affiliates									(100,000)	(27,777,000)	(35,088,000)
Other									44,000	43,000	20,000
Net cash used in investing activities									8,729,000	(21,677,000)	(35,809,000)
Cash flows from financing activities:
Cash dividends paid									(12,208,000)	(11,874,000)	(11,405,000)
Issuance of common stock									2,983,000	1,461,000	1,199,000
Payments on line of credit									(6,000,000)	(3,000,000)
Borrowings under line of credit									3,500,000	22,500,000	35,000,000
Purchase of treasury stock									(1,927,000)	(1,538,000)	(146,000)
Net cash (used in) provided by financing activities									(13,652,000)	7,549,000	24,648,000
Net change in cash									121,000	(157,000)	(264,000)
Cash at beginning of year				684,000				841,000	684,000	841,000	1,105,000
Cash at end of year	$ 805,000				$ 684,000				$ 805,000	$ 684,000	$ 841,000

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Investments (Details 1) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Held to Maturity
Due in one year or less, Amortized Cost	$ 1,000,000
Due after one year through five years, Amortized Cost	31,815,724
Due after five years through ten years, Amortized Cost	9,093,408
Due after ten years, Amortized Cost
Residential mortgage-backed securities, Amortized Cost	191,064
Total held to maturity, Amortized Cost	42,100,196	58,489,619
Due in one year or less, Estimated Fair Value	1,011,510
Due after one year through five years, Estimated Fair Value	32,965,749
Due after five years through ten years, Estimated Fair Value	9,552,594
Due after ten years, Estimated Fair Value
Residential mortgage-backed securities, Estimated Fair Value	205,886
Total Held to Maturity, Estimated Fair Value	43,735,739	61,422,347
Available for sale
Due in one year or less, Amortized Cost	8,942,472
Due after one year through five years, Amortized Cost	62,233,761
Due after five years through ten years, Amortized Cost	181,558,392
Due after ten years, Amortized Cost	276,832,736
Residential mortgage-backed securities, Amortized Cost	125,606,445
Total available for sale securities, Amortized Cost	655,173,806	614,298,854
Due in one year or less, Estimated Fair Value	9,003,925
Due after one year through five years, Estimated Fair Value	64,199,249
Due after five years through ten years, Estimated Fair Value	192,859,072
Due after ten years, Estimated Fair Value	299,591,597
Residential mortgage-backed securities, Estimated Fair Value	128,855,978
Total available for sale, Estimated Fair Value	$ 694,509,821	$ 646,598,178

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Stock Compensation Plans (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2001
Stock Compensation Plans (Textual) [Abstract]
Tax benefit for tax deductions from option exercise	$ 52,422	0	0
Equity Incentive Plan 1996 [Member]
Stock Compensation Plans (Textual) [Abstract]
Common stock available for issuance to employees/directors and those of the subsidiaries and affiliates	2,666,667
Stock available for issuance	4,000,000
Equity Incentive Plan [Member]
Stock Compensation Plans (Textual) [Abstract]
Common stock available for issuance to employees/directors and those of the subsidiaries and affiliates	355,556
Common stock available for issuance to employees of subsidiaries and affiliates under identical plan in 2011	3,500,000	3,500,000
Exercisable period of stock options	10 years
Common stock available for issuance to directors and those of the subsidiaries and affiliates under identical plan in 2011	4,000,000	400,000
Restricted shares issued to directors	400
Weighted-average grant date fair value of options granted	$ 2.85	1.90	1.26
Fair value of risk-free interest rate	0.43%	0.75%	1.04%
Expected life	5 years	5 years	3 years
Expected volatility	33.00%	31.00%	29.00%
Expected dividend yield	3.00%	4.00%	4.00%
Compensation expense for stock compensation plans against income before income taxes	420,735	283,811	46,733
Income tax benefit	143,050	96,496	15,889
Unrecognized compensation cost related to non-vested share-based compensation granted under the plan	1,200,000	929,679
Weighted average period	8 years 10 months 24 days
Implied dividends	2,500,000	2,300,000	1,300,000
Cash from option exercises	1,100,000	0	0
Tax benefit for tax deductions from option exercise	52,422
Shares available for future option grants	40,936
Equity Incentive Plan [Member] | Restricted Stock [Member]
Stock Compensation Plans (Textual) [Abstract]
Additional issued shares	6,800	5,598	5,598
Employee Stock Purchase Plan [Member]
Stock Compensation Plans (Textual) [Abstract]
Common stock available for issuance to employees/directors and those of the subsidiaries and affiliates	533,333	300,000
Exercisable period of stock options		10 years
Additional issued shares	16,485
Additional issued share price	$ 11.93
Percentage of purchase price of shares	85.00%
Agency Stock Purchase Plan [Member]
Stock Compensation Plans (Textual) [Abstract]
Common stock available for issuance to employees/directors and those of the subsidiaries and affiliates		300,000		533,333
Additional issued shares	70,366	66,260	56,879
Number of trading days of subscription period	10 days
Investment	$ 12,000
Percentage of purchase price of shares	90.00%

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Investments (Tables)

12 Months Ended

Dec. 31, 2012

Investments [Abstract]

Summary of amortized cost and estimated fair value of fixed maturities

	2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Held to Maturity
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	1,000,000	$	11,510	$	—	$	1,011,510
Obligations of states and political subdivisions		40,909,132		1,609,211		—		42,518,343
Residential mortgage-backed securities		191,064		14,822		—		205,886
Totals	$	42,100,196	$	1,635,543	$	—	$	43,735,739

	2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	70,253,846	$	1,101,208	$	43,951	$	71,311,103
Obligations of states and political subdivisions		385,371,983		32,221,045		606,065		416,986,963
Corporate securities		73,941,532		3,522,954		108,709		77,355,777
Residential mortgage-backed securities		125,606,445		3,315,976		66,443		128,855,978
Fixed maturities		655,173,806		40,161,183		825,168		694,509,821
Equity securities		8,663,183		200,823		106,748		8,757,258
Totals	$	663,836,989	$	40,362,006	$	931,916	$	703,267,079

