UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

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

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 incorporation or organization)		(I.R.S. Employer Identification No.)

1195 River Road, P.O. Box 302, Marietta, PA 17547

(717) 426-1931

Not applicable

     Indicate by check mark whether 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 þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

     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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 20,004,315 shares of Class A Common Stock, par value $0.01 per share, and 5,576,775 shares of Class B Common Stock, par value $0.01 per share, outstanding on July 29, 2011.

 

 

Part I. Financial Information

Item 1. Financial Statements.

Donegal Group Inc. and Subsidiaries
Consolidated Balance Sheets

		June 30, 2011				December 31, 2010
		(Unaudited)
Assets
Investments
Fixed maturities
Held to maturity, at amortized cost		$	62,862,624			$	64,766,429
Available for sale, at fair value			630,545,678				603,846,201
Equity securities, available for sale, at fair value			14,501,261				10,161,614
Investments in affiliates			29,971,736				8,991,577
Short-term investments, at cost, which approximates fair value			33,560,242				40,775,993
Total investments			771,441,541				728,541,814
Cash			3,687,405				16,342,212
Accrued investment income			7,038,680				7,365,171
Premiums receivable			107,100,320				96,467,949
Reinsurance receivable			189,975,735				173,836,746
Deferred policy acquisition costs			36,360,264				34,445,579
Deferred tax asset, net			10,586,934				11,988,169
Prepaid reinsurance premiums			106,382,310				89,365,771
Property and equipment, net			6,477,407				7,069,086
Accounts receivable — securities			—				428,983
Federal income taxes recoverable			920,226				948,325
Goodwill			5,625,354				5,493,316
Other intangible assets			958,010				958,010
Other			1,439,122				1,368,392
Total assets		$	1,247,993,308			$	1,174,619,523
Liabilities and Stockholders’ Equity
Liabilities
Unpaid losses and loss expenses		$	402,741,902			$	383,318,672
Unearned premiums			335,637,737				297,272,161
Accrued expenses			21,431,558				21,287,406
Reinsurance balances payable			21,081,236				19,140,322
Borrowings under line of credit			54,500,000				35,617,371
Cash dividends declared to stockholders			—				2,870,955
Subordinated debentures			20,465,000				20,465,000
Accounts payable — securities			3,238,320				—
Payable for the purchase of Michigan Insurance Company			—				7,207,471
Due to affiliate			2,641,815				2,926,104
Drafts payable			1,854,144				1,304,779
Other			1,733,806				3,106,472
Total liabilities			865,325,518				794,516,713
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 20,705,303 and 20,656,527 shares and outstanding 19,992,944 and 19,994,226 shares			207,054				206,566
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			167,803,221				167,093,504
Accumulated other comprehensive income			13,619,827				8,561,086
Retained earnings			210,905,634				213,435,095
Treasury stock			(9,924,438	)			(9,249,933	)
Total stockholders’ equity			382,667,790				380,102,810
Total liabilities and stockholders’ equity		$	1,247,993,308			$	1,174,619,523

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)

		Three Months Ended June 30,
		2011				2010
Revenues:
Net premiums earned		$	104,991,401			$	93,002,409
Investment income, net of investment expenses			5,420,992				4,968,490
Net realized investment gains			4,316,021				1,965,091
Lease income			234,861				229,490
Installment payment fees			1,872,672				1,359,874
Other income			218,551				—
Total revenues			117,054,498				101,525,354
Expenses:
Net losses and loss expenses			84,195,796				68,509,616
Amortization of deferred policy acquisition costs			16,628,000				16,146,000
Other underwriting expenses			17,092,478				14,182,695
Policyholder dividends			98,915				65,482
Interest			558,842				168,935
Other expenses			552,066				581,750
Total expenses			119,126,097				99,654,478
(Loss) income before income tax (benefit) expense			(2,071,599	)			1,870,876
Income tax (benefit) expense			(377,610	)			131,148
Net (loss) income		$	(1,693,989	)		$	1,739,728
(Loss) earnings per common share:
Class A common stock — basic and diluted		$	(0.07	)		$	0.07
Class B common stock — basic and diluted		$	(0.06	)		$	0.06

Consolidated Statements of Comprehensive Income

		Three Months Ended June 30,
		2011				2010
Net (loss) income		$	(1,693,989	)		$	1,739,728
Other comprehensive income, net of tax Unrealized gain on securities:
Unrealized holding income during the period, net of income tax			7,692,542				4,383,766
Reclassification adjustment, net of income tax			(2,848,574	)			(1,296,960	)
Other comprehensive income			4,843,968				3,086,806
Comprehensive income		$	3,149,979			$	4,826,534

