Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Donegal Mutual Insurance Company ("Donegal Mutual") organized us as an insurance holding company on August 26, 1986. See "Business - History and Organizational Structure" for more information. Our insurance subsidiaries are Atlantic States Insurance Company ("Atlantic States"), Michigan Insurance Company ("MICO"), The Peninsula Insurance Company and its wholly owned subsidiary, Peninsula Indemnity Company (collectively, "Peninsula"), and Southern Insurance Company of Virginia ("Southern"). Our insurance subsidiaries and their affiliates write commercial and personal lines of property and casualty coverages exclusively through a network of independent insurance agents in certain Mid-Atlantic, Midwest, Southern and Southwestern states. The commercial lines products of our insurance subsidiaries consist primarily of commercial automobile, commercial multi-peril and workers' compensation policies. The personal lines products of our insurance subsidiaries consist primarily of homeowners and private passenger automobile policies.

At December 31, 2025, Donegal Mutual held approximately 44% of our outstanding Class A common stock and approximately 85% of our outstanding Class B common stock. This ownership provides Donegal Mutual with approximately 70% of the combined voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock.

Donegal Mutual and Atlantic States have participated in a proportional reinsurance agreement, or pooling agreement, since 1986. Under the pooling agreement, Donegal Mutual and Atlantic States contribute substantially all of their respective premiums, losses and loss expenses to the underwriting pool, and the underwriting pool, acting through Donegal Mutual, then allocates 80% of the pooled business to Atlantic States. Thus, Donegal Mutual and Atlantic States share the underwriting results of the pooled business in proportion to their respective participation in the underwriting pool. The operations of our insurance subsidiaries and Donegal Mutual are interrelated due to the pooling agreement and other factors. While maintaining the separate corporate existence of each company, our insurance subsidiaries conduct business together with Donegal Mutual and its insurance subsidiaries as the Donegal Insurance Group. The Donegal Insurance Group is not a legal entity, is not an insurance company and does not issue or administer insurance policies. Rather, it is a trade name that refers to the group of insurance companies that are affiliated with Donegal Mutual. See "Business - Relationship with Donegal Mutual" for more information regarding the pooling agreement and other transactions with our affiliates.

Donegal Mutual and our insurance subsidiaries operate together as the Donegal Insurance Group and share a combined business plan designed 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 allow the individual companies to manage certain risk segments through variations in coverage, terms and pricing. Therefore, the underwriting profitability of the business the individual companies write directly will vary. However, because the pool homogenizes the risk characteristics of the predominant percentage of the business Donegal Mutual and Atlantic States write directly and each company shares the underwriting results according to each company's participation percentage, each company realizes its percentage share of the underwriting results of the pool.

In July 2013, our board of directors authorized a share repurchase program pursuant to which we have the authority to purchase up to 500,000 additional shares of our Class A common stock at prices prevailing from time to time in the open market subject to the provisions of the SEC Rule 10b-18 and in privately negotiated transactions. We did not purchase any shares of our Class A common stock under this program during 2025 or 2024. We have purchased a total of 57,658 shares of our Class A common stock under this program from its inception through December 31, 2025.

On April 29, 2022, Donegal Mutual disclosed that it will, at its discretion, purchase shares of our Class A common stock and our Class B common stock at market prices prevailing from time to time in the open market subject to the provisions of SEC Rule 10b-18 and in privately negotiated transactions. Such disclosure did not stipulate a maximum number of shares that may be purchased under this program. Donegal Mutual purchased 776,332 and 1,057,282 shares of our Class A common stock during 2025 and 2024, respectively. Donegal Mutual purchased 43,404 shares of our Class B common stock during 2025. Donegal Mutual did not purchase any shares of our Class B common stock during 2024.

In September 2025, Donegal Mutual and Southern entered into a renewal rights agreement with an affiliate of a farm-focused Pennsylvania-based mutual insurance group to provide a continuation option for their farm policyholders when they begin to non-renew all farm policies as they expire beginning in the second quarter of 2026. Donegal Mutual and Southern determined that the costs required to modernize the legacy farm product and systems were higher than the projected return on investment for this non-core line of business that represents approximately $6 million in premiums. None of our other insurance subsidiaries offered farm policies. We currently include farm policies within other commercial lines in our line of business reporting.

