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.

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
(Address of principal executive offices) (Zip code)

(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 o 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: 19,994,226 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 October 31, 2010.

 

 

Part I. Financial Information

Item 1. Financial Statements.

Donegal Group Inc. and Subsidiaries
Consolidated Balance Sheets

		September 30, 2010				December 31, 2009
		(Unaudited)
Assets
Investments
Fixed maturities
Held to maturity, at amortized cost		$	66,005,469			$	73,807,126
Available for sale, at fair value			563,276,871				517,703,672
Equity securities, available for sale, at fair value			12,714,676				9,914,626
Investments in affiliates			9,183,620				9,309,347
Short-term investments, at cost, which approximates fair value			28,631,483				56,100,415
Total investments			679,812,119				666,835,186
Cash			12,729,268				12,923,898
Accrued investment income			6,420,863				6,202,710
Premiums receivable			71,950,432				61,187,021
Reinsurance receivable			95,514,905				84,670,009
Deferred policy acquisition costs			34,843,612				32,844,179
Deferred tax asset, net			1,552,566				5,086,949
Prepaid reinsurance premiums			64,497,515				56,040,728
Property and equipment, net			6,326,177				6,592,223
Accounts receivable — securities			350,016				588,292
Federal income taxes recoverable			—				663,047
Other			2,104,526				1,967,685
Total assets		$	976,101,999			$	935,601,927
Liabilities and Stockholders’ Equity
Liabilities
Unpaid losses and loss expenses		$	278,635,509			$	263,598,844
Unearned premiums			268,150,466				241,821,419
Accrued expenses			9,699,243				10,578,695
Reinsurance balances payable			2,989,619				2,561,426
Federal income taxes payable			695,654				—
Cash dividends declared to stockholders			—				2,798,378
Subordinated debentures			15,465,000				15,465,000
Accounts payable — securities			1,553,931				6,828,873
Due to affiliate			893,040				3,813,294
Drafts payable			1,560,506				884,993
Other			1,683,525				1,745,306
Total liabilities			581,326,493				550,096,228
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 20,628,243 and 20,569,930 shares and outstanding 19,965,942 and 19,917,331 shares			206,283				205,700
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			166,684,631				164,585,214
Accumulated other comprehensive income			22,473,601				15,007,044
Retained earnings			214,604,432				214,755,495
Treasury stock			(9,249,933	)			(9,104,246	)
Total stockholders’ equity			394,775,506				385,505,699
Total liabilities and stockholders’ equity		$	976,101,999			$	935,601,927

See accompanying notes to consolidated financial statements.

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

		Three Months Ended September 30,
		2010				2009
Revenues:
Net premiums earned		$	94,948,843			$	87,997,723
Investment income, net of investment expenses			4,709,458				5,107,356
Net realized investment gains			2,460,462				189,230
Lease income			231,905				232,762
Installment payment fees			1,399,650				1,349,016
Other income			—				6,080
Total revenues			103,750,318				94,882,167
Expenses:
Net losses and loss expenses			67,401,697				58,609,247
Amortization of deferred policy acquisition costs			16,388,000				14,791,000
Other underwriting expenses			14,019,279				13,344,369
Policyholder dividends			220,536				251,573
Interest			183,616				185,315
Other expenses			502,279				335,410
Total expenses			98,715,407				87,516,914
Income before income tax expense			5,034,911				7,365,253
Income tax expense			125,032				620,402
Net income		$	4,909,879			$	6,744,851
Earnings per common share:
Class A common stock — basic		$	0.20			$	0.27
Class A common stock — diluted		$	0.20			$	0.27
Class B common stock — basic and diluted		$	0.18			$	0.24
Consolidated Statements of Comprehensive Income (Unaudited)
		Three Months Ended September 30,
		2010				2009
Net income		$	4,909,879			$	6,744,851
Other comprehensive income, net of tax
Unrealized income on securities:
Unrealized holding income during the period, net of income tax			6,469,008				16,163,607
Reclassification adjustment, net of income tax			(1,623,905	)			(122,999	)
Other comprehensive income			4,845,103				16,040,608
Comprehensive income		$	9,754,982			$	22,785,459

See accompanying notes to consolidated financial statements.