	2011
	Amortized Cost		Gross Unrealized   Gains		Gross Unrealized  Losses		Estimated Fair   Value
Held to Maturity
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
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale
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

Summary of amortized cost and estimated fair value of fixed maturities by contractual maturity

	Amortized Cost		Estimated Fair Value
Held to maturity
Due in one year or less	$	1,000,000	$	1,011,510
Due after one year through five years		31,815,724		32,965,749
Due after five years through ten years		9,093,408		9,552,594
Due after ten years		—		—
Residential mortgage-backed securities		191,064		205,886
Total held to maturity	$	42,100,196	$	43,735,739
Available for sale
Due in one year or less	$	8,942,472	$	9,003,925
Due after one year through five years		62,233,761		64,199,249
Due after five years through ten years		181,558,392		192,859,072
Due after ten years		276,832,736		299,591,597
Residential mortgage-backed securities		125,606,445		128,855,978
Total available for sale	$	655,173,806	$	694,509,821

Schedule of Investments in affiliates

	2012		2011
DFSC	$	36,770,530	$	31,857,246
Other		465,000		465,000
Total	$	37,235,530	$	32,322,246

Summary of financial information

	December 31,
	2012		2011
Balance sheets:
Total assets	$	509,670,100	$	532,938,460
Total liabilities	$	433,490,583	$	466,940,425
Stockholders’ equity		76,179,517		65,998,035
Total liabilities and stockholders’ equity	$	509,670,100	$	532,938,460

	Year Ended December 31,
	2012		2011		2010
Income statements:
Net income (loss)	$	9,401,001	$	4,196,054	$	(556,528	)

Summary of Net investment income, consisting primarily of interest and dividends

	2012			2011			2010
Fixed maturities	$	24,642,897		$	25,044,316		$	23,995,220
Equity securities		85,905			162,934			42,869
Short-term investments		34,482			57,296			91,665
Other		44,874			48,588			46,095
Investment income		24,808,158			25,313,134			24,175,849
Investment expenses		(4,639,239	)		(4,454,955	)		(4,226,135	)
Net investment income	$	20,168,919		$	20,858,179		$	19,949,714

Summary of gross realized gains and losses from investments before applicable income taxes

	2012			2011			2010
Gross realized gains:
Fixed maturities	$	6,730,331		$	4,959,707		$	4,136,455
Equity securities		926,053			8,760,511			1,791,585
		7,656,384			13,720,218			5,928,040
Gross realized losses:
Fixed maturities		42,135			163,316			533,918
Equity securities		754,810			1,275,635			998,402
		796,945			1,438,951			1,532,320
Net realized gains	$	6,859,439		$	12,281,267		$	4,395,720
Change in difference between fair value and cost of investments:
Fixed maturities	$	5,739,506		$	29,646,545		$	(11,571,194	)
Equity securities		(104,660	)		(7,459,314	)		1,547,487
Totals	$	5,634,846		$	22,187,231		$	(10,023,707	)

Summary of Changes in difference between fair value and cost of investments

	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	$	12,308,333	$	43,951	$	—	$	—
Obligations of states and political subdivisions		22,134,226		606,065		—		—
Corporate securities		12,271,750		79,136		2,958,520		29,573
Residential mortgage-backed securities		22,491,562		66,443		—		—
Equity securities		2,226,050		106,748		—		—
Totals	$	71,431,921	$	902,343	$	2,958,520	$	29,573

Summary of fixed maturities and equity securities with unrealized losses

	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

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Transactions With Affiliates (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Ceded reinsurance transactions with unaffiliated reinsurers
Premiums earned	$ 258,064,301	$ 242,186,814	$ 144,554,336
Prepaid reinsurance premiums	111,156,162	106,450,018
Atlantic States ceded [Member] | Affiliated Entity [Member]
Ceded reinsurance transactions with unaffiliated reinsurers
Premiums earned	132,876,094	118,812,725	105,376,068
Losses and loss expenses	92,459,147	97,130,846	81,203,625
Prepaid reinsurance premiums	70,572,281	64,214,378	57,783,435
Liability for losses and loss expenses	$ 83,623,652	$ 77,312,645	$ 65,028,781

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Stock Compensation Plans

12 Months Ended

Dec. 31, 2012

Stock Compensation Plans [Abstract]

Stock Compensation Plans

14 - Stock Compensation Plans

Equity Incentive Plans

During 1996, we adopted an Equity Incentive Plan for Employees. During 2001, we adopted a nearly identical plan that made a total of 2,666,667 shares of Class A common stock available for issuance to employees of our subsidiaries and affiliates. During 2005, we amended the plan to make a total of 4,000,000 shares of Class A common stock available for issuance. During 2007, we adopted a nearly identical plan that made a total of 3,500,000 shares of Class A common stock available for issuance to employees of our subsidiaries and affiliates. During 2011, we adopted a nearly identical plan that made a total of 3,500,000 shares of Class A common stock available for issuance to employees of our subsidiaries and affiliates. Each plan provides for the granting of awards by our board of directors in the form of stock options, stock appreciation rights, restricted stock or any combination of the above. The plans provide that stock options may become exercisable up to ten years from date of grant, with an option price not less than fair market value on date of grant. We have not granted any stock appreciation rights.