Critical Accounting Policies and Estimates

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

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

Liability for Losses and Loss Expenses

Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with respect to incurred policyholder claims based on facts and circumstances the insurer knows at that point in time. For example, legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries to pay losses for damages that their policies explicitly excluded or did not intend to cover. At the time of establishing its estimates, an insurer recognizes that its ultimate liability for losses and loss expenses will exceed or be less than such estimates. Our insurance subsidiaries base their estimates of liabilities for losses and loss expenses on assumptions as to future loss trends, expected claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, our insurance subsidiaries may learn additional facts regarding individual claims, and, consequently, it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates for these liabilities. We reflect any adjustments to the liabilities for losses and loss expenses of our insurance subsidiaries in our consolidated results of operations in the period in which our insurance subsidiaries make adjustments to their estimates.

Our insurance subsidiaries maintain liabilities for the payment of losses and loss expenses with respect to both reported and unreported claims. Our insurance subsidiaries establish these liabilities for the purpose of covering the ultimate costs of settling all losses, including investigation and litigation costs. Our insurance subsidiaries base the amount of their liability for reported losses primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss the policyholder incurred. Our insurance subsidiaries determine the amount of their liability for unreported claims and loss expenses on the basis of historical information by line of insurance. Our insurance subsidiaries account for inflation in the reserving function through analysis of costs and trends and reviews of historical reserving results. Our insurance subsidiaries monitor their liabilities closely and recompute them periodically using new information on reported claims and a variety of statistical techniques. Our insurance subsidiaries do not discount their liabilities for losses 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 related to our insurance subsidiaries' internal operations. For example, our insurance subsidiaries have experienced an increase in claims severity and a lengthening of the claim settlement periods on bodily injury claims during the past several years. In addition, the COVID-19 pandemic and related government mandates and restrictions resulted in various changes from historical claims reporting and settlement trends during 2020 and resulted in significant increases in loss costs in several following years due to a number of factors, including supply chain disruption, higher new and used automobile values, increases in the cost of replacement automobile parts and rising labor rates. These trend changes caused significant disruption to historical loss patterns and gave rise to greater uncertainty as to the pattern of future loss settlements. Uncertainties regarding future trends include social inflation, availability and cost of replacement automobile parts and building materials, availability and cost of skilled labor, the rate of specialized plaintiff attorney involvement in claims, plaintiff attorney utilization of litigation financing and the cost of medical technologies and procedures. Assumptions related to our insurance subsidiaries' external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and policy provisions and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodology, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries make adjustments in their reserves that they consider appropriate for such changes. Accordingly, our insurance subsidiaries' ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at December 31, 2025. For every 1% change in our insurance subsidiaries' loss and loss expense reserves, net of reinsurance recoverable, the effect on our pre-tax results of operations would be approximately $7.1 million.

The establishment of appropriate liabilities is an inherently uncertain process and we can provide no assurance that our insurance subsidiaries' ultimate liability will not exceed our insurance subsidiaries' loss and loss expense reserves and have an adverse effect on our results of operations and financial condition. Furthermore, we cannot predict the timing, frequency and extent of adjustments to our insurance subsidiaries' estimated future liabilities, because the historical conditions and events that serve as a basis for our insurance subsidiaries' estimates of ultimate claim costs may change. As is the case for substantially all property and casualty insurance companies, our insurance subsidiaries have found it necessary in the past to increase their estimated future liabilities for losses and loss expenses in certain periods and, in other periods, their estimated future liabilities for losses and loss expenses have exceeded their actual liabilities for losses and loss expenses. Changes in our insurance subsidiaries' estimates of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received subsequent to the prior reporting period.

Our insurance subsidiaries recognized a decrease in their liability for losses and loss expenses of prior years of $10.3 million, $15.0 million and $16.7 million in 2025, 2024 and 2023, respectively. Our insurance subsidiaries made no significant changes in their reserving philosophy or claims management personnel, and they have made no significant offsetting changes in estimates that increased or decreased their loss and loss expense reserves in those years. The 2025 development represented 1.5% of the December 31, 2024 net carried reserves and resulted primarily from lower-than-expected loss emergence in all lines of business except other commercial lines (which is primarily commercial umbrella liability) for accident years prior to 2025. The majority of the 2025 development related to decreases in the liability for losses and loss expenses of prior years for Southern and Peninsula. The 2024 development represented 2.2% of the December 31, 2023 net carried reserves and resulted primarily from lower-than-expected loss emergence in the commercial multi-peril, personal automobile and homeowner lines of business, offset partially by higher-than-expected loss emergence in the workers' compensation and commercial automobile lines of business, for accident years prior to 2024. The majority of the 2024 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO. The 2023 development represented 2.5% of the December 31, 2022 net carried reserves and resulted primarily from lower-than-expected loss emergence in the personal automobile and commercial automobile lines of business for accident years prior to 2023. The majority of the 2023 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO.