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)

		Six Months Ended June 30,
		2011				2010
Revenues:
Net premiums earned		$	208,786,680			$	184,374,505
Investment income, net of investment expenses			10,651,136				9,898,981
Net realized investment gains			4,689,094				1,986,603
Lease income			466,543				455,997
Installment payment fees			3,706,536				2,660,116
Other income			337,951				—
Total revenues			228,637,940				199,376,202
Expenses:
Net losses and loss expenses			157,275,361				136,491,102
Amortization of deferred policy acquisition costs			33,620,000				32,161,000
Other underwriting expenses			34,539,390				26,815,711
Policyholder dividends			305,929				244,783
Interest			1,002,312				353,693
Other expenses			1,370,412				1,163,499
Total expenses			228,113,404				197,229,788
Income before income tax expense			524,536				2,146,414
Income tax expense			12,589				171,928
Net income		$	511,947			$	1,974,486
Earnings per common share:
Class A common stock — basic and diluted		$	0.02			$	0.08
Class B common stock — basic and diluted		$	0.02			$	0.07

Consolidated Statements of Comprehensive Income

		Six Months Ended June 30,
		2011				2010
Net income		$	511,947			$	1,974,486
Other comprehensive income, net of tax Unrealized gain on securities:
Unrealized holding income during the period, net of income tax			8,153,543				3,932,612
Reclassification adjustment, net of income tax			(3,094,802	)			(1,311,158	)
Other comprehensive income			5,058,741				2,621,454
Comprehensive income		$	5,570,688			$	4,595,940

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Unaudited)
Six Months Ended June 30, 2011

																		Additional				Accumulated Other												Total
																		Paid-In				Comprehensive				Retained				Treasury				Stockholders’
		Class A Shares				Class B Shares				Class A Amount				Class B Amount				Capital				Income				Earnings				Stock				Equity
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)			48,776								488								675,143																675,631
Net income																											511,947								511,947
Cash dividends declared																											(3,006,834	)							(3,006,834	)
Grant of stock options																			34,574								(34,574	)							—
Repurchase of treasury stock																															(674,505	)			(674,505	)
Other comprehensive income																							5,058,741												5,058,741
Balance, June 30, 2011			20,705,303				5,649,240			$	207,054			$	56,492			$	167,803,221			$	13,619,827			$	210,905,634			$	(9,924,438	)		$	382,667,790

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows

		Six Months Ended June 30,
		2011				2010
Cash Flows from Operating Activities:
Net income		$	511,947			$	1,974,486
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,925,467				1,257,660
Net realized investment gains			(4,689,094	)			(1,986,603	)
Equity (income) loss			(337,951	)			197,545
Changes in assets and liabilities:
Losses and loss expenses			19,423,230				12,631,578
Unearned premiums			38,365,576				17,016,015
Premiums receivable			(10,632,371	)			(8,923,708	)
Deferred acquisition costs			(1,914,685	)			(1,028,946	)
Deferred income taxes			(1,251,607	)			(579,005	)
Reinsurance receivable			(16,138,989	)			(9,125,388	)
Prepaid reinsurance premiums			(17,016,539	)			(6,100,772	)
Accrued investment income			326,491				(233,132	)
Due to affiliate			(284,289	)			(1,769,359	)
Reinsurance balances payable			1,940,914				694,923
Current income taxes			28,099				1,318,713
Accrued expenses			144,152				(1,299,672	)
Other, net			(894,038	)			297,926
Net adjustments			8,994,366				2,367,775
Net cash provided by operating activities			9,506,313				4,342,261
Cash Flows from Investing Activities:
Purchases of fixed maturities:
Available for sale			(71,799,322	)			(80,020,763	)
Purchases of equity securities, available for sale			(14,261,819	)			(11,014,460	)
Maturity of fixed maturities:
Held to maturity			1,709,495				5,612,123
Available for sale			26,504,947				39,093,985
Sales of fixed maturities:
Available for sale			32,233,706				26,454,158
Sales of equity securities, available for sale			11,007,627				6,765,783
Purchase of Michigan Insurance Company			(7,207,471	)			—
Net purchases of property and equipment			—				(390,737	)
Net increase in investment in affiliates			(20,570,000	)			—
Net sales of short-term investments			7,215,751				11,378,590
Net cash used in investing activities			(35,167,086	)			(2,121,321	)
Cash Flows from Financing Activities:
Cash dividends paid			(5,877,789	)			(5,666,605	)
Issuance of common stock			675,631				790,633
Purchase of treasury stock			(674,505	)			(145,687	)
Payments on line of credit			(3,617,371	)			—
Borrowings under line of credit			22,500,000				—
Net cash provided by (used in) financing activities			13,005,966				(5,021,659	)
Net decrease in cash			(12,654,807	)			(2,800,719	)
Cash at beginning of period			16,342,212				12,923,898
Cash at end of period		$	3,687,405			$	10,123,179
Cash paid during period — Interest		$	788,976			$	337,677
Net cash paid (received) during period — Taxes		$	1,110,000			$	(600,000	)

See accompanying notes to consolidated financial statements.