During 1996, we adopted an Equity Incentive Plan for Directors. During 2001, we adopted a nearly identical plan that made 355,556 shares of Class A common stock available for issuance to our directors and those of our subsidiaries and affiliates. During 2007, we adopted a nearly identical plan that made 400,000 shares of Class A common stock available for issuance to our directors and the directors of our subsidiaries and affiliates. During 2011, we adopted a nearly identical plan that made 400,000 shares of Class A common stock available for issuance to our directors and the directors of our subsidiaries and affiliates.We may make awards in the form of stock options. The plan also provides for the issuance of 400 shares of restricted stock on the first business day of January in each year to each of our directors and each director of Donegal Mutual who does not serve as one of our directors. We issued 6,800, 5,598 and 5,598 shares of restricted stock on January 2, 2012, 2011 and 2010, respectively.

We measure all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and record such 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 other than Donegal Mutual, 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, expected term, dividend yield and expected volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected term used as the assumption in the model. We base the expected term of an option award on our historical experience for similar awards. We determine the dividend yield by dividing the per share dividend by the grant date stock price. We base the expected volatility on the volatility of our stock price over a historical period comparable to the expected term.

The weighted-average grant date fair value of options granted during 2012 was $2.85. We calculated this fair value based upon a risk-free interest rate of .43%, expected life of five years, expected volatility of 33% and expected dividend yield of 3%.

The weighted-average grant date fair value of options granted during 2011 was $1.90. We calculated this fair value based upon a risk-free interest rate of .75%, expected life of five years, expected volatility of 31% and expected dividend yield of 4%.

The weighted-average grant date fair value of options granted during 2010 was $1.26. We calculated this fair value based upon a risk-free interest rate of 1.04%, expected life of three years, expected volatility of 29% and expected dividend yield of 4%.

We charged compensation expense for our stock compensation plans against income before income taxes of $420,735, $283,811 and $46,733 for the years ended December 31, 2012, 2011 and 2010, respectively, with a corresponding income tax benefit of $143,050, $96,496 and $15,889. At December 31, 2012 and 2011, our total unrecognized compensation cost related to non-vested share-based compensation granted under our stock compensation plans was $1.2 million and $929,679, respectively. We expect to recognize this cost over a weighted average period of 8.9 years.

We account for share-based compensation to employees and directors of Donegal Mutual as share-based compensation to employees of a controlling entity. As such, we measure the fair value of an award at the grant date and recognize the fair value as a dividend to the controlling entity. These provisions apply to options granted to the employees and directors of Donegal Mutual, the employer of record for the employees that provide services to us. We recorded implied dividends of $2.5 million, $2.3 million and $1.3 million for the years ended December 31, 2012, 2011 and 2010, respectively.

During 2012, we received cash from option exercises under all stock compensation plans of $1.1 million. We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of $52,422 for 2012. We did not receive any cash from option exercises in 2011 or 2010. No further shares are available for plans in effect prior to 2011.

Information regarding activity in our stock option plans follows:

	Number of Options			Weighted-Average Exercise Price Per Share
Outstanding at December 31, 2009		3,290,099		$	17.98
Granted - 2010		1,787,500			14.00
Forfeited - 2010		(15,500	)		15.69
Expired - 2010		(1,063,432	)		15.76
Outstanding at December 31, 2010		3,998,667			16.80
Granted - 2011		2,321,000			12.52
Forfeited - 2011		(52,000	)		15.63
Expired - 2011		(958,667	)		21.00
Outstanding at December 31, 2011		5,309,000			14.18
Granted - 2012		1,593,600			14.50
Exercised - 2012		(82,102	)		13.01
Forfeited - 2012		(109,673	)		13.84
Expired - 2012		(10,000	)		21.00
Outstanding at December 31, 2012		6,700,825		$	14.27
Exercisable at:
December 31, 2010		1,805,751		$	18.13
December 31, 2011		1,821,333		$	16.42
December 31, 2012		3,072,970		$	15.03

Shares available for future option grants at December 31, 2012 totaled 40,936 shares under all plans.

The following table summarizes information about fixed stock options at December 31, 2012:

Exercise Price	Number of Options Outstanding		Weighted-Average Remaining Contractual Life	Number of Options Exercisable
$12.50		2,184,542	9.0 years		728,181
14.00		1,710,683	3.0 years		1,133,789
14.50		1,593,600	10.0 years		—
15.00		3,000	3.0 years		2,000
17.50		1,198,500	0.5 years		1,198,500
18.70		3,000	0.5 years		3,000
21.00		7,500	0.5 years		7,500
Total		6,700,825			3,072,970

Employee Stock Purchase Plans

During 1996, we adopted an Employee Stock Purchase Plan. During 2001, we adopted a nearly identical plan that made 533,333 shares of Class A common stock available for issuance. During 2011, we adopted another nearly identical plan that made 300,000 shares of Class A common stock available for issuance.

The 2011 plan extends over a 10-year period and provides for shares to be offered to all eligible employees at a purchase price equal to the lesser of 85% of the fair market value of our Class A common stock on the last day before the first day of each enrollment period (June 1 and December 1 of each year) under the plan or 85% of the fair market value of our common stock on the last day of each subscription period (June 30 and December 31 of each year).

A summary of plan activity follows:

	Shares Issued
	Price		Shares
January 1, 2010	$	12.85		11,717
July 1, 2010		10.45		12,403
January 1, 2011		11.02		13,243
July 1, 2011		10.88		11,371
January 1, 2012		11.91		10,523
July 1, 2012		11.29		19,031

On January 1, 2013, we issued an additional 16,485 shares at a price of $11.93 per share under this plan.

Agency Stock Purchase Plans

During 1996, we adopted an Agency Stock Purchase Plan. During 2001, we adopted a nearly identical plan that made 533,333 shares of Class A common stock available for issuance. During 2011, we adopted another nearly identical plan that made 300,000 shares of Class A common stock available for issuance. The plan provides for agents of our insurance subsidiaries and Donegal Mutual to invest up to $12,000 per subscription period (April 1 to September 30 and October 1 to March 31 of each year) under various methods. We issue stock at the end of each subscription period at a price equal to 90% of the average market price during the last ten trading days of each subscription period. During 2012, 2011 and 2010, we issued 70,366, 66,260 and 56,879 shares, respectively, under this plan. Expense recognized under the plan was not material.