Excluding the impact of severe weather events and the COVID-19 pandemic, our insurance subsidiaries have noted stable amounts 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 due to various factors such as increased property and automobile repair and replacement costs, rising medical loss costs and increased litigation trends and lengthening of repair completion times for property and automobile claims. We have also experienced a general slowing of settlement rates in litigated claims. Our insurance subsidiaries could have to make further adjustments to their estimates in the future. However, on the basis of our insurance subsidiaries' internal procedures, which analyze, among other things, their prior assumptions, their experience with similar cases and historical trends such as reserving patterns, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes, we believe that our insurance subsidiaries have made adequate provision for their liability for losses and loss expenses.

Atlantic States' participation in the underwriting pool with Donegal Mutual exposes Atlantic States to adverse loss development on the business that Donegal Mutual contributes to the underwriting pool. However, pooled business represents the predominant percentage of the net underwriting activity of both companies, and Donegal Mutual and Atlantic States share proportionately any adverse risk development relating to the pooled business. The business in the underwriting pool is homogeneous and each company has a pro-rata share of the entire underwriting pool. Since the predominant percentage of the business of Atlantic States and Donegal Mutual is pooled and the results shared by each company according to its participation level under the terms of the pooling agreement, the intent of the underwriting pool is to produce a more uniform and stable underwriting result from year to year for each company than either would experience individually and to spread the risk of loss between the companies.

Our insurance subsidiaries' liability for losses and loss expenses by major line of business at December 31, 2025 and 2024 consisted of the following:

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

(1)

Net of income tax effect.

Our insurance subsidiaries base their reserves for unpaid losses and loss expenses on current trends in loss and loss expense development and reflect their best estimates for future amounts needed to pay losses and loss expenses with respect to incurred events currently known to them plus incurred but not reported ("IBNR") claims. Our insurance subsidiaries develop their reserve estimates based on an assessment of known facts and circumstances, review of historical loss settlement patterns, estimates of trends in claims severity, frequency, legal and regulatory changes and other assumptions. Our insurance subsidiaries consistently apply actuarial loss reserving techniques and assumptions, which rely on historical information as adjusted to reflect current conditions, including consideration of recent case reserve activity. Our insurance subsidiaries use the point estimate their actuaries select. For the year ended December 31, 2025, the actuaries developed a range from a low of $666.6 million to a high of $746.1 million and selected a point estimate of $705.2 million. The actuaries' range of estimates for commercial lines in 2025 was $543.0 million to $607.8 million, and the actuaries selected a point estimate of $574.4 million. The actuaries' range of estimates for personal lines in 2025 was $123.5 million to $138.3 million, and the actuaries selected a point estimate of $130.8 million. For the year ended December 31, 2024, the actuaries developed a range from a low of $672.1 million to a high of $740.4 million and selected a point estimate of $704.4 million. The actuaries' range of estimates for commercial lines in 2024 was $533.0 million to $587.5 million, and the actuaries selected a point estimate of $558.2 million. The actuaries' range of estimates for personal lines in 2024 was $139.1 million to $153.0 million, and the actuaries selected a point estimate of $146.2 million.

Our insurance subsidiaries seek to enhance their underwriting results by carefully selecting the product lines they underwrite. For personal lines products, our insurance subsidiaries insure standard and preferred risks in private passenger automobile and homeowners lines. For commercial lines products, the commercial risks that our insurance subsidiaries primarily insure are business offices, wholesalers, service providers, contractors, artisans and light manufacturing operations. Our insurance subsidiaries have limited exposure to asbestos and other environmental liabilities. Through the consistent application of this disciplined underwriting philosophy, our insurance subsidiaries have avoided many of the "long-tail" issues other insurance companies have faced. We consider workers' compensation to be a "long-tail" line of business, in that workers' compensation claims tend to be settled over a longer time frame than those in the other lines of business of our insurance subsidiaries.

The following table presents 2025 and 2024 claim count and payment amount information for workers' compensation. Workers' compensation losses primarily consist of indemnity and medical costs for injured workers.

Management Evaluation of Operating Results

We believe that our focused business strategy has positioned us well for 2026 and beyond. Because our insurance subsidiaries do not prepare GAAP financial statements, we evaluate the performance of our commercial lines and personal lines segments utilizing statutory accounting practices ("SAP"), which include financial measures that reflect the growth trends and underwriting results of our insurance subsidiaries.