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

		Nine Months Ended September 30,
		2010				2009
Revenues:
Net premiums earned		$	279,323,348			$	263,887,611
Investment income, net of investment expenses			14,608,439				15,731,106
Net realized investment gains			4,447,065				893,225
Lease income			687,902				689,096
Installment payment fees			4,059,766				3,957,392
Other income			—				48,771
Total revenues			303,126,520				285,207,201
Expenses:
Net losses and loss expenses			203,892,799				186,461,543
Amortization of deferred policy acquisition costs			48,549,000				44,158,000
Other underwriting expenses			40,834,990				38,548,332
Policyholder dividends			465,319				586,784
Interest			537,309				1,588,560
Other expenses			1,665,778				1,152,946
Total expenses			295,945,195				272,496,165
Income before income tax expense			7,181,325				12,711,036
Income tax expense			296,960				1,408,757
Net income		$	6,884,365			$	11,302,279
Earnings per common share:
Class A common stock — basic		$	0.28			$	0.45
Class A common stock — diluted		$	0.28			$	0.45
Class B common stock — basic and diluted		$	0.25			$	0.41
Consolidated Statements of Comprehensive Income (Unaudited)
		Nine Months Ended September 30,
		2010				2009
Net income		$	6,884,365			$	11,302,279
Other comprehensive income, net of tax
Unrealized income on securities:
Unrealized holding income during the period, net of income tax			10,401,620				22,084,037
Reclassification adjustment, net of income tax			(2,935,063	)			(580,596	)
Other comprehensive income			7,466,557				21,503,441
Comprehensive income		$	14,350,922			$	32,805,720

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Unaudited)
Nine Months Ended September 30, 2010

																						Accumulated
																		Additional				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, 2009			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)			58,313								583								799,921																800,504
Net income																											6,884,365								6,884,365
Cash dividends declared																											(5,735,932	)							(5,735,932	)
Grant of stock options																			1,299,496								(1,299,496	)							—
Repurchase of treasury stock																															(145,687	)			(145,687	)
Other comprehensive income																							7,466,557												7,466,557
Balance, September 30, 2010			20,628,243				5,649,240			$	206,283			$	56,492			$	166,684,631			$	22,473,601			$	214,604,432			$	(9,249,933	)		$	394,775,506

See accompanying notes to consolidated financial statements.

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

		Nine Months Ended September 30,
		2010				2009
Cash Flows from Operating Activities:
Net income		$	6,884,365			$	11,302,279
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			2,054,392				1,961,738
Net realized investment gains			(4,447,065	)			(893,225	)
Equity loss (income)			292,742				(48,771	)
Changes in assets and liabilities:
Losses and loss expenses			15,036,665				11,222,678
Unearned premiums			26,329,047				18,145,206
Premiums receivable			(10,763,411	)			(8,171,563	)
Deferred acquisition costs			(1,999,433	)			(2,242,635	)
Deferred income taxes			(486,071	)			(66,092	)
Reinsurance receivable			(10,844,896	)			(5,246,931	)
Prepaid reinsurance premiums			(8,456,787	)			(6,824,930	)
Accrued investment income			(218,153	)			338,405
Due to affiliate			(2,920,254	)			(2,345,677	)
Reinsurance balances payable			428,193				1,991,578
Current income taxes			1,358,701				2,264,731
Accrued expenses			(879,452	)			(3,487,075	)
Other, net			476,909				1,018,363
Net adjustments			4,961,127				7,615,800
Net cash provided by operating activities			11,845,492				18,918,079
Cash Flows from Investing Activities:
Purchases of fixed maturities:
Available for sale			(152,968,758	)			(93,510,595	)
Purchases of equity securities, available for sale			(44,168,645	)			(25,815,019	)
Maturity of fixed maturities:
Held to maturity			7,503,370				20,981,616
Available for sale			53,870,605				30,353,892
Sales of fixed maturities:
Available for sale			62,607,346				12,121,541
Sales of equity securities, available for sale			42,088,169				25,847,613
Payments to Sheboygan policyholders			—				(5,676,678	)
Net increase in investment in affiliates			—				(50,000	)
Net purchases of property and equipment			(561,648	)			(826,047	)
Net sales of short-term investments			27,468,932				32,103,338
Net cash used in investing activities			(4,160,629	)			(4,470,339	)
Cash Flows from Financing Activities:
Cash dividends paid			(8,534,310	)			(8,197,741	)
Issuance of common stock			800,504				934,653
Purchase of treasury stock			(145,687	)			(198,879	)
Net cash used in financing activities			(7,879,493	)			(7,461,967	)
Net (decrease) increase in cash			(194,630	)			6,985,773
Cash at beginning of period			12,923,898				1,830,954
Cash at end of period		$	12,729,268			$	8,816,727
Cash paid during period — Interest		$	517,038			$	675,193
Net cash received during period — Taxes		$	(600,000	)		$	(792,582	)