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Condensed Financial Information of Parent Company

12 Months Ended

Dec. 31, 2012

Condensed Financial Information of Parent Company [Abstract]

Condensed Financial Information of Parent Company

19 - Condensed Financial Information of Parent Company

Condensed Balance Sheets

(in thousands)

December 31,	2012		2011
Assets
Investment in subsidiaries/affiliates (equity method)	$	470,565	$	445,795
Short-term investments		326		9,258
Cash		805		684
Property and equipment		883		1,224
Other		304		381
Total assets	$	472,883	$	457,342
Liabilities and Stockholders’ Equity
Liabilities
Cash dividends declared to stockholders	$	3,067	$	2,996
Borrowings under line of credit		52,000		54,500
Subordinated debentures		15,465		15,465
Other		2,316		930
Total liabilities		72,848		73,891
Stockholders’ equity		400,035		383,451
Total liabilities and stockholders’ equity	$	472,883	$	457,342

Condensed Statements of Income and Comprehensive Income

(in thousands)

Year Ended December 31,	2012		2011			2010
Statements of Income
Revenues
Dividends from subsidiaries	$	7,000	$	16,000		$	12,000
Other		5,487		2,995			701
Total revenues		12,487		18,995			12,701
Expenses
Operating expenses		2,323		2,392			2,060
Interest		2,118		1,864			778
Total expenses		4,441		4,256			2,838
Income before income tax expense (benefit) and equity in undistributed net income (loss) of subsidiaries		8,046		14,739			9,863
Income tax expense (benefit)		378		372			(487	)
Income before equity in undistributed net income (loss) of subsidiaries		7,668		14,367			10,350
Equity in undistributed net income (loss) of subsidiaries		15,425		(13,914	)		1,117
Net income	$	23,093	$	453		$	11,467
Statements of Comprehensive Income
Net income	$	23,093	$	453		$	11,467
Other comprehensive income (loss), net of tax
Unrealized gain (loss) - subsidiaries		4,644		14,972			(6,446	)
Other comprehensive income (loss), net of tax		4,644		14,972			(6,446	)
Comprehensive income	$	27,737	$	15,425		$	5,021

Condensed Statements of Cash Flows

(in thousands)

Year Ended December 31,	2012			2011			2010
Cash flows from operating activities:
Net income	$	23,093		$	453		$	11,467
Adjustments:
Equity in undistributed net (income) loss of subsidiaries		(15,425	)		13,914			(1,117	)
Other		(2,624	)		(396	)		547
Net adjustments		(18,049	)		13,518			(570	)
Net cash provided		5,044			13,971			10,897
Cash flows from investing activities:
Net sale (purchase) of short-term investments		8,932			6,437			(249	)
Net purchase of property and equipment		(147	)		(380	)		(492	)
Investment in subsidiaries		(100	)		(27,777	)		(35,088	)
Other		44			43			20
Net cash used		8,729			(21,677	)		(35,809	)
Cash flows from financing activities:
Cash dividends paid		(12,208	)		(11,874	)		(11,405	)
Issuance of common stock		2,983			1,461			1,199
Payments on line of credit		(6,000	)		(3,000	)		—
Borrowings under line of credit		3,500			22,500			35,000
Repurchase of treasury stock		(1,927	)		(1,538	)		(146	)
Net cash provided (used)		(13,652	)		7,549			24,648
Net change in cash		121			(157	)		(264	)
Cash at beginning of year		684			841			1,105
Cash at end of year	$	805		$	684		$	841

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Reconciliation of Statutory Filings to Amounts Reported Herein (Details) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Reconciliation of statutory net income loss and capital and surplus
Statutory net income (loss) of insurance subsidiaries									$ 17,534,586	$ (4,732,784)	$ 9,163,680
Increases (decreases):
Deferred policy acquisition costs									3,696,742	1,979,376	1,601,400
Deferred federal income taxes									(1,151,250)	5,922,490	2,380,430
Salvage and subrogation recoverable									772,600	1,273,000	748,000
Amortization of MICO fair value adjustments									(5,416)	(3,275,777)	(597,643)
Consolidating eliminations and adjustments									(5,421,779)	(15,080,164)	(12,178,977)
Parent-only net income									7,667,137	14,366,812	10,350,289
Net income	6,220,022	6,839,384	2,023,067	8,010,147	(878,920)	819,926	(1,693,989)	2,205,936	23,092,620	452,953	11,467,179
Statutory capital and surplus of insurance subsidiaries	361,968,384				349,911,429				361,968,384	349,911,429	371,871,702
Increases (decreases):
Deferred policy acquisition costs	40,121,697				36,424,955				40,121,697	36,424,955	34,445,579
Deferred federal income taxes	(25,682,004)				(21,007,223)				(25,682,004)	(21,007,223)	(14,834,855)
Salvage and subrogation recoverable	12,000,600				11,228,000				12,000,600	11,228,000	9,955,000
Non-admitted assets and other adjustments, net	2,005,603				1,478,988				2,005,603	1,478,988	4,889,231
Fixed maturities	39,607,340				33,165,065				39,607,340	33,165,065	4,430,879
Parent-only equity and other adjustments	(29,987,526)				(27,749,622)				(29,987,526)	(27,749,622)	(30,654,726)
Total stockholders' equity	$ 400,034,094				$ 383,451,592				$ 400,034,094	$ 383,451,592	$ 380,102,810	$ 385,505,699

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Interim Financial Data (Unaudited) (Tables)

12 Months Ended

Dec. 31, 2012

Interim Financial Data [Abstract]