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

Non-GAAP Information

We prepare our consolidated financial statements on the basis of GAAP. Our insurance subsidiaries prepare financial statements based on SAP. SAP financial measures are considered non-GAAP financial measures under applicable SEC rules because the SAP financial measures include or exclude certain items that the most comparable GAAP financial measures do not ordinarily include or exclude. Our calculation of non-GAAP financial measures may differ from similar measures other companies use. As a result, investors should exercise caution when comparing our non-GAAP financial measures to the non-GAAP financial measures other companies use. The SAP financial measures we utilize are net premiums written and statutory combined ratio.

Net Premiums Written

We define net premiums written as the amount of full-term premiums our insurance subsidiaries record for policies effective within a given period less premiums our insurance subsidiaries cede to reinsurers. Net premiums earned is the most comparable GAAP financial measure to net premiums written. Net premiums earned represent the sum of the amount of net premiums written and the change in net unearned premiums during a given period. Our insurance subsidiaries earn premiums and recognize them as revenue over the terms of their policies, which are one year or less in duration. Therefore, increases or decreases in net premiums earned generally reflect increases or decreases in net premiums written in the preceding 12-month period compared to the comparable period one year earlier.

The following table provides a reconciliation of our net premiums earned to our net premiums written for 2025:

The following table provides a reconciliation of our net premiums earned to our net premiums written for 2024:

The following table provides a reconciliation of our net premiums earned to our net premiums written for 2023:

Statutory Combined Ratio

The combined ratio is a standard measurement of underwriting profitability for an insurance company. The combined ratio does not reflect investment income, net investment gains or losses, federal income taxes or other non-operating income or expense. A combined ratio of less than 100% generally indicates underwriting profitability.

The statutory combined ratio is a non-GAAP financial measure that is based upon amounts determined under SAP. We calculate our statutory combined ratio as the sum of:

The calculation of our statutory combined ratio differs from the calculation of our GAAP combined ratio. In calculating our GAAP combined ratio, we do not deduct installment payment fees from incurred expenses, and we base the expense ratio on net premiums earned instead of net premiums written. Differences between our GAAP loss ratio and our statutory loss ratio result from anticipating salvage and subrogation recoveries for our GAAP loss ratio but not for our statutory loss ratio.

The following table presents comparative details with respect to our GAAP and statutory combined ratios for the years ended December 31, 2025, 2024 and 2023:

Our insurance subsidiaries' net premiums earned decreased to $921.2 million for 2025, a decrease of $15.5 million, or 1.7%, compared to 2024, primarily reflecting lower new business writings, offset partially by solid premium retention and renewal premium increases. Our insurance subsidiaries earn premiums and recognize them as income over the terms of the policies they issue. Such terms are generally one year or less in duration. Therefore, increases or decreases in net premiums earned generally reflect increases or decreases in net premiums written in the preceding twelve-month period compared to the same period one year earlier.

Net Premiums Written

Our insurance subsidiaries' 2025 net premiums written decreased 4.0% to $904.8 million, compared to $942.3 million for 2024. Commercial lines net premiums written increased $16.0 million, or 2.9%, for 2025 compared to 2024. We attribute the increase in commercial lines net premiums written primarily to solid premium retention and a continuation of renewal premium increases in lines other than workers' compensation, offset partially by lower new business writings. Personal lines net premiums written decreased $53.5 million, or 13.6%, for 2025 compared to 2024. We attribute the decrease in personal lines net premiums written primarily to planned attrition due to lower new business writings and strategic non-renewal actions, offset partially by a continuation of renewal premium rate increases and solid retention.

Investment Income

For 2025, our net investment income increased 17.2% to $52.6 million, compared to $44.9 million for 2024, due primarily to higher average invested assets and an increase in the average investment yield compared to the prior year.

Net Investment Gains

Our net investment gains for 2025 were $619,342, compared to $5.0 million for 2024. The net investment gains for 2025 and 2024 were primarily related to increases in the market value of the equity securities held at the end of the respective periods, with the increase in 2025 offset largely by net realized investment losses on the strategic sales of available-for-sale fixed-maturity securities. We did not recognize any impairment losses during 2025 or 2024.