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 a downstream insurance holding company on August 26, 1986. Our six insurance subsidiaries and Donegal Mutual conduct business as the Donegal Insurance Group. The Donegal Insurance Group writes personal and commercial lines of property and casualty insurance exclusively through a network of independent insurance agents in 20 Mid-Atlantic, Midwestern, New England and Southeastern states. The personal lines products consist primarily of homeowners and private passenger automobile policies. The commercial lines products consist primarily of commercial automobile, commercial multi-peril and workers’ compensation policies.

     Our insurance subsidiaries are 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, and Sheboygan Falls Insurance Company (“Sheboygan”). We also own approximately 48% of the outstanding stock of Donegal Financial Services Corporation (“DFSC”), a unitary thrift holding company that owns Province Bank FSB. Donegal Mutual owns the remaining approximately 52% of the outstanding stock of DFSC.

     At September 30, 2010, Donegal Mutual held approximately 42% of our outstanding Class A common stock and approximately 75% of our outstanding Class B common stock.

     Atlantic States and Donegal Mutual are parties to a pooling agreement under which each company places all of its direct written business in the pool and both companies share the underwriting results of the pool as provided in the pooling agreement, excluding certain reinsurance Donegal Mutual assumes from our five other insurance subsidiaries. From July 1, 2000 through February 29, 2008, Atlantic States had a 70% share of the results of the pool, and Donegal Mutual had a 30% share of the results of the pool. Donegal Mutual and Atlantic States amended the pooling agreement effective March 1, 2008 to increase Atlantic States’ share of the results of the pool to 80% and to decrease Donegal Mutual’s share of the results of the pool to 20% beginning on that date. See Note 4 — Reinsurance for more information regarding the pooling agreement.

     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 did not purchase any shares of our Class A common stock under this program during the three months ended September 30, 2010 and 2009, respectively. We purchased 9,702 and no shares of our Class A common stock under this program during the nine months ended September 30, 2010 and 2009, respectively. We have purchased a total of 17,371 shares of our Class A common stock under this program through September 30, 2010.

     In October 2009, Donegal Mutual consummated an affiliation with Southern Mutual Insurance Company (“Southern Mutual”), pursuant to which Donegal Mutual purchased a surplus note of Southern Mutual in the principal amount of $2.5 million, Donegal Mutual designees became a majority of the members of Southern Mutual’s board of directors and Donegal Mutual agreed to provide quota share reinsurance to Southern Mutual for 100% of its business. Effective October 31, 2009, Donegal Mutual began to include business Donegal Mutual assumes from Southern Mutual in the pooling agreement with Atlantic States. Southern Mutual writes primarily personal lines of insurance in Georgia and South Carolina and had direct premiums written of approximately $13.3 million in 2009. Pursuant to applicable accounting standards, Southern Mutual is a variable interest entity, of which we are not the primary beneficiary.

     In April 2010, DFSC and certain of its affiliates, including Donegal Mutual and us, and Union National Financial Corporation (“UNNF”) executed an agreement pursuant to which DFSC and UNNF would merge, with DFSC as the surviving company in the merger. The merger is subject to a number of conditions, including the approval of various federal bank regulatory agencies. Under the agreement, Province Bank FSB, which DFSC owns, and Union National Community Bank, which UNNF owns, would also merge. The combined bank would have total assets of approximately $600 million and would have 13 branch locations in Lancaster County, Pennsylvania. The companies expect to complete the mergers in the fourth quarter of

2010. Following the mergers, we expect to continue using 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.

     In July 2010, we executed an agreement pursuant to which we will acquire all of the outstanding stock of Michigan Insurance Company (“MICO”), an 83.6%-owned subsidiary of West Bend Mutual Insurance Company (“WBM”). MICO writes various lines of property and casualty insurance exclusively in the State of Michigan. MICO had direct written premiums of $106.6 million and net written premiums of $26.7 million for the year ended December 31, 2009. The purchase price will be calculated based on the United States generally accepted accounting principles (“GAAP”) book value of MICO as of the closing date of the acquisition. We estimate that the purchase price payable to the shareholders of MICO will be approximately $39 million. The acquisition is subject to a number of conditions, including the approval of the Insurance Department of the State of Michigan. We expect to complete the acquisition in the fourth quarter of 2010.