Summary of interim financial data

	2012
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Net premiums earned	$	114,691,791	$	117,569,122	$	120,916,960	$	121,824,349
Total revenues		125,348,162		127,299,190		130,431,531		131,903,702
Net losses and loss expenses		76,609,219		86,385,353		82,105,094		87,771,918
Net income		8,010,147		2,023,067		6,839,384		6,220,022
Net earnings per common share:
Class A common stock - basic		0.32		0.08		0.27		0.25
Class A common stock - diluted		0.31		0.08		0.27		0.25
Class B common stock - basic and diluted		0.29		0.07		0.25		0.22

	2011
	First Quarter		Second Quarter			Third Quarter		Fourth Quarter
Net premiums earned	$	103,795,279	$	104,991,401		$	108,506,809	$	114,176,695
Total revenues		111,583,442		117,054,498			119,164,471		127,215,208
Net losses and loss expenses		73,079,565		84,195,796			89,411,543		93,815,873
Net income (loss)		2,205,936		(1,693,989	)		819,926		(878,920	)
Net earnings (loss) per common share:
Class A common stock - basic and diluted		0.09		(0.07	)		0.03		(0.03	)
Class B common stock - basic and diluted		0.08		(0.06	)		0.03		(0.03	)

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Interim Financial Data (Unaudited) (Details) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Summary of interim financial data
Net premiums earned/Premiums earned	$ 121,824,349	$ 120,916,960	$ 117,569,122	$ 114,691,791	$ 114,176,695	$ 108,506,809	$ 104,991,401	$ 103,795,279	$ 475,002,222	$ 431,470,184	$ 378,030,129	$ 27,000,000
Total revenues	131,903,702	130,431,531	127,299,190	125,348,162	127,215,208	119,164,471	117,054,498	111,583,442	514,982,585	475,017,619	408,549,446
Net losses and loss expenses	87,771,918	82,105,094	86,385,353	76,609,219	93,815,873	89,411,543	84,195,796	73,079,565	487,124,325	481,756,932	398,705,297
Net income (loss)	$ 6,220,022	$ 6,839,384	$ 2,023,067	$ 8,010,147	$ (878,920)	$ 819,926	$ (1,693,989)	$ 2,205,936	$ 23,092,620	$ 452,953	$ 11,467,179
Common Class A [Member]
Net earnings (loss) per common share:
Earnings per share, Basic	$ 0.25	$ 0.27	$ 0.08	$ 0.32					$ 0.92	$ 0.02	$ 0.46
Earnings per share, Diluted	$ 0.25	$ 0.27	$ 0.08	$ 0.31					$ 0.91	$ 0.02	$ 0.46
Common stock - basic and diluted					$ (0.03)	$ 0.03	$ (0.07)	$ 0.09
Common Class B [Member]
Net earnings (loss) per common share:
Earnings per share, Basic									$ 0.83	$ 0.01	$ 0.41
Earnings per share, Diluted									$ 0.83	$ 0.01	$ 0.41
Common stock - basic and diluted	$ 0.22	$ 0.25	$ 0.07	$ 0.29	$ (0.03)	$ 0.03	$ (0.06)	$ 0.08	$ 0.83	$ 0.01	$ 0.41

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Income Taxes (Tables)

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

Provision for income tax

	2012		2011			2010
Current	$	3,614,390	$	(1,269,775	)	$	757,400
Deferred		1,151,250		(5,922,491	)		(2,380,430	)
Federal tax (benefit) provision	$	4,765,640	$	(7,192,266	)	$	(1,623,030	)

Reconciliation of federal income tax rate

	2012			2011			2010
Income (loss) before income taxes	$	27,858,260		$	(6,739,313	)	$	9,844,149
Computed “expected” taxes (benefit)		9,750,391			(2,358,760	)		3,445,452
Tax-exempt interest		(5,824,281	)		(6,038,463	)		(6,183,795	)
Proration		869,551			905,326			923,071
Other, net		(30,021	)		299,631			192,242
Federal income tax (benefit) provision	$	4,765,640		$	(7,192,266	)	$	(1,623,030	)

Schedule of deferred tax assets and deferred tax liabilities

	2012			2011
Deferred tax assets:
Unearned premium	$	17,613,415		$	16,113,291
Loss reserves		7,275,091			7,339,644
Net operating loss carryforward		1,942,128			4,473,462
Net operating loss carryforward - Le Mars		1,797,194			2,191,532
Alternative minimum tax credit carryforward		7,964,853			4,294,879
Other		1,413,285			634,885
Total gross deferred assets		38,005,966			35,047,693
Less valuation allowance		(440,778	)		(440,778	)
Net deferred tax assets		37,565,188			34,606,915
Deferred tax liabilities:
Deferred policy acquisition costs		14,042,594			12,750,631
Net unrealized gains		14,212,465			11,711,531
Other		3,042,593			225,033
Total gross deferred tax liabilities		31,297,652			24,687,195
Net deferred tax asset	$	6,267,536		$	9,919,720

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Consolidated Statements of Income and Comprehensive Income (Parenthetical) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Consolidated Statements of Income and Comprehensive Income [Abstract]
Net premiums earned - affiliated reinsurance	$ 142,608,940	$ 130,555,613	$ 134,823,098
Net losses and loss expenses - affiliated reinsurance	81,219,926	87,950,502	81,539,930
Income tax (benefit) on unrealized holding gain (loss) arising during the period	4,833,143	12,237,669	(1,976,358)
Income tax (benefit) on reclassification adjustment for gains	$ 2,332,209	$ 4,175,631	$ 1,494,545

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Stockholders' Equity (Details)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Stockholders Equity (Textual) [Abstract]
Percentage of dividend declared on each share	10.00%
Authority to purchase shares	28,308
Common Class A [Member]
Equity, Class of Treasury Stock [Line Items]
Treasury stock	916,622	781,558
Purchase of shares	135,064	119,257
Purchased shares for class A common stock	300,000
Common Class B [Member]
Equity, Class of Treasury Stock [Line Items]
Treasury stock	72,465	72,465

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Transactions with Affiliates