Losses and Loss Expenses

Our insurance subsidiaries' loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 61.3% for 2025, compared to 64.5% for 2024. Our insurance subsidiaries' commercial lines loss ratio increased slightly to 62.1% for 2025, compared to 62.0% for 2024. The commercial multi-peril loss ratio decreased to 56.4% for 2025, compared to 57.5% for 2024. The commercial automobile loss ratio decreased to 63.5% for 2025, compared to 68.5% for 2024. The workers' compensation loss ratio decreased to 67.4% for 2025, compared to 67.7% for 2024. The personal lines loss ratio decreased to 60.0% for 2025, compared to 68.0% for 2024, due primarily to the continued benefit of earned premium rate increases and lower weather-related losses. The personal automobile loss ratio decreased to 57.7% for 2025, compared to 68.5% for 2024. The homeowners loss ratio decreased to 66.0% for 2025, compared to 66.7% for 2024. Our insurance subsidiaries experienced favorable loss reserve development of approximately $10.3 million, or 1.1 percentage points of the loss ratio, during 2025 in their reserves for prior accident years, compared to approximately $15.0 million, or 1.6 percentage points of the loss ratio, during 2024. The favorable loss reserve development in 2025 resulted primarily from lower-than-expected loss emergence in the commercial multi-peril, personal automobile, commercial automobile, homeowners, other personal lines and workers' compensation lines of business, offset partially by unfavorable development in the other commercial lines of business (which is primarily umbrella liability). Weather-related losses of $56.9 million, or 6.2 percentage points of the loss ratio, for 2025 decreased from $67.7 million, or 7.2 percentage points of the loss ratio, for 2024, with the decrease primarily impacting the commercial multi-peril and homeowners lines of business. Large fire losses, which we define as individual fire losses in excess of $50,000, were $43.9 million, or 4.8 percentage points of the loss ratio, for 2025, compared to $45.8 million, or 4.9 percentage points of the loss ratio, for 2024.

Our insurance subsidiaries' expense ratio, which is the ratio of policy acquisition and other underwriting expenses to premiums earned, was 33.8% for 2025, compared to 33.7% for 2024. The impact from costs that Donegal Mutual Insurance Company allocated to our insurance subsidiaries related to its systems modernization project represented approximately 1.2 percentage points of the expense ratio for 2025.

Policyholder Dividends

Our insurance subsidiaries pay policyholder dividends primarily on workers' compensation policies on a sliding scale based on the profitability of a given policy.

Combined Ratio

Our insurance subsidiaries' combined ratio was 95.4% and 98.6% for 2025 and 2024, respectively. The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of workers' compensation policy dividends incurred to premiums earned. We attribute the decrease in our combined ratio primarily to the decrease in the loss ratio.

Interest Expense

Our interest expense for 2025 increased to $1.4 million, compared to $946,020 for 2024. We attribute the increase to higher interest rates on borrowings under our lines of credit during 2025 compared to 2024.

Income Taxes

Our income tax expense was $18.3 million for 2025, compared to $11.5 million for 2024. Our effective tax rate for 2025 and 2024 was 18.7% and 18.4%, respectively.

Net Income and Earnings Per Share

Our net income for 2025 was $79.3 million, or $2.18 per share of Class A common stock on a diluted basis and $2.01 per share of Class B common stock, compared to $50.9 million, or $1.53 per share of Class A common stock on a diluted basis and $1.38 per share of Class B common stock, for 2024. We had 31.4 million and 30.0 million Class A shares outstanding at December 31, 2025 and 2024, respectively. We had 5.6 million Class B shares outstanding for both periods. There are no outstanding securities that dilute our shares of Class B common stock.

Book Value Per Share

Our stockholders' equity increased by $94.6 million during 2025, primarily due to our net income, after-tax unrealized gains within our available-for-sale fixed-maturity portfolio and other increases, offset partially by the cash dividends we declared during the year, resulting in an increase in our book value per share to $17.33 at December 31, 2025, compared to $15.36 a year earlier.

Net Premiums Written

Our insurance subsidiaries' 2024 net premiums written increased 5.2% to $942.3 million, compared to $895.7 million for 2023. Commercial lines net premiums written increased $19.5 million, or 3.7%, for 2024 compared to 2023. We attribute the increase in commercial lines net premiums written primarily to strong premium retention and a continuation of renewal premium increases in lines other than workers' compensation, offset partially by planned attrition in states we exited or classes of business we have targeted for profit improvement. Personal lines net premiums written increased $27.1 million, or 7.4%, for 2024 compared to 2023. We attribute the increase in personal lines net premiums written primarily to renewal premium rate increases and solid policy retention, offset partially by planned attrition due to non-renewal actions and lower new business writings.

Investment Income

For 2024, our net investment income increased 10.0% to $44.9 million, compared to $40.9 million for 2023, due primarily to higher average reinvestment yields and higher average invested assets for 2024 compared to 2023.

Net Investment Gains

Our net investment gains for 2024 were $5.0 million, compared to $3.2 million for 2023. The net investment gains for 2024 and 2023 were primarily related to increases in the market value of the equity securities held at the end of the respective periods. We did not recognize any impairment losses during 2024 or 2023.