DONEGAL GROUP INC. AND SUBSIDIARIES
(Unaudited)
Notes to Consolidated Financial Statements

1 — Organization

     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 (“Michigan”), 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 Michigan on December 1, 2010, and we have included Michigan’s results of operations in our consolidated results of operations since that date. We have three operating segments: our investment function, our personal lines of insurance and our commercial lines of insurance. 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 thrift holding company that owns Union Community Bank FSB (“UCB”). Donegal Mutual owns the remaining 51.8% of the outstanding stock of DFSC.

     At June 30, 2011, Donegal Mutual held approximately 39% of our outstanding Class A common stock and approximately 75% of our outstanding Class B common stock. This ownership provides Donegal Mutual with 66% of the total voting power of our outstanding common stock. Our insurance subsidiaries and Donegal Mutual have interrelated operations. 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.

     On February 23, 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 prices prevailing from time to time in the open market subject to the provisions of applicable SEC rules and in privately negotiated transactions. We purchased 50,058 shares of our Class A common stock under this program during the three months ended June 30, 2011. We purchased 50,058 and 9,702 shares of our Class A common stock under this program during the six months ended June 30, 2011 and 2010. We have purchased a total of 67,429 shares of our Class A common stock under this program from its inception through June 30, 2011.

     In May 2011, DFSC and Union National Financial Corporation (“UNNF”) merged, with DFSC as the surviving company in the merger. Province Bank FSB and Union National Community Bank, which UNNF owned, also merged and now operate as UCB.

2 — Basis of Presentation

     Our financial information for the interim periods included in this Form 10-Q Report is unaudited; however, such information reflects all adjustments, consisting only of normal recurring adjustments that, in the opinion of our management, are necessary for a fair presentation of our financial position, results of operations and cash flows for those interim periods. Our results of operations for the six months ended June 30, 2011 are not necessarily indicative of the results of operations we expect for the year ending December 31, 2011.

     You should read these interim financial statements in conjunction with the financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2010.

3 — Earnings Per Share

     We have two classes of common stock, which we refer to as our Class A common stock and our Class B common stock. Our certificate of incorporation provides that whenever our board of directors declares a dividend on our Class B common stock, our board of directors must also declare a dividend on our Class A common stock that is payable at the same time to holders as of the same record date at a rate that is at least 10% greater than the rate at which our board of directors declared a dividend on our Class B common stock. Accordingly, we use the two-class method to compute our 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 we have declared and an allocation of our remaining undistributed earnings using a participation percentage that reflects the dividend rights of each class. The table below presents for the periods indicated a reconciliation of the numerators and denominators we used to compute basic and diluted net (loss) income per share for each class of our common stock:

For the Three Months Ended June 30:

		2011								2010
		Class A				Class B				Class A				Class B
		(in thousands, except per share data)
Basic and diluted net (loss) income per share:
Numerator:
Allocation of net (loss) income		$	(1,344	)		$	(350	)		$	1,396			$	343
Denominator:
Weighted-average shares outstanding			20,026,238				5,576,775				19,953,539				5,576,775
Basic and diluted net (loss) income per share		$	(0.07	)		$	(0.06	)		$	0.07			$	0.06

For the Six Months Ended June 30:

		2011								2010
		Class A				Class B				Class A				Class B
		(in thousands, except per share data)
Basic and diluted net income per share:
Numerator:
Allocation of net income		$	417			$	95			$	1,584			$	390
Denominator:
Weighted-average shares outstanding			20,019,481				5,576,775				19,942,153				5,576,775
Basic and diluted net income per share		$	0.02			$	0.02			$	0.08			$	0.07

     We did not include outstanding options to purchase the following number of shares of Class A common stock in our 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 during the period:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Number of shares excluded			4,021,667				3,290,099				4,021,667				3,290,099

4 — Reinsurance

     Atlantic States and Donegal Mutual have participated in a pooling agreement since 1986 under which each company places all of its direct written business into the pool, and Atlantic States and Donegal Mutual then share the underwriting results of the pool in accordance with the terms of the pooling agreement. 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.