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 nine months ended September 30, 2010 are not necessarily indicative of the results of operations we expect for the year ending December 31, 2010.

     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, 2009.

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 the 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 income per share for each class of common stock:

For the Three Months Ended September 30:

		2010								2009
		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		$	3,925			$	985			$	5,386			$	1,359
Denominator:
Weighted-average shares outstanding			19,965,942				5,576,775				19,905,174				5,576,775
Basic and diluted net income per share		$	0.20			$	0.18			$	0.27			$	0.24

For the Nine Months Ended September 30:

		2010								2009
		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		$	5,508			$	1,376			$	9,028			$	2,274
Denominator:
Weighted-average shares outstanding			19,950,170				5,576,775				19,895,840				5,576,775
Basic and diluted net income per share		$	0.28			$	0.25			$	0.45			$	0.41

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 during the period:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Number of shares excluded			4,005,667				3,395,264				4,005,667				3,423,432

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. From July 1, 2000 through February 29, 2008, Atlantic States had a 70% share of the results of the pool, and Donegal Mutual had a 30% share of the results of the pool. Donegal Mutual and Atlantic States amended the pooling agreement effective March 1, 2008 to increase Atlantic States’ share of the results of the pool to 80% beginning on that date.

     Atlantic States, Southern and Donegal Mutual purchase third-party reinsurance on a combined basis. Le Mars, Peninsula and Sheboygan have separate third-party reinsurance programs that provide similar types of coverage and that are 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 2010 and 2009:

	•		excess of loss reinsurance, under which losses are automatically reinsured, through a series of reinsurance agreements, over a set retention ($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 ($3.0 million).

     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.

     We made no significant changes to our third-party reinsurance or the reinsurance agreements between our insurance subsidiaries and Donegal Mutual during the nine months ended September 30, 2010.

5 — Investments

     The amortized cost and estimated fair values of our fixed maturities and equity securities at September 30, 2010 are as follows:

						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
Held to Maturity		Cost				Gains				Losses				Value
						(in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	1,000			$	97			$	—			$	1,097
Obligations of states and political subdivisions			59,949				4,095				—				64,044
Corporate securities			4,246				54				—				4,300
Residential mortgage-backed securities			810				40				—				850
Totals		$	66,005			$	4,286			$	—			$	70,291

						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
Available for Sale		Cost				Gains				Losses				Value
						(in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	47,957			$	808			$	—			$	48,765
Obligations of states and political subdivisions			359,404				21,916				235				381,085
Corporate securities			55,381				1,237				19				56,599
Residential mortgage-backed securities			74,432				2,450				54				76,828
Fixed maturities			537,174				26,411				308				563,277
Equity securities			7,429				6,181				895				12,715
Totals		$	544,603			$	32,592			$	1,203			$	575,992

     The amortized cost and estimated fair values of our fixed maturities and equity securities at December 31, 2009 are as follows:

						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
Held to Maturity		Cost				Gains				Losses				Value
						(in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	2,000			$	80			$	—			$	2,080
Obligations of states and political subdivisions			61,736				3,011				24				64,723
Corporate securities			6,243				72				13				6,302
Residential mortgage-backed securities			3,828				73				—				3,901
Totals		$	73,807			$	3,236			$	37			$	77,006

						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
Available for Sale		Cost				Gains				Losses				Value
						(in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	41,061			$	154			$	585			$	40,630
Obligations of states and political subdivisions			346,799				12,587				1,019				358,367
Corporate securities			26,972				866				72				27,766
Residential mortgage-backed securities			88,914				2,357				330				90,941
Fixed maturities			503,746				15,964				2,006				517,704
Equity securities			3,804				6,339				228				9,915
Totals		$	507,550			$	22,303			$	2,234			$	527,619