Losses and Loss Expenses

Our insurance subsidiaries' loss ratio, which is the ratio of incurred losses and loss expenses to premiums earned, was 64.5% for 2024, compared to 69.1% for 2023. Our insurance subsidiaries' commercial lines loss ratio decreased to 62.0% for 2024, compared to 64.8% for 2023. This decrease resulted primarily from the commercial multi-peril loss ratio decreasing to 57.5% for 2024, compared to 73.1% for 2023, primarily due to a decrease in severity of non-weather claims, offset partially by increases in the commercial automobile and workers' compensation loss ratios due primarily to increases in loss emergence for prior accident years. The commercial automobile loss ratio increased to 68.5% for 2024, compared to 63.0% for 2023. The workers' compensation loss ratio increased to 67.7% for 2024, compared to 59.0% for 2023. The personal lines loss ratio decreased to 68.0% for 2024, compared to 75.6% for 2023, due primarily to increases in net premiums earned related to premium rate increases. The personal automobile loss ratio decreased to 68.5% for 2024, compared to 78.5% for 2023. The homeowners loss ratio decreased to 66.7% for 2024, compared to 73.6% for 2023. Our insurance subsidiaries experienced favorable loss reserve development of approximately $15.0 million, or 1.6 percentage points of the loss ratio, during 2024 in their reserves for prior accident years, compared to approximately $16.7 million, or 1.9 percentage points of the loss ratio, during 2023. The favorable loss reserve development in 2024 resulted primarily from lower-than-expected loss emergence in the commercial multi-peril, personal automobile and homeowner lines of business, offset partially by higher-than-expected loss emergence in the workers' compensation and commercial automobile lines of business, for accident years prior to 2024. Weather-related losses of $67.7 million, or 7.2 percentage points of the loss ratio, for 2024 increased from $72.9 million, or 8.3 percentage points of the loss ratio, for 2023, with the decrease primarily impacting the commercial multi-peril and homeowners lines of business. Large fire losses, which we define as individual fire losses in excess of $50,000, were $45.8 million, or 4.9 percentage points of the loss ratio, for 2024, compared to $45.4 million, or 5.2 percentage points of the loss ratio, for 2023.

Underwriting Expenses

Our insurance subsidiaries' expense ratio, which is the ratio of policy acquisition and other underwriting expenses to premiums earned, was 33.7% for 2024, compared to 34.7% for 2023. We attribute the decrease to the impacts of various expense reduction initiatives, including agency incentive program revisions, commission schedule adjustments, targeted staffing reductions, and hiring restrictions for open employment positions, among others. These impacts were offset partially by an increase in underwriting-based incentive costs as well as higher technology systems-related expenses that were primarily due to increased costs related to our ongoing systems modernization project, a portion of which Donegal Mutual Insurance Company allocates to our insurance subsidiaries. We expect the impact from allocated costs from Donegal Mutual Insurance Company to our insurance subsidiaries related to the ongoing systems modernization project peaked at approximately 1.3 percentage points of the expense ratio for 2024 and will subside gradually in 2025 and subsequent years.

Policyholder Dividends

Our insurance subsidiaries pay policyholder dividends primarily on workers' compensation policies on a sliding scale based on the profitability of a given policy.

Combined Ratio

Our insurance subsidiaries' combined ratio was 98.6% and 104.4% for 2024 and 2023, respectively. The combined ratio represents the sum of the loss ratio, the expense ratio and the dividend ratio, which is the ratio of workers' compensation policy dividends incurred to premiums earned. We attribute the decrease in our combined ratio primarily to the decreases in the loss and expense ratios.

Interest Expense

Our interest expense for 2024 increased to $946,020, compared to $619,813 for 2023. We attribute the increase to higher interest rates on borrowings under our lines of credit during 2024 compared to 2023.

Income Taxes

Our income tax expense was $11.5 million for 2024, compared to $637,972 for 2023. Our effective tax rate for 2024 and 2023 was 18.4% and 12.6%, respectively.

Net Income and Earnings Per Share

Our net income for 2024 was $50.9 million, or $1.53 per share of Class A common stock on a diluted basis and $1.38 per share of Class B common stock, compared to $4.4 million, or $0.14 per share of Class A common stock on a diluted basis and $0.11 per share of Class B common stock, for 2023. We had 30.0 million and 27.8 million Class A shares outstanding at December 31, 2024 and 2023, respectively. We had 5.6 million Class B shares outstanding for both periods. There are no outstanding securities that dilute our shares of Class B common stock.