     Our insurance subsidiaries and Donegal Mutual purchase certain third-party reinsurance on a combined basis. Le Mars, Michigan, Peninsula and Sheboygan also purchase separate third-party reinsurance that provides coverage that is commensurate with their relative size and risk exposures. Our insurance subsidiaries place reinsurance with various reinsurers, all of which, consistent with Donegal Insurance Group’s requirements, 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. The following information describes the external reinsurance our insurance subsidiaries have in place during 2011 and 2010:

	•		excess of loss reinsurance, under which losses are automatically reinsured, through a series of reinsurance agreements, over a set retention (generally $750,000), and
	•		catastrophe reinsurance, under which Donegal Mutual, Atlantic States and Southern recover, through a series of reinsurance agreements, 100% of an accumulation of many losses resulting from a single event, including natural disasters, over a set retention ($5.0 million for 2011 and $3.0 million for 2010).

     Our insurance subsidiaries and Donegal Mutual also purchase facultative reinsurance to cover exposures from losses that exceed the limits provided by their reinsurance agreements with third parties.

     In addition to the pooling agreement and third-party reinsurance, our insurance subsidiaries have various reinsurance agreements with Donegal Mutual.

     Upon the recovery of losses under the terms of our insurance subsidiaries’ catastrophe reinsurance agreements with third parties and Donegal Mutual, the agreements require our insurance subsidiaries to pay reinstatement premiums to reinstate coverage for additional events that may occur during the term of the agreements. Payment of a reinstatement premium entitles our insurance subsidiaries to the same amount of coverage under the same terms in place prior to their utilization of coverage. Our insurance subsidiaries recognize the cost of the original prepaid reinsurance premiums ratably over the term of the agreements and immediately recognize the cost of reinstatement premiums upon recovery of losses that give rise to an obligation to pay such reinstatement premiums. Our insurance subsidiaries recorded reinstatement premiums of $3.2 million and $1.2 million during the three months ended June 30, 2011 and 2010, respectively. Our insurance subsidiaries recorded reinstatement premiums of $3.2 million and $1.8 million during the six months ended June 30, 2011 and 2010, respectively.

     Other than a change in the set retention under our catastrophe reinsurance we discuss above, we made no significant changes to our third-party reinsurance or the reinsurance agreements between our insurance subsidiaries and Donegal Mutual during the six months ended June 30, 2011.

5 — Investments

The amortized cost and estimated fair values of our fixed maturities and equity securities at June 30, 2011 are as follows:

						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
						(in thousands)
Held to Maturity
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	1,000			$	73			$	—			$	1,073
Obligations of states and political subdivisions			58,159				2,960				—				61,119
Corporate securities			3,249				32				—				3,281
Residential mortgage-backed securities			455				31				—				486
Totals		$	62,863			$	3,096			$	—			$	65,959

						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
						(in thousands)
Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	81,984			$	1,100			$	159			$	82,925
Obligations of states and political subdivisions			360,334				12,119				844				371,609
Corporate securities			67,568				673				594				67,647
Residential mortgage-backed securities			106,193				2,433				261				108,365
Fixed maturities			616,079				16,325				1,858				630,546
Equity securities			11,056				4,322				877				14,501
Totals		$	627,135			$	20,647			$	2,735			$	645,047

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

						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
						(in thousands)
Held to Maturity
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	1,000			$	84			$	—			$	1,084
Obligations of states and political subdivisions			59,852				2,894				—				62,746
Corporate securities			3,247				25				—				3,272
Residential mortgage-backed securities			667				40				—				707
Totals		$	64,766			$	3,043			$	—			$	67,809

						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
						(in thousands)
Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	57,284			$	484			$	452			$	57,316
Obligations of states and political subdivisions			388,091				6,838				5,300				389,629
Corporate securities			67,518				650				1,074				67,094
Residential mortgage-backed securities			88,410				1,851				454				89,807
Fixed maturities			601,303				9,823				7,280				603,846
Equity securities			2,504				7,693				35				10,162
Totals		$	603,807			$	17,516			$	7,315			$	614,008

     The amortized cost and estimated fair value of our fixed maturities at June 30, 2011, by contractual maturity, are shown below. 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.