12 Months Ended

Dec. 31, 2012

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 insurance 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. 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 2012, 2011 and 2010:

	2012		2011		2010
Premiums earned	$	132,876,094	$	118,812,725	$	105,376,068
Losses and loss expenses		92,459,147		97,130,846		81,203,625
Prepaid reinsurance premiums		70,572,281		64,214,378		57,783,435
Liability for losses and loss expenses		83,623,652		77,312,645		65,028,781

The following amounts represent reinsurance Atlantic States assumed from the pool during 2012, 2011 and 2010:

	2012		2011		2010
Premiums earned	$	298,803,060	$	266,687,610	$	238,308,846
Losses and loss expenses		187,415,893		206,907,170		160,256,348
Unearned premiums		157,140,642		141,880,039		125,322,884
Liability for losses and loss expenses		162,863,045		156,941,512		134,580,026

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. Until October 31, 2012, Donegal Mutual and Southern had a quota-share reinsurance agreement whereby Southern assumed 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. The following amounts represent reinsurance Southern and Le Mars assumed from Donegal Mutual pursuant to the quota-share reinsurance agreements during 2012, 2011 and 2010:

	2012		2011		2010
Premiums earned	$	22,189,399	$	17,757,409	$	14,516,901
Losses and loss expenses		19,620,587		14,983,405		12,600,094
Unearned premiums		9,926,381		10,225,922		8,124,069
Liability for losses and loss expenses		8,873,592		7,770,053		7,316,879

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 2012, 2011 and 2010:

	2012		2011		2010
Premiums earned	$	33,046,914	$	22,123,229	$	4,516,313
Losses and loss expenses		22,569,557		16,038,590		3,463,112
Prepaid reinsurance premiums		15,457,605		14,181,338		4,590,424
Liability for losses and loss expenses		18,285,182		11,868,641		4,006,231

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 $500,000 ($350,000 in 2011 and 2010) of losses in excess of $500,000 ($400,000 in 2011 and 2010).

The following amounts represent reinsurance that our insurance subsidiaries ceded to Donegal Mutual pursuant to these reinsurance agreements during 2012, 2011 and 2010:

	2012		2011		2010
Premiums earned	$	12,460,511	$	12,953,452	$	8,110,268
Losses and loss expenses		10,787,850		20,770,637		6,649,775
Liability for losses and loss expenses		2,206,786		3,980,024		3,441,447

The following amounts represent the effect of affiliated reinsurance transactions on net premiums our insurance subsidiaries earned during 2012, 2011 and 2010:

	2012			2011			2010
Assumed	$	320,992,459		$	284,445,019		$	252,825,747
Ceded		(178,383,519	)		(153,889,406	)		(118,002,649	)
Net	$	142,608,940		$	130,555,613		$	134,823,098

The following amounts represent the effect of affiliated reinsurance transactions on net losses and loss expenses our insurance subsidiaries incurred during 2012, 2011 and 2010:

	2012			2011			2010
Assumed	$	207,036,480		$	221,890,575		$	172,856,442
Ceded		(125,816,554	)		(133,940,073	)		(91,316,512	)
Net	$	81,219,926		$	87,950,502		$	81,539,930

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 $78,778,333, $64,711,860 and $63,982,793 for 2012, 2011 and 2010, 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, 2012 and 2011, we had $18,806,576 and $10,907,454, respectively, in checking accounts with UCB, a wholly owned subsidiary of DFSC. We earned $1,591, $1,019 and $1,575 in interest on these accounts during 2012, 2011 and 2010, respectively.

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Transactions With Affiliates (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Property, Plant and Equipment [Line Items]
Coverage under catastrophic occurrence	$ 5,000,000
Transactions With affiliates (Textual) [Abstract]
Combined retention for Catastrophe	3,000,000
Charges for services	78,778,333	64,711,860	63,982,793
Accounts with UCB	18,806,576	10,907,454
Interest on UCB accounts	1,591	1,019	1,575
Donegal Mutual [Member]
Property, Plant and Equipment [Line Items]
Percentage of resulting shares of pool	20.00%
Premiums and losses related to certain products	100.00%
Premiums and losses related to business of MICO	25.00%
Period of Donegal Mutual under lease agreement	10 years
Donegal mutual and southern have an excess of loss reinsurance agreement	500,000	350,000	350,000
Atlantic States [Member]
Property, Plant and Equipment [Line Items]
Percentage of resulting shares of pool	80.00%
Coverage under catastrophic occurrence	2,000,000
Southern [Member]
Property, Plant and Equipment [Line Items]
Premiums and losses related to certain products	100.00%
Coverage under catastrophic occurrence	1,500,000
Donegal mutual and southern have an excess of loss reinsurance agreement	500,000	400,000	400,000
Le Mars [Member]
Property, Plant and Equipment [Line Items]
Premiums and losses related to certain products	100.00%
Coverage under catastrophic occurrence	500,000
Insurance Subsidiaries [Member]
Property, Plant and Equipment [Line Items]
Coverage under catastrophic occurrence	$ 5,000,000
Minimum [Member] | Lease office equipment and automobile [Member]
Property, Plant and Equipment [Line Items]
Lease office equipment and automobiles range	3 years
Maximum [Member] | Lease office equipment and automobile [Member]
Property, Plant and Equipment [Line Items]
Lease office equipment and automobiles range	10 years

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Reinsurance (Details 3) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Amounts represent the effect of reinsurance on premiums earned
Direct	$ 408,846,530	$ 385,737,801	$ 269,394,549
Assumed	324,219,993	287,919,197	253,189,916
Ceded	(258,064,301)	(242,186,814)	(144,554,336)
Net premiums earned	$ 475,002,222	$ 431,470,184	$ 378,030,129

