Donegal (DGICA) 8-K Donegal Group Inc. Announces Third Quarter Earnings

DONEGAL GROUP INC. ANNOUNCES THIRD QUARTER EARNINGS

Jeffrey D. Miller
Senior Vice President & Chief Financial Officer
Phone (717) 426-1931
Fax     (717) 426-7009

For Immediate Release

     MARIETTA, Pennsylvania, October 21, 2005 — Donegal Group Inc. (Nasdaq: DGICA and DGICB) today reported that its net income for the third quarter ended September 30, 2005 increased 66.1% to $9,777,157, or $.52 per share on a diluted basis, compared to $5,886,886, or $.32 per share on a diluted basis, for the third quarter of 2004.

     The Company’s third quarter earnings continued to reflect solid revenue growth and excellent underwriting results. As previously announced, the Company incurred relatively few claims totaling approximately $250,000 as a result of Hurricanes Katrina and Rita. Revenues for the third quarter of 2005 were $80,566,455, an increase of 9.4% over a year earlier, while premiums earned expanded to $74,584,045, a 9.7% increase over the third quarter of 2004. Investment income rose 13.2% to $4,548,837 for the third quarter of 2005, compared to $4,017,915 for the third quarter of 2004.

     The Company’s combined ratio improved to a record quarterly low 88.5% for the third quarter of 2005, compared to 95.0% for the third quarter of 2004. The Company’s loss ratio for the third quarter of 2005 was 55.1%, which compared favorably to the loss ratio of 62.2% posted for the third quarter of 2004. Net losses incurred in the third quarter of 2004 included approximately $3.2 million in property claims from a series of severe weather events that added 4.6 percentage points to the loss ratio in that quarter. The Company’s expense ratio increased slightly to 32.6% for the third quarter of 2005, compared to 32.2% for the third quarter of 2004, and continued to reflect higher levels of incentive compensation resulting from the excellent underwriting results.

     Net income for the nine months ended September 30, 2005 increased 43.0% to $27,097,520, or $1.46 per share on a diluted basis, compared to $18,943,709, or $1.04 per share on a diluted basis, before extraordinary item for the nine months ended September 30, 2004. Net income in the first nine months of 2004 was $24,389,379, or $1.34 per share on a diluted basis, which included an extraordinary gain of $5,445,670, or $.30 per share on a diluted basis, recorded in the first quarter of 2004 related to an acquisition.

     “The continuation of our strong underwriting results is directly related to the combination of our disciplined underwriting philosophy and the ongoing implementation

of our organic and acquisition growth strategies. We are pleased that our management of our hurricane catastrophe exposures helped us to avoid significant claims from the unprecedented storms in recent months,” stated Donald H. Nikolaus, President and Chief Executive Officer of Donegal Group Inc.

     The Company’s combined ratio for the first nine months of 2005 was 89.5%, compared to a combined ratio of 93.2% for the comparable period in 2004. The Company’s loss ratio for the first nine months of 2005 improved to 55.7%, compared to 62.5% for the first nine months of 2004.

     The excellent operating results through the first nine months of 2005 contributed to an increase in the Company’s book value to $14.72 per common share as of September 30, 2005, compared to $13.53 per common share at December 31, 2004.

     All 2004 per share information has been restated to reflect a 4-for-3 stock split in the form of a 33 1/3% stock dividend effected on March 28, 2005.

     The Company also announced that yesterday its Board of Directors declared a regular quarterly cash dividend payable on November 15, 2005 of $.10 per share of Class A Common Stock and $.085 per share of Class B Common Stock to stockholders of record as of the close of business on November 1, 2005.

     The Company previously announced that certain members of the Donegal Insurance Group have entered into an Acquisition Rights Agreement (the “Agreement”) with The Shelby Insurance Company and Shelby Casualty Insurance Company (together “Shelby”), part of Vesta Insurance Group, Inc. The Agreement grants those members the right, at their discretion and subject to their traditional underwriting and agency appointment standards, to offer renewal or replacement policies to the holders of Shelby’s personal lines policies in Pennsylvania, Tennessee and Alabama, pursuant to Shelby’s plans of withdrawal from those three states. As part of the Agreement, the Donegal Insurance Group will pay specified amounts to Shelby based on the direct gross premiums written by the Donegal Insurance Group on the renewal and replacement policies it issues. Renewal and replacement policies will be offered for policies issued on or after January 1, 2006. Thus, the Agreement will have no impact on the Company’s 2005 operating results.

     The Company will hold a conference call on Friday, October 21, 2005, beginning at 11:00 A. M. Eastern Time. You may participate in the conference call by calling 1-800-510-0178 (Passcode 92709965). An instant replay of the conference call will be available until October 28, 2005, by calling 1-888-286-8010 (Passcode 59103119).