						Estimated
		Amortized				Fair
		Cost				Value
		(in thousands)
Held to maturity
Due in one year or less		$	3,749			$	3,782
Due after one year through five years			34,459				36,291
Due after five years through ten years			24,200				25,400
Due after ten years			—				—
Residential mortgage-backed securities			455				486
Total held to maturity		$	62,863			$	65,959
Available for sale
Due in one year or less		$	23,703			$	24,086
Due after one year through five years			88,085				89,947
Due after five years through ten years			180,942				185,450
Due after ten years			217,156				222,698
Residential mortgage-backed securities			106,193				108,365
Total available for sale		$	616,079			$	630,546

     Gross realized gains and losses from investments before applicable income taxes are as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(in thousands)								(in thousands)
Gross realized gains:
Fixed maturities		$	—			$	1,547			$	441			$	1,631
Equity securities			4,416				501				4,505				613
		$	4,416			$	2,048			$	4,946			$	2,244
Gross realized losses:
Fixed maturities		$	—			$	5			$	102			$	179
Equity securities			100				78				155				78
			100				83				257				257
Net realized gains		$	4,316			$	1,965			$	4,689			$	1,987

We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at June 30, 2011 as follows:

		Less than 12 months								More than 12 months
		Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses
						(in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	16,846			$	159			$	—			$	—
Obligations of states and political subdivisions			41,891				839				1,493				5
Corporate securities			28,184				594				—				—
Residential mortgage-backed securities			31,995				261				—				—
Equity securites			5,529				877				—				—
Totals		$	124,445			$	2,730			$	1,493			$	5

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

		Less than 12 months								More than 12 months
		Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses
						(in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	23,901			$	452			$	—			$	—
Obligations of states and political subdivisions			171,610				5,209				1,407				91
Corporate securities			44,101				1,062				491				12
Residential mortgage-backed securities			35,930				454				—				—
Equity securites			314				35				—				—
Totals		$	275,856			$	7,212			$	1,898			$	103

     Of our total fixed maturity securities with an unrealized loss at June 30, 2011, we classified 115 securities with a fair value of $120.4 million and an unrealized loss of $1.9 million as available-for-sale and carried them at fair value on our balance sheet.

     Of our total fixed maturity securities with an unrealized loss at December 31, 2010, we classified 301 securities with a fair value of $277.4 million and an unrealized loss of $7.3 million as available-for-sale and carried them at fair value on our balance sheet.

     We have no direct exposure to sub-prime residential mortgage-backed securities and hold no collateralized debt obligations. Substantially all of the unrealized losses in our fixed maturity investment portfolio have resulted from general market conditions and the related impact on our fixed maturity investment valuations. 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, when we consider the decline in value of an individual investment to be other than temporary, we write the investment down to its fair value, and we reflect the amount of the write-down as a realized loss in our results of operations. We individually monitor all investments for other-than-temporary declines in value. Generally, 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 assume there has been an other-than-temporary decline in value. We held 11 equity securities that were in an unrealized loss position at June 30, 2011. Based upon our analysis of general market conditions and underlying factors impacting these equity securities, we consider 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 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 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 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. To determine whether a credit loss has occurred, we compare 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 a credit loss to have occurred. If we consider a credit loss to have 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 the fair value of the investment being significantly below its cost, whether the financial condition of the issuer of the security has deteriorated, the occurrence of industry, company and geographic events that have negatively impacted the value of the security and rating agency downgrades. We determined that no investments with fair values below cost had declined on an other-than-temporary basis during the first six months of 2011 and 2010, respectively.

     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 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. We have compiled the following summary financial information for DFSC at June 30, 2011 and December 31, 2010 and for the three and six months ended June 30, 2011 and 2010, respectively, from the financial statements of DFSC.

		June 30,				December 31,
		2011				2010
		(in thousands)
Balance sheets:
Total assets		$	558,019			$	99,118
Total liabilities		$	496,896			$	81,510
Stockholders equity			61,123				17,608
Total liabilities and stockholders equity		$	558,019			$	99,118

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
						(in thousands)
Income statements:
Net income (loss)		$	453			$	(410	)		$	701			$	(277	)

6 — Segment Information

     We evaluate the performance of our personal lines and commercial lines segments based upon the underwriting results of our insurance subsidiaries using statutory accounting principles (“SAP”) that various state insurance departments prescribe or permit. Our management uses SAP to measure the performance of our insurance subsidiaries instead of GAAP. Financial data by segment is as follows:

		Three Months Ended
		June 30,
		2011				2010
		(in thousands)
Revenues:
Premiums earned
Commercial lines		$	37,039			$	28,903
Personal lines			68,956				64,099
Net premiums earned			105,995				93,002
GAAP adjustments			(1,003	)			—
GAAP premiums earned			104,992				93,002
Net investment income			5,421				4,968
Realized investment gains			4,316				1,965
Other			2,325				1,590
Total revenues		$	117,054			$	101,525
(Loss) income before income taxes:
Underwriting income (loss):
Commercial lines		$	302			$	1,830
Personal lines			(14,821	)			(9,430	)
SAP underwriting loss			(14,519	)			(7,600	)
GAAP adjustments			1,495				1,699
GAAP underwriting loss			(13,024	)			(5,901	)
Net investment income			5,421				4,968
Realized investment gains			4,316				1,965
Other			1,215				839
(Loss) income before income taxes			($2,072	)		$	1,871