     The amortized cost and estimated fair value of our fixed maturities at September 30, 2010, 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		$	3,996			$	4,050
Due after one year through five years			13,828				14,774
Due after five years through ten years			45,600				48,722
Due after ten years			1,771				1,895
Residential mortgage-backed securities			810				850
Total held to maturity		$	66,005			$	70,291
Available for sale
Due in one year or less		$	11,945			$	12,074
Due after one year through five years			92,738				95,990
Due after five years through ten years			128,570				134,649
Due after ten years			229,489				243,736
Residential mortgage-backed securities			74,432				76,828
Total available for sale		$	537,174			$	563,277

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(in thousands)								(in thousands)
Gross realized gains:
Fixed maturities		$	2,050			$	—			$	3,681			$	133
Equity securities			765				270				1,300				889
		$	2,815			$	270			$	4,981			$	1,022
Gross realized losses:
Fixed maturities		$	355			$	81			$	534			$	82
Equity securities			—				—				—				47
			355				81				534				129
Net realized gains		$	2,460			$	189			$	4,447			$	893

     We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at September 30, 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		$	—			$	—			$	—			$	—
Obligations of states and political subdivisions			9,150				214				2,995				21
Corporate securities			2,810				12				746				7
Residential mortgage-backed securities			2,905				54				—				—
Equity securites			4,486				895				—				—
Totals		$	19,351			$	1,175			$	3,741			$	28

     We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at December 31, 2009 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		$	26,704			$	585			$	—			$	—
Obligations of states and political subdivisions			17,971				257				29,582				787
Corporate securities			1,284				24				667				62
Residential mortgage-backed securities			23,514				329				478				—
Equity securites			2,140				227				—				—
Totals		$	71,613			$	1,422			$	30,727			$	849

     Of our total fixed maturity securities with an unrealized loss at September 30, 2010, we classified 19 securities with a fair value of $18.3 million and an unrealized loss of $308,487 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, 2009, we classified 70 securities with a fair value of $97.9 million and an unrealized loss of $2.0 million as available-for-sale and carried them at fair value on our balance sheet, while we classified three securities with a fair value of $2.3 million and an unrealized loss of $37,097 as held-to-maturity on our balance sheet and carried them at amortized cost.

     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 six equity securities that were in an unrealized loss position at September 30, 2010. 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 is deteriorating, 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 nine months of 2010 and 2009, 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 which 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.

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 prescribed or permitted by various state insurance departments (“SAP”). 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
		September 30,
		2010				2009
		(in thousands)
Revenues:
Premiums earned
Commercial lines		$	29,436			$	27,520
Personal lines			65,513				60,546
Net premiums earned			94,949				88,066
GAAP adjustments			—				(62	)
GAAP premiums earned			94,949				88,004
Net investment income			4,709				5,107
Realized investment gains			2,460				189
Other			1,632				1,582
Total revenues		$	103,750			$	94,882
Income before income taxes:
Underwriting income (loss):
Commercial lines		$	1,819			$	4,410
Personal lines			(5,906	)			(4,040	)
SAP underwriting (loss) income			(4,087	)			370
GAAP adjustments			1,006				632
GAAP underwriting (loss) income			(3,081	)			1,002
Net investment income			4,709				5,107
Realized investment gains			2,460				189
Other			947				1,067
Income before income taxes		$	5,035			$	7,365

		Nine Months Ended
		September 30,
		2010				2009
		(in thousands)
Revenues:
Premiums earned
Commercial lines		$	86,027			$	84,844
Personal lines			193,324				179,557
Net premiums earned			279,351				264,401
GAAP adjustments			(28	)			(464	)
GAAP premiums earned			279,323				263,937
Net investment income			14,608				15,731
Realized investment gains			4,447				893
Other			4,749				4,646
Total revenues		$	303,127			$	285,207
Income before income taxes:
Underwriting income (loss):
Commercial lines		$	1,058			$	6,431
Personal lines			(18,173	)			(14,269	)
SAP underwriting loss			(17,115	)			(7,838	)
GAAP adjustments			2,696				1,971
GAAP underwriting loss			(14,419	)			(5,867	)
Net investment income			14,608				15,731
Realized investment gains			4,447				893
Other			2,545				1,954
Income before income taxes		$	7,181			$	12,711

7 — 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 3.85%, which is adjustable quarterly. At September 30, 2010, the interest rate on the debentures was 4.33%.