Book Value Per Share

Our stockholders' equity increased by $66.0 million during 2024, primarily due to our net income, stock issuances under our stock compensation plans and other increases exceeding the cash dividends we declared during the year and resulting in an increase in our book value per share to $15.36 at December 31, 2024, compared to $14.39 a year earlier.

We have historically generated sufficient net positive cash flow from our operations to fund our commitments and build our investment portfolio, thereby increasing future investment returns. The pooling agreement with Donegal Mutual historically has been cash flow positive because of the profitability of the underwriting pool. Because we settle the pool monthly, our cash flows are substantially similar to the cash flows that would result from the underwriting of direct business. We maintain a high degree of liquidity in our investment portfolio in the form of marketable fixed maturities, equity securities and short-term investments. We structure our fixed-maturity investment portfolio following a "laddering" approach so that projected cash flows from investment income and principal maturities are evenly distributed from a timing perspective. This laddering approach provides an additional measure of liquidity to meet our obligations and the obligations of our insurance subsidiaries should an unexpected variation occur in the future. Net cash flows provided by operating activities in 2025, 2024 and 2023 were $70.2 million, $67.4 million and $28.6 million, respectively.

At December 31, 2025, we had no outstanding borrowings under our line of credit with M&T and had the ability to borrow up to $20.0 million at interest rates equal to the then-current Term SOFR rate plus 2.11%. At December 31, 2025, Atlantic States had a $35.0 million outstanding advance with the FHLB of Pittsburgh that carries a fixed interest rate of 3.806% and is due in September 2026. We discuss in Note 9 - Borrowings our estimate of the timing of the amounts payable for the borrowings under our lines of credit based on their contractual maturities.

We estimate the timing of claim payments associated with the liabilities for losses and loss expenses of our insurance subsidiaries based on historical experience and expectations of future payment patterns. Amounts Atlantic States assumes pursuant to the pooling agreement with Donegal Mutual represent a substantial portion of our insurance subsidiaries' gross liabilities for losses and loss expenses, and amounts Atlantic States cedes pursuant to the pooling agreement represent a substantial portion of our insurance subsidiaries' reinsurance recoverable on unpaid losses and loss expenses. We include cash settlement of Atlantic States' assumed liabilities from the pool in monthly settlements of pooled activity, as we net amounts ceded to and assumed from the pool. Although Donegal Mutual and we do not anticipate any changes in the pool participation levels in the foreseeable future, any such change would be prospective in nature and therefore would not impact the timing of expected payments by Atlantic States for its percentage share of pooled losses occurring in periods prior to the effective date of such change.

The cash dividends we declared to our stockholders totaled $26.3 million, $23.2 million and $22.2 million in 2025, 2024 and 2023, respectively. There are no regulatory restrictions on our payment of dividends to our stockholders, although there are restrictions under applicable state laws on the payment of dividends from our insurance subsidiaries to us, which is a significant source of cash for payment of stockholder dividends by us. Our insurance subsidiaries are required by law to maintain certain minimum surplus on a statutory basis and are subject to regulations under which their payment of dividends from statutory surplus is restricted and may require prior approval of their domiciliary insurance regulatory authorities. Our insurance subsidiaries are also subject to risk-based capital ("RBC") requirements. The amount of statutory capital and surplus necessary for our insurance subsidiaries to satisfy regulatory requirements, including the RBC requirements, was not significant in relation to our insurance subsidiaries' statutory capital and surplus at December 31, 2025. Amounts available for distribution to us as dividends from our insurance subsidiaries without prior approval of insurance regulatory authorities in 2026 are approximately $50.8 million from Atlantic States, $10.2 million from MICO and $5.4 million from Peninsula, or a total of approximately $66.4 million.

Investments

At December 31, 2025 and 2024, our investment portfolio of primarily investment-grade bonds, common stock, short-term investments and cash totaled $1.5 billion and $1.4 billion, respectively, representing 64.0% and 61.6%, respectively, of our total assets. See "Business - Investments" for more information.

The carrying value of our fixed maturity investments represented 94.5% and 95.6% of our total invested assets at December 31, 2025 and 2024, respectively.

Our fixed maturity investments consisted of high-quality marketable bonds, of which 96.4% and 95.6% were rated at investment-grade levels at December 31, 2025 and 2024, respectively.

At December 31, 2025, the net unrealized loss on our available-for-sale fixed maturity investments, net of deferred taxes, amounted to $7.6 million, compared to $27.4 million at December 31, 2024.