		Six Months Ended
		June 30,
		2011				2010
		(in thousands)
Revenues:
Premiums earned
Commercial lines		$	71,943			$	56,591
Personal lines			139,632				127,811
Net premiums earned			211,575				184,402
GAAP adjustments			(2,788	)			(28	)
GAAP premiums earned			208,787				184,374
Net investment income			10,651				9,899
Realized investment gains			4,689				1,987
Other			4,511				3,116
Total revenues		$	228,638			$	199,376
Income before income taxes:
Underwriting income (loss):
Commercial lines		$	428				( $761	)
Personal lines			(17,812	)			(12,267	)
SAP underwriting loss			(17,384	)			(13,028	)
GAAP adjustments			430				1,690
GAAP underwriting loss			(16,954	)			(11,338	)
Net investment income			10,651				9,899
Realized investment gains			4,689				1,987
Other			2,139				1,598
Income before income taxes		$	525			$	2,146

7 — Borrowings

Line of Credit

     In June 2011, 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 2014. 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 Michigan. In May 2011, we borrowed $19.0 million in connection with the merger of UNNF with and into DFSC. As of June 30, 2011, we had $54.5 million in outstanding borrowings and had the ability to borrow an additional $5.5 million at interest rates equal to M&T’s current prime rate or the then current LIBOR rate plus between 1.75% and 2.25%, depending on our leverage ratio. 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 six months ended June 30, 2011.

Subordinated Debentures

     On October 29, 2003, we received $10.0 million in net proceeds from the issuance of subordinated debentures. The debentures mature on October 29, 2033 and are callable at our option, at par. The debentures carry an interest rate equal to the three-month LIBOR rate plus 4.10%, which is adjustable quarterly. At June 30, 2011, the interest rate on these debentures was 4.12% and was next subject to adjustment on July 29, 2011.

     On May 24, 2004, we received $5.0 million in net proceeds from the issuance of subordinated debentures. The debentures mature on May 24, 2034 and are callable at our option, at par. The debentures carry an interest rate equal to the three-month LIBOR rate plus 3.85%, which is adjustable quarterly. At June 30, 2011, the interest rate on these debentures was 4.11% and was next subject to adjustment on August 24, 2011.

     In January 2002, West Bend Mutual Insurance Company (“West Bend”) purchased a surplus note from Michigan for $5.0 million to increase Michigan’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.

8 — Share–Based Compensation

     We measure all share-based payments to employees, including grants of stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. 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.

     We charged compensation expense for our stock compensation plans against income before income taxes of $29,104 and $60,824 for the three months ended June 30, 2011 and 2010, respectively, with a corresponding income tax benefit of $9,895 and $20,680, respectively. We charged compensation expense for our stock compensation plans against income before income taxes of $69,486 and $120,985 for the six months ended June 30, 2011 and 2010, respectively, with a corresponding income tax benefit of $23,625 and $41,135, respectively. As of June 30, 2011, our total unrecognized compensation cost related to nonvested share-based compensation granted under our stock compensation plans was $208,471. We expect to recognize this cost over a weighted average period of 4.1 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 the award at the grant date and recognize the fair value as a dividend to Donegal Mutual. This accounting applies to options we grant to employees and directors of Donegal Mutual, the employer of a majority of the employees that provide services to us. We recorded no implied dividends for the three months ended June 30, 2011 and 2010, respectively. We recorded implied dividends of $34,574 and $23,072 for the six months ended June 30, 2011 and 2010, respectively.

     We received no cash from option exercises under all stock option compensation plans for the six months ended June 30, 2011 and 2010. We realized no tax benefits for tax deductions from option exercises for the six months ended June 30, 2011 and 2010.

9 — 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 broker quotes we obtain from independent pricing services through a bank trustee. 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. During the first six months of 2010, we classified one equity security as Level 3. The terms of an initial public offering included a restriction from selling that security for a specified period. During the six months ended June 30, 2011, the restriction period expired for a portion of our holdings, and we transferred this portion from Level 3 to Level 1. We utilized a fair value model that incorporated significant other unobservable inputs, such as estimated volatility, to estimate the fair value of the remaining portion of our holdings in this security that remain subject to the selling restriction. The fair value we determined as of June 30, 2011 reflects this restriction, and we continue to classify this portion of our holdings in this security as Level 3.

