3—Transactions with Affiliates

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

a. Reinsurance Pooling and Other Reinsurance Arrangements

Atlantic States, our largest insurance subsidiary, and Donegal Mutual have a pooling agreement under which both companies contribute substantially all of their direct written business to the pool and receive an allocated percentage of the pooled underwriting results, excluding certain reinsurance Donegal Mutual assumes from our insurance subsidiaries. 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 2018, 2017 and 2016:


	2018		2017		2016
Premiums earned	$	212,928,238	$	200,752,599	$	185,444,009
Losses and loss expenses		159,495,489		140,015,950		115,371,839
Prepaid reinsurance premiums		106,224,424		103,991,861		95,469,329
Liability for losses and loss expenses		158,081,925		136,786,070		120,434,535

The following amounts represent reinsurance Atlantic States assumed from the pool during 2018, 2017 and 2016:


	2018		2017		2016
Premiums earned	$	473,512,781	$	451,470,894	$	422,985,921
Losses and loss expenses		335,789,280		289,503,373		240,394,302
Unearned premiums		231,958,181		228,988,598		214,372,048
Liability for losses and loss expenses		303,546,744		252,263,547		230,543,393

Until February 1, 2016, Donegal Mutual and Le Mars had a quota-share reinsurance agreement under which Le Mars assumed 100% of the premiums and losses related to certain products Donegal Mutual offered in certain Midwestern states, which provided 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 offered 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 2018, 2017 and 2016:


	2018			2017			2016
Premiums earned	$	—		$	(271	)	$	(1,512	)
Losses and loss expenses		(104,817	)		(690,268	)		(378,199	)
Liability for losses and loss expenses		719,573			827,193			3,222,100

Donegal Mutual and MICO have a quota-share reinsurance agreement under which 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 under which 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 under the reinsurance agreements is subject to 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 2018, 2017 and 2016:


	2018		2017		2016
Premiums earned	$	42,813,929	$	42,578,047	$	39,917,800
Losses and loss expenses		23,175,456		24,978,631		21,524,856
Prepaid reinsurance premiums		19,047,084		19,827,115		19,180,421
Liability for losses and loss expenses		38,434,078		36,396,109		31,881,756

Through December 31, 2018, Atlantic States, Southern and Le Mars each had a catastrophe reinsurance agreement with Donegal Mutual that provided coverage under any one catastrophic occurrence above a set retention ($2,500,000, $2,000,000 and $1,000,000 for Atlantic States, Southern and Le Mars, respectively, for 2018), with a combined retention of $5,000,000 for a catastrophe involving a combination of these subsidiaries, up to the amount Donegal Mutual and our insurance subsidiaries retained under catastrophe reinsurance agreements with unaffiliated reinsurers. The set retention was $2,000,000, $1,500,000 and $750,000 for Atlantic States, Southern and Le Mars, respectively, for 2017 and 2016. Through December 31, 2018, Donegal Mutual and Southern had an excess of loss reinsurance agreement in which Donegal Mutual assumed up to $500,000 of Southern’s losses in excess of $500,000.

The following amounts represent reinsurance that our insurance subsidiaries ceded to Donegal Mutual pursuant to these reinsurance agreements during 2018, 2017 and 2016:


	2018		2017		2016
Premiums earned	$	19,190,067	$	17,215,273	$	12,965,868
Losses and loss expenses		12,899,927		8,953,411		995,076
Liability for losses and loss expenses		4,847,176		3,399,207		3,136,438

The following amounts represent the effect of affiliated reinsurance transactions on net premiums our insurance subsidiaries earned during 2018, 2017 and 2016:


	2018			2017			2016
Assumed	$	473,512,781		$	451,470,623		$	422,984,409
Ceded		(274,932,234	)		(260,545,919	)		(238,327,677	)

Net	$	198,580,547		$	190,924,704		$	184,656,732

The following amounts represent the effect of affiliated reinsurance transactions on net losses and loss expenses our insurance subsidiaries incurred during 2018, 2017 and 2016:


	2018			2017			2016
Assumed	$	335,684,463		$	288,813,105		$	240,016,103
Ceded		(195,570,872	)		(173,947,992	)		(137,891,771	)

Net	$	140,113,591		$	114,865,113		$	102,124,332

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 $126,153,511, $124,999,770 and $122,428,117 for 2018, 2017 and 2016, 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. Union Community Bank

At December 31, 2018 and 2017, we had $50,252,479 and $32,373,544, respectively, in checking accounts with UCB, a wholly owned subsidiary of DFSC. We earned $538,311, $286,410 and $87,941 in interest on these accounts during 2018, 2017 and 2016, respectively. We refer you to Note 22—Subsequent Event for information regarding the sale of DFSC in March 2019.