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Supplementary Insurance Information (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Supplementary Insurance Information, by Segment [Line Items]
Net Earned Premiums	$ 475,002	$ 431,470	$ 378,030
Net Investment Income	20,169	20,858	19,950
Net Losses And Loss Expenses	332,872	340,503	274,309
Amortization of Deferred Policy Acquisition Costs	74,314	68,571	66,354
Other Underwriting Expenses	73,915	66,924	54,565
Net Premiums Written	496,447	454,051	391,522
Deferred Policy Acquisition Costs	40,122	36,425
Liability For Losses And Loss Expenses	458,827	442,408
Unearned Premiums	363,088	336,937
Other Policy Claims and Benefits Payable
Personal lines [Member]
Supplementary Insurance Information, by Segment [Line Items]
Net Earned Premiums	300,269	280,370	260,469
Net Losses And Loss Expenses	218,502	232,141	196,008
Amortization of Deferred Policy Acquisition Costs	46,977	44,558	45,719
Other Underwriting Expenses	46,725	43,487	37,596
Net Premiums Written	308,571	291,065	268,047
Deferred Policy Acquisition Costs	24,956	23,385
Liability For Losses And Loss Expenses	201,884	207,047
Unearned Premiums	225,841	216,314
Other Policy Claims and Benefits Payable
Commercial lines [Member]
Supplementary Insurance Information, by Segment [Line Items]
Net Earned Premiums	174,733	151,100	117,561
Net Losses And Loss Expenses	114,370	108,362	78,301
Amortization of Deferred Policy Acquisition Costs	27,337	24,013	20,635
Other Underwriting Expenses	27,190	23,437	16,969
Net Premiums Written	187,876	162,986	123,475
Deferred Policy Acquisition Costs	15,166	13,040
Liability For Losses And Loss Expenses	256,943	235,361
Unearned Premiums	137,247	120,623
Other Policy Claims and Benefits Payable
Investments [Member]
Supplementary Insurance Information, by Segment [Line Items]
Net Investment Income	20,169	20,858	19,950
Other Policy Claims and Benefits Payable

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Investments (Details 7) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Summary of fixed maturities and equity securities with unrealized losses
Less than 12 months, Fair Value	$ 71,431,921	$ 23,235,433
Less than 12 months, Unrealized Losses	902,343	996,951
More than 12 months, Fair Value	2,958,520	540,688
More than 12 months, Unrealized Losses	29,573	21,409
U.S. Treasury securities and obligations of U.S. government corporations and agencies [Member]
Summary of fixed maturities and equity securities with unrealized losses
Less than 12 months, Fair Value	12,308,333
Less than 12 months, Unrealized Losses	43,951
Obligations of states and political subdivisions [Member]
Summary of fixed maturities and equity securities with unrealized losses
Less than 12 months, Fair Value	22,134,226	1,638,135
Less than 12 months, Unrealized Losses	606,065	17,390
More than 12 months, Fair Value		540,062
More than 12 months, Unrealized Losses		21,400
Corporate securities [Member]
Summary of fixed maturities and equity securities with unrealized losses
Less than 12 months, Fair Value	12,271,750	10,101,753
Less than 12 months, Unrealized Losses	79,136	528,164
Residential mortgage-backed securities [Member]
Summary of fixed maturities and equity securities with unrealized losses
Less than 12 months, Fair Value	22,491,562	7,411,682
Less than 12 months, Unrealized Losses	66,443	43,692
More than 12 months, Fair Value	2,958,520	626
More than 12 months, Unrealized Losses	29,573	9
Equity securities [Member]
Summary of fixed maturities and equity securities with unrealized losses
Less than 12 months, Fair Value	2,226,050	4,083,863
Less than 12 months, Unrealized Losses	$ 106,748	$ 407,705

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Segment Information

12 Months Ended

Dec. 31, 2012

Segment Information [Abstract]

Segment Information

20 - Segment Information

We have four reportable segments, which consist of our investment function, our personal lines of insurance, our commercial lines of insurance and our investment in DFSC. Using independent agents, our insurance subsidiaries market personal lines of insurance to individuals and commercial lines of insurance to small and medium-sized businesses.

We evaluate the performance of the personal lines and commercial lines primarily based upon our insurance subsidiaries’ underwriting results as determined under SAP for our total business.

We do not allocate assets to the personal and commercial lines and review the two segments in total for purposes of decision-making. We operate only in the United States and no single customer or agent provides 10 percent or more of our revenues.

Financial data by segment is as follows:

	2012			2011			2010
	(in thousands)
Revenues:
Premiums earned:
Commercial lines	$	174,735		$	152,247		$	117,755
Personal lines		300,272			282,498			260,900
SAP premiums earned		475,007			434,745			378,655
GAAP adjustments		(5	)		(3,275	)		(625	)
GAAP premiums earned		475,002			431,470			378,030
Net investment income		20,169			20,858			19,950
Realized investment gains		6,859			12,281			4,396
Equity in earnings (loss) of DFSC		4,533			2,023			(269	)
Other		8,420			8,386			6,442
Total revenues	$	514,983		$	475,018		$	408,549

	2012			2011			2010
	(in thousands)
Income before income taxes:
Underwriting income (loss):
Commercial lines	$	5,251		$	(6,560	)	$	2,252
Personal lines		(18,236	)		(40,739	)		(22,526	)
SAP underwriting loss		(12,985	)		(47,299	)		(20,274	)
GAAP adjustments		5,545			1,532			2,458
GAAP underwriting loss		(7,440	)		(45,767	)		(17,816	)
Net investment income		20,169			20,858			19,950
Realized investment gains		6,859			12,281			4,396
Equity in earnings (loss) of DFSC		4,533			2,023			(269	)
Other		3,737			3,866			3,583
Income (loss) before income taxes	$	27,858		$	(6,739	)	$	9,844

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Property and Equipment (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Property and Equipment (Textual) [Abstract]
Depreciation expense	$ 944,632	$ 1,000,000	$ 1,200,000