     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 we could realize 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. 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 using proprietary pricing applications, which include available relevant market information, benchmark yields, sector curves and matrix pricing. The pricing services do not use broker quotes in determining the fair values of our investments. We review the estimates of fair value the pricing services provide to determine if the estimates we obtain are representative of fair values based upon our general knowledge of the market, our research findings related to unusual fluctuations in value and our comparison of such values to execution prices for similar securities. As of June 30, 2011 and December 31, 2010, we received one estimate per security from one of the pricing services, and we priced all but an insignificant amount of our Level 1 and Level 2 investments using those prices. In our review of the estimates the pricing services provided to us as of June 30, 2011 and December 31, 2010, we did not identify any discrepancies, and we did not make any adjustments to the estimates the pricing services provided to us.

     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 evaluate our assets and liabilities on a recurring basis to determine the appropriate level at which to classify them for each reporting period.

     The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities as of June 30, 2011:

						Fair Value Measurements Using
						Quoted
						Prices in Active Markets				Significant Other				Significant
						for Identical Assets				Observable Inputs				Unobservable Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
		(in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	82,925			$	—			$	82,925			$	—
Obligations of states and political subdivisions			371,609				—				371,609				—
Corporate securities			67,647				—				67,647				—
Residential mortgage-backed securities			108,365				—				108,365				—
Equity securities			14,501				9,086				1,391				4,024
Totals		$	645,047			$	9,086			$	631,937			$	4,024

     We did not have any transfers between Levels 1 and 2 during the quarter ended June 30, 2011.

     The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities as of December 31, 2010:

						Fair Value Measurements Using
						Quoted
						Prices in Active Markets				Significant Other				Significant
						for Identical Assets				Observable Inputs				Unobservable Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
		(in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	57,316			$	—			$	57,316			$	—
Obligations of states and political subdivisions			389,629				—				389,629				—
Corporate securities			67,094				—				67,094				—
Residential mortgage-backed securities			89,807				—				89,807				—
Equity securities			10,162				1,152				1,437				7,573
Totals		$	614,008			$	1,152			$	605,283			$	7,573

     The following table presents a roll forward of the significant unobservable inputs for our Level 3 securities for the three and six months ended June 30, 2011 and 2010, respectively:

		Three Months Ended June 30,
		2011				2010
		(in thousands)
Balance, March 31		$	3,628			$	5,852
Transfer to level 1		$	—			$	—
Net unrealized gain			396				474
Balance, June 30		$	4,024			$	6,326

		Six Months Ended June 30,
		2011				2010
		(in thousands)
Balance, January 1		$	7,573			$	6,232
Transfer to level 1		$	(3,966	)		$	—
Net unrealized gain			417				94
Balance, June 30		$	4,024			$	6,326

10 – Income Taxes

     As of June 30, 2011 and December 31, 2010, respectively, we had no material unrecognized tax benefits or accrued interest and penalties. Tax years 2007 through 2010 remained open for examination as of June 30, 2011.

11 – Business Combinations

     In December 2010, we acquired Michigan, which had been a majority-owned subsidiary of West Bend. Michigan 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, Michigan 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 Michigan maintained with West Bend through November 30, 2010. The final purchase price for the acquisition was $42.3 million in cash.

     During the first quarter of 2011, we completed our analysis of the estimated acquisition date fair value of the assets we acquired and the liabilities we assumed. Based on the finalized analysis of our valuation specialist, we decreased the fair value of other assets acquired by $132,000 and recorded a corresponding increase to goodwill.

     As part of our acquisition accounting for Michigan in 2010, we eliminated Michigan’s deferred policy acquisition costs and unearned commission income and recorded Michigan’s obligations and rights under unexpired insurance and reinsurance contracts at their estimated fair value. We estimated the fair value adjustments by applying a market ceding commission rate to Michigan’s unearned premiums and prepaid reinsurance premiums that resulted in a net reduction of Michigan’s obligations. We are amortizing the ceding commission component of the fair value adjustments over the estimated remaining term of Michigan’s policies in force as of the acquisition date and recording the amortization as a reduction in net premiums earned. For the six months ended June 30 2011, we recorded a reduction in net premiums earned of $2.8 million related to this amortization. We will amortize the remaining fair value adjustments of $493,000 throughout the remainder of 2011.

12 – Impact of New Accounting Standards

     In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends ASC subtopic 820-10 by requiring new, and clarifying existing, fair value disclosures. We have included herein the disclosures ASU 2010-06 requires for the first six months of 2011.

     In October 2010, 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 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 ending after December 15, 2011. We do not expect the adoption of this guidance to have a material impact on our financial position or results of operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     You should read the following information in conjunction with the historical financial information and the notes thereto we include in this Quarterly Report on Form 10-Q. You should also read Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2010.