     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 September 30, 2010, the interest rate on the debentures was 4.18%.

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 utilized in applying the Black-Scholes option pricing model are the risk-free interest rate, expected term, dividend yield and expected volatility.

     Compensation expense related to our stock compensation plans was immaterial for the three and nine months ended September 30, 2010 and 2009. As of September 30, 2010, our total unrecognized compensation cost related to nonvested share-based compensation granted under our stock compensation plans was $303,607. We expect to recognize this cost over a weighted average period of 2.1 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 implied dividends of $1.3 million and $30,068 for the three months ended September 30, 2010 and 2009, respectively. We recorded implied dividends of $1.3 million and $62,991 for the nine months ended September 30, 2010 and 2009, respectively.

     We received no cash from option exercises under all stock option compensation plans for the nine months ended September 30, 2010 and 2009. We realized no tax benefits for tax deductions from option exercises for the nine months ended September 30, 2010 and 2009.

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 nine months of 2010, we classified one equity security as Level 3. We utilized a fair value model that incorporated significant other unobservable inputs, such as estimated volatility, to estimate the equity security’s fair value. Pursuant to terms of an initial public offering, we are restricted from selling this security for a specified period, and the fair value we determined as of September 30, 2010 reflects this restriction. During the first nine months of 2010, we recorded an unrealized loss of $171,891 related to this security in other comprehensive income.

     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 obtained 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 September 30, 2010 and December 31, 2009, 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 as of September 30, 2010 and December 31, 2009, 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 cost, which approximates fair value. The carrying values in the balance sheet for premium and reinsurance receivables and payables approximate their fair values. The carrying amounts reported in the balance sheet for our subordinated debentures approximate their fair values due to their variable rate nature, and there has been no change in our creditworthiness.

     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 September 30, 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		$	48,765			$	—			$	48,765			$	—
Obligations of states and political subdivisions			381,085				—				381,085				—
Corporate securities			56,599				—				56,599				—
Residential mortgage-backed securities			76,828				—				76,828				—
Equity securities			12,715				5,363				1,292				6,060
Totals		$	575,992			$	5,363			$	564,569			$	6,060

     We did not have any transfers between Levels 1 and 2 during the quarter ended September 30, 2010.

     The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities as of December 31, 2009:

						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		$	40,630			$	—			$	40,630			$	—
Obligations of states and political subdivisions			358,367				—				358,367				—
Corporate securities			27,766				—				27,766				—
Residential mortgage-backed securities			90,941				—				90,941				—
Equity securities			9,915				2,426				1,257				6,232
Totals		$	527,619			$	2,426			$	518,961			$	6,232

          The following table presents a roll forward of the significant unobservable inputs for our Level 3 securities for the three months ended September 30, 2010 and 2009, respectively:

		2010				2009
		(in thousands)
Balance, June 30		$	6,326			$	—
Transfer to Level 3			—				4,960
Net unrealized loss			(266	)			—
Balance, September 30		$	6,060			$	4,960

     The following table presents a roll forward of the significant unobservable inputs for our Level 3 securities for the nine months ended September 30, 2010 and 2009, respectively:

		2010				2009
		(in thousands)
Balance, January 1		$	6,232			$	—
Transfer to Level 3			—				4,960
Net unrealized loss			(172	)			—
Balance, September 30		$	6,060			$	4,960

10 — Income Taxes

     As of September 30, 2010 and December 31, 2009, respectively, we had no material unrecognized tax benefits or accrued interest and penalties. The Internal Revenue Service examined our 2006 federal tax return and made no adjustments to the taxes we had reported. Tax years 2007, 2008 and 2009 remained open for examination as of September 30, 2010.

11 — Impact of New Accounting Standards

          In June 2009, the FASB issued FAS 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140,” codified in ASC subtopic 860-20. ASC subtopic 860-20 amends the derecognition guidance in Statement 140 and eliminates the concept of qualifying special-purpose entities. ASC subtopic 860-20 is effective for fiscal years and interim periods beginning after November 15, 2009. We adopted ASC subtopic 860-20 on January 1, 2010. The adoption did not impact our financial position or results of operations.