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Liability for Losses and Loss Expenses (Tables)

12 Months Ended

Dec. 31, 2012

Liability for Losses and Loss Expenses [Abstract]

Summary of insurance subsidiaries' liability for losses and loss expenses

	2012			2011			2010
Balance at January 1	$	442,407,615		$	383,318,672		$	263,598,844
Less reinsurance recoverable		(199,392,836	)		(165,422,373	)		(83,336,726	)
Net balance at January 1		243,014,779			217,896,299			180,262,118
Acquisition of MICO		—			—			26,960,063
Incurred related to:
Current year		325,275,882			340,671,237			277,193,930
Prior years		7,595,702			(168,460	)		(2,885,072	)
Total incurred		332,871,584			340,502,777			274,308,858
Paid related to:
Current year		205,876,331			219,183,102			179,069,304
Prior years		119,074,197			96,201,195			84,565,436
Total paid		324,950,528			315,384,297			263,634,740
Net balance at December 31		250,935,835			243,014,779			217,896,299
Plus reinsurance recoverable		207,891,560			199,392,836			165,422,373
Balance at December 31	$	458,827,395		$	442,407,615		$	383,318,672

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Stockholders' Equity

12 Months Ended

Dec. 31, 2012

Stockholders' Equity [Abstract]

Stockholders' Equity

13 - Stockholders’ Equity

On April 19, 2001, our stockholders approved an amendment to our certificate of incorporation. Among other things, the amendment reclassified our common stock as Class B common stock and effected a one-for-three reverse split of our Class B common stock effective April 19, 2001. The amendment also authorized a new class of common stock with one-tenth of a vote per share designated as Class A common stock. Our board of directors also declared a dividend of two shares of Class A common stock for each share of Class B common stock, after the one-for-three reverse split, held of record at the close of business April 19, 2001.

Each share of Class A common stock outstanding at the time of the declaration of any dividend or other distribution payable in cash upon the shares of Class B common stock is entitled to a dividend or distribution payable at the same time and to stockholders of record on the same date in an amount at least 10% greater than any dividend declared upon each share of Class B common stock. In the event of our merger or consolidation with or into another entity, the holders of Class A common stock and the holders of Class B common stock are entitled to receive the same per share consideration in such merger or consolidation. In the event of our liquidation, dissolution or winding-up, any assets available to common stockholders will be distributed pro-rata to the holders of Class A common stock and Class B common stock after payment of all of our obligations.

In February 2009, our board of directors authorized a share repurchase program, pursuant to which we may purchase up to 300,000 shares of our Class A common stock at market prices prevailing from time to time in the open market subject to the provisions of Securities and Exchange Commission (“SEC”) Rule 10b-18 and in privately negotiated transactions. We purchased 135,064 and 119,257 shares of our Class A common stock under this program during 2012 and 2011, respectively. At December 31, 2012, we had the authority remaining to purchase 28,308 shares under this program.

At December 31, 2012, our treasury stock consisted of 916,622 and 72,465 shares of Class A common stock and Class B common stock, respectively. At December 31, 2011, our treasury stock consisted of 781,558 and 72,465 shares of Class A common stock and Class B common stock, respectively.

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Condensed Financial Information of Parent Company (Details 1) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Revenues
Total revenues	$ 131,903,702	$ 130,431,531	$ 127,299,190	$ 125,348,162	$ 127,215,208	$ 119,164,471	$ 117,054,498	$ 111,583,442	$ 514,982,585	$ 475,017,619	$ 408,549,446
Expenses
Interest									2,358,711	2,126,784	799,578
Total expenses	87,771,918	82,105,094	86,385,353	76,609,219	93,815,873	89,411,543	84,195,796	73,079,565	487,124,325	481,756,932	398,705,297
Income before income tax expense (benefit) and equity in undistributed net income (loss) of subsidiaries									27,858,260	(6,739,313)	9,844,149
Income tax expense (benefit)									4,765,640	(7,192,266)	(1,623,030)
Equity in undistributed net income (loss) of subsidiaries									4,533,257	2,023,127	(268,341)
Net income	6,220,022	6,839,384	2,023,067	8,010,147	(878,920)	819,926	(1,693,989)	2,205,936	23,092,620	452,953	11,467,179
Statements of Comprehensive Income
Net income	6,220,022	6,839,384	2,023,067	8,010,147	(878,920)	819,926	(1,693,989)	2,205,936	23,092,620	452,953	11,467,179
Other comprehensive income (loss), net of tax
Unrealized gain (loss) - subsidiaries									(9,171,817)	(23,077,997)	3,544,783
Comprehensive income									27,737,207	15,425,314	5,021,221
Parent Company [Member]
Revenues
Dividends from subsidiaries									7,000,000	16,000,000	12,000,000
Other									5,487,000	2,995,000	701,000
Total revenues									12,487,000	18,995,000	12,701,000
Expenses
Operating expenses									2,323,000	2,392,000	2,060,000
Interest									2,118,000	1,864,000	778,000
Total expenses									4,441,000	4,256,000	2,838,000
Income before income tax expense (benefit) and equity in undistributed net income (loss) of subsidiaries									8,046,000	14,739,000	9,863,000
Income tax expense (benefit)									378,000	372,000	(487,000)
Income before equity in undistributed net income (loss) of subsidiaries									7,668,000	14,367,000	10,350,000
Equity in undistributed net income (loss) of subsidiaries									15,425,000	(13,914,000)	1,117,000
Net income									23,093,000	453,000	11,467,000
Statements of Comprehensive Income
Net income									23,093,000	453,000	11,467,000
Other comprehensive income (loss), net of tax
Unrealized gain (loss) - subsidiaries									4,644,000	14,972,000	(6,446,000)
Other comprehensive income (loss), net of tax									4,644,000	14,972,000	(6,446,000)
Comprehensive income									$ 27,737,000	$ 15,425,000	$ 5,021,000