Critical Accounting Policies and Estimates

     We combine our financial statements with those of our insurance subsidiaries and present our financial statements 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 that we report in our 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 in the value of investments and policy acquisition costs. While we believe our estimates and the estimates of our insurance subsidiaries are appropriate, the ultimate amounts may differ from the amounts we and our insurance subsidiaries estimate. We regularly review these estimates and reflect any adjustment we consider necessary in our current results of operations.

Liability for Unpaid Losses and Loss Expenses

     Liabilities for unpaid 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 the insurer knows at the time. At the time an insurer establishes its estimates, it recognizes that its ultimate liability for unpaid losses and loss expenses will exceed or be less than those estimates. Our insurance subsidiaries base their estimates of liabilities for unpaid losses and loss expenses on assumptions as to future loss trends and expected claims severity, judicial theories of liability and other factors, including prevailing economic conditions. 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 adjust their estimates of liability. Our insurance subsidiaries reflect any adjustments to their liabilities for unpaid losses and loss expenses in their results of operations for the period in which our insurance subsidiaries change their estimates.

     Our insurance subsidiaries maintain liabilities for the payment of unpaid losses and loss expenses with respect to both reported and unreported claims. The intent of our insurance subsidiaries is that their liabilities for loss expenses will cover the ultimate costs of settling all losses, including investigation and litigation costs from those losses. Our insurance subsidiaries base the amount of their liabilities 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 provisions of our insurance policies relating to the type of loss. Our insurance subsidiaries determine the amount of their liabilities 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 unpaid losses and loss expenses.

     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 the collectibility of reinsured losses, among other items. To the extent our insurance subsidiaries determine that the factors underlying 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 June 30, 2011. For every 1% change in our estimate of our insurance subsidiaries’ liability for unpaid losses and loss expenses, net of reinsurance recoverable, the effect on our pre-tax results of operations would be approximately $2.2 million.

     The establishment of appropriate liabilities is an inherently uncertain process. There can be no assurance that the ultimate liability of our insurance subsidiaries will not exceed our insurance subsidiaries’ unpaid 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 unpaid 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 liabilities for unpaid losses and loss expenses generally reflect actual payments and the evaluation of information they have received since the prior reporting date.

     Excluding the impact of periodic catastrophic weather events in recent years, our insurance subsidiaries have generally 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. However, the amount of the average claim outstanding has increased gradually over the past several years. We attribute this increase to 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 make further adjustments to their estimates for liabilities in the future based on the factors we describe above. 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 as of June 30, 2011.

     Atlantic States’ participation in the pool with Donegal Mutual exposes Atlantic States to adverse loss development on the business of Donegal Mutual 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 share any adverse risk development of the pooled business according to their respective participation in the pool. The business in the pool is homogeneous, and the pooling agreement provides that each company has a percentage share of the entire pool. Since Atlantic States and Donegal Mutual pool substantially all their business and each company shares the results according to its respective participation 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 might experience individually and to spread the risk of loss between Atlantic States and Donegal Mutual.

     The risk profiles of the business Atlantic States and Donegal Mutual write have historically been substantially similar and we expect this similarity to continue. The same executive management and underwriting personnel administer the products, classes of business underwritten, pricing practices and underwriting standards of Donegal Mutual and our insurance subsidiaries.

     In addition, Donegal Mutual and our insurance subsidiaries, operating together as the Donegal Insurance Group, share a combined business plan to achieve market penetration and underwriting profitability objectives. The products our insurance subsidiaries and Donegal Mutual offer are generally complementary, thereby allowing Donegal Insurance Group to offer a broader range of products to a given market and to expand 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 products compared to 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, because the pool homogenizes the risk characteristics of all business Donegal Mutual and Atlantic States write directly and each company shares the results according to each company’s participation percentage, each company realizes its percentage share of the underwriting results of the pool. Our insurance subsidiaries’ unpaid liability for losses and loss expenses by major line of business as of June 30, 2011 and December 31, 2010 consisted of the following:

		June 30,				December 31,
		2011				2010
		(in thousands)
Commercial lines:
Automobile		$	23,599			$	22,790
Workers’ compensation			55,473				54,902
Commercial multi-peril			36,555				32,961
Other			4,100				3,875
Total commercial lines			119,727				114,528
Personal lines:
Automobile			82,037				83,042
Homeowners			15,980				18,695
Other			2,514				1,632
Total personal lines			100,531				103,369
Total commercial and personal lines			220,258				217,897
Plus reinsurance recoverable			182,484				165,422
Total liability for unpaid losses and loss expenses		$	402,742			$	383,319