Impact of Inflation

Our insurance subsidiaries establish their property and casualty insurance premium rates before they know the amount of losses and loss settlement expenses or the extent to which inflation may impact such expenses. Consequently, our insurance subsidiaries attempt, in establishing rates, to anticipate the potential future impact of inflation. Our insurance subsidiaries account for inflation in the reserving function through analysis of costs and trends and reviews of historical reserving results.

Impact of Changing Climate Conditions

Insured losses from severe weather events could significantly impact the underwriting results of our insurance subsidiaries. Losses from catastrophic events are a function of both the extent of our insurance subsidiaries' exposures, the frequency and severity of the events themselves and the level of reinsurance coverage our insurance subsidiaries purchase. The increased frequency and severity of weather-related catastrophes and other losses, such as from wildfires and flooding, incurred by the industry in recent years may be indicative of changing weather patterns due to climate change. Should those patterns continue to emerge, increased weather-related catastrophes in the states in which our insurance subsidiaries operate would lead to higher overall losses that they may be unable to offset through pricing actions.

Our insurance subsidiaries seek to reduce their exposure to catastrophe losses through their underwriting strategies and their purchase of catastrophe reinsurance. While the emerging science regarding climate change and its connection to extreme weather events continues to be studied, climate change, to the extent it produces rising temperatures and changes in weather patterns, could affect the frequency and severity of weather events and other losses and thus impact the affordability and availability of catastrophe reinsurance coverage for our insurance subsidiaries. Our insurance subsidiaries' ability to appropriately manage catastrophe risk depends partially on catastrophe models, which rely on historical data that might not be representative of the frequency and severity of future events. Such models might also be unable to anticipate the uncertain impact of changing climate conditions that tend to occur gradually over time. Because the policies of our insurance subsidiaries renew not less frequently than annually, our insurance subsidiaries have the ability to respond to the impact of changing climate conditions through adjustments to their underwriting standards, pricing, and policy terms and conditions, subject to applicable regulatory approvals.

Changing climate conditions could lead to new or revised regulations with which our insurance subsidiaries would have to comply. Such regulations could impact the ability of our insurance subsidiaries to manage their exposures in areas impacted by increased weather activity, require our insurance companies to alter the terms and conditions of their policies or impact the ability of our insurance subsidiaries to obtain sufficient pricing increases to offset higher loss activity.

Impact of New Accounting Standards

In September 2016, the Financial Accounting Standards Board (the "FASB") issued guidance that amended previous guidance on the impairment of financial instruments by adding an impairment model that requires an entity to recognize expected credit losses as an allowance rather than impairments as credit losses are incurred. The intent of this guidance is to reduce complexity and result in a more timely recognition of expected credit losses. In November 2019, the FASB issued guidance that delayed the effective date for "smaller reporting companies," as defined in Item 10(f)(1) of Regulation S-K, to annual and interim reporting periods beginning after December 15, 2022 from December 15, 2019. We were a smaller reporting company at the time this guidance was issued, and our adoption of this guidance on January 1, 2023 resulted in an after-tax decrease in retained earnings of $1.9 million. The adoption of this guidance did not have a significant impact on our results of operations or cash flows.

In November 2023, the FASB issued guidance that amended previous guidance on the disclosure of reportable segments. The guidance requires disclosure of incremental segment information including the title and position of the individual identified as the chief operating decision maker, a narrative explanation of how the chief operating decision maker uses each reported measure of a segment's profit or loss in assessing performance and determining how to allocate resources, as well as quantification of significant segment expenses and other items. We refer to Note 18 - Segment Information for further information and disclosure of items required within the amended and enhanced guidance. The adoption of this guidance did not have an impact on our financial position, results of operations or cash flows.

In December 2023, the FASB issued guidance to enhance the transparency and usefulness of income tax disclosures. The guidance requires disclosure of specific categories in the rate reconciliation table and additional information for reconciling items that meet a quantitative threshold of equal to or greater than 5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate. The guidance also requires disaggregated disclosure of the amount of income taxes paid for federal, state and foreign taxes. We refer to Note 11- Income Taxes for further information and disclosure of items required within the amended and enhanced guidance. The adoption of this guidance did not have an impact on our financial position, results of operations or cash flows.

In November 2024, the FASB issued guidance requiring disaggregated disclosure of income statement expenses in the notes to financial statements. The guidance requires disclosure of certain expenses, including employee compensation, depreciation and selling expenses. The guidance will not impact current income statement expense captions that industry-specific guidance requires. The guidance is effective for annual reporting periods beginning after December 15, 2026. The adoption of this guidance will not have an impact on our financial position, results of operations or cash flows.

Off-Balance Sheet Arrangements

As of December 31, 2025 and 2024, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.