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.