          In June 2009, the FASB issued FAS 167, “Amendments to FASB Interpretation No. 46(R),” which amends the consolidation guidance applicable to variable interest entities (“VIEs”) and is codified in ASC subtopic 810-10. An entity would consolidate a VIE, as the primary beneficiary, when the entity has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. ASC subtopic 810-10 requires ongoing reassessment of whether an enterprise is the primary beneficiary of a VIE. ASC subtopic 810-10 amends interpretation 46(R) to eliminate the quantitative approach previously required for determining the primary beneficiary of a VIE. ASC subtopic 810-10 is effective for fiscal years and interim periods beginning after November 15, 2009. We adopted ASC subtopic 810-10 on January 1, 2010. The adoption did not impact our financial position or results of operations.

          In January 2010, the 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. ASU 2010-06 is effective for the interim period ended March 31, 2010, except for certain new Level 3 roll forward disclosures, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We have included herein the disclosures ASU 2010-06 requires for the first nine months of 2010, and we will include the Level 3 roll forward disclosures ASU 2010-06 requires for fiscal years and interim periods beginning after December 31, 2010.

          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 be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. 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 included in this Quarterly Report on Form 10-Q and 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, 2009.

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 estimated. 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 then knows. An insurer recognizes at the time it establishes its estimates 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. It is the intent of our insurance subsidiaries 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.

     Our liability 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 bodily injury 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 accurate measurement of the impact of rate changes and changes in policy provisions and consistency in the quality and characteristics of business written within a given line of business among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments they consider appropriate for those changes in their liabilities.

Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at September 30, 2010. 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 $1.9 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, 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 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 received since the prior reporting date.

     Excluding the impact of severe weather events, our insurance subsidiaries have noted slight downward trends in the number of claims incurred and 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, periods in which economic conditions have extended the estimated length of disabilities, increased medical loss cost trends and a general slowing of settlement rates in litigated claims. We may make adjustments in the future to reflect subsequent developments. 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 liabilities for unpaid losses and loss expenses as of September 30, 2010.

     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 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 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 Atlantic States and Donegal Mutual.

     The risk profiles of the business Atlantic States and Donegal Mutual write have historically been, and continue to be, substantially similar. 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, 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 directly written by the individual companies will vary. However, because the pool homogenizes the risk characteristics of all business written directly by Donegal Mutual and Atlantic States 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 September 30, 2010 and December 31, 2009 consisted of the following:

		September 30,				December 31,
		2010				2009
		(in thousands)
Commercial lines:
Automobile		$	20,437			$	21,465
Workers’ compensation			40,835				38,092
Commercial mult-peril			32,234				30,640
Other			2,235				1,886
Total commercial lines			95,741				92,083
Personal lines:
Automobile		$	72,537			$	70,019
Homeowners			15,034				16,312
Other			1,721				1,848
Total personal lines			89,292				88,179
Total commercial and personal lines			185,033				180,262
Plus reinsurance recoverable			93,603				83,337
Total liability for unpaid losses and loss expenses		$	278,636			$	263,599

     We have evaluated the effect on our insurance subsidiaries’ unpaid loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables we considered in establishing the loss and loss expense reserves of our insurance subsidiaries. We established the range of reasonably likely changes based on a review of changes in accident year development by line of business and applied those changes 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 the most likely scenario. The following table sets forth the estimated effect on our insurance subsidiaries’ unpaid loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables we considered in establishing loss and loss expense reserves:

				Adjusted Loss and
Percentage				Loss Expense								Adjusted Loss and
Change in Loss				Reserves Net of				Percentage Change				Loss Expense				Percentage Change
and Loss Expense				Reinsurance as of				in Stockholders’ Equity as of				Reserves Net of				in Stockholders’ Equity as of
Reserves Net of				September 30,				September 30,				Reinsurance as of				December 31,
Reinsurance				2010				2010(1)				December 31, 2009				2009(1)
(dollars in thousands)
	(10.0	)%		$	166,530				3.0	%		$	162,236				3.0	%
	(7.5	)			171,156				2.3				166,742				2.3
	(5.0	)			175,781				1.5				171,249				1.5
	(2.5	)			180,407				0.8				175,755				0.8
Base					185,033				—				180,262				—
	2.5				189,659				-0.8				184,769				-0.8
	5.0				194,285				-1.5				189,275				-1.5
	7.5				198,910				-2.3				193,782				-2.3
	10.0				203,536				-3.0				198,288				-3.0