     Donegal Group Inc. is an insurance holding company whose insurance subsidiaries offer personal and commercial property and casualty lines of insurance in six Mid-Atlantic states (Connecticut, Delaware, Maryland, New Hampshire, New York and Pennsylvania), eight Southeastern states (Alabama, Georgia, Louisiana, North Carolina,

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South Carolina, Tennessee, Virginia and West Virginia) and five Midwestern states (Iowa, Nebraska, Ohio, Oklahoma and South Dakota).

     All statements contained in this press release that are not historic facts are based on current expectations. Such statements are forward-looking (as defined in the Private Securities Litigation Reform Act of 1995) in nature and necessarily involve a number of risks and uncertainties. Actual results could vary materially. The factors that could cause actual results to vary materially include, but are not limited to, the ability of the Company to maintain profitable operations, the adequacy of the Company’s reserves for losses and loss adjustment expenses, business and economic conditions in the areas in which the Company operates, severe weather events, competition from various insurance and non-insurance businesses, terrorism, legal and judicial developments, changes in regulatory requirements and other risks that are described from time to time in the Company’s filings with the Securities and Exchange Commission. The Company disclaims any obligation to update such statements or to announce publicly the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

(Tables Follow)

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	Three Months Ended September 30
	2005		2004*
Net premiums earned	$	74,584,045	$	67,958,382
Investment income, net of investment expenses		4,548,837		4,017,915
Net realized investment gains		124,896		448,367
Total revenues		80,566,455		73,613,653
Net income	$	9,777,157	$	5,886,886
Net income per common share:
Basic	$	0.54	$	0.33
Diluted	$	0.52	$	0.32

	Nine Months Ended September 30
	2005		2004*
Net premiums earned	$	219,784,658	$	196,156,262
Investment income, net of investment expenses		13,312,933		11,640,506
Net realized investment gains		1,235,248		1,092,365
Total revenues		238,137,593		212,307,736
Net income before extraordinary item	$	27,097,520	$	18,943,709
Net income after extraordinary item	$	27,097,520	$	24,389,379
Net income per common share before extraordinary item:
Basic	$	1.51	$	1.09
Diluted	$	1.46	$	1.04
Net income per common share after extraordinary item:
Basic	$	1.51	$	1.40
Diluted	$	1.46	$	1.34

* Per share information restated for 4-for-3 stock split

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Consolidated Statements of Income
(unaudited; in thousands, except share data)

	Quarter Ended September 30
	2005		2004*
Net premiums earned	$	74,584	$	67,959
Investment income, net of investment expenses		4,549		4,018
Net realized investment gains		125		448
Lease income		242		224
Installment payment fees		1,066		965
Total revenues		80,566		73,614
Net losses and loss expenses		41,072		42,286
Amortization of deferred policy acquisition costs		12,069		9,961
Other underwriting expenses		12,270		11,941
Other expenses		290		382
Policyholder dividends		572		404
Interest		588		417
Total expenses		66,861		65,391
Income before income tax expense		13,705		8,223
Income tax expense		3,928		2,336
Net income	$	9,777	$	5,887
Net income per common share:
Basic	$	0.54	$	0.33
Diluted	$	0.52	$	0.32
Supplementary Financial Analysts’ Data
Weighted average number of shares outstanding:
Basic		17,993,174		17,640,012
Diluted		18,672,331		18,206,375
Net written premiums	$	77,565	$	71,079
Book value per common share	$	14.72	$	13.34

* Per share information restated for 4-for-3 stock split

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Consolidated Statements of Income
(unaudited; in thousands, except share data)

	Nine Months Ended September 30
	2005		2004*
Net premiums earned	$	219,785	$	196,156
Investment income, net of investment expenses		13,313		11,641
Net realized investment gains		1,235		1,092
Lease income		708		663
Installment payment fees		3,097		2,756
Total revenues		238,138		212,308
Net losses and loss expenses		122,417		122,618
Amortization of deferred policy acquisition costs		35,291		28,248
Other underwriting expenses		37,915		31,098
Other expenses		1,179		1,463
Policyholder dividends		1,181		866
Interest		1,630		1,114
Total expenses		199,613		185,407
Income before income tax expense		38,525		26,901
Income tax expense		11,427		7,957
Net income before extraordinary item		27,098		18,944
Extraordinary item		—		5,445
Net income	$	27,098	$	24,389
Net income per common share before extraordinary item:
Basic	$	1.51	$	1.09
Diluted	$	1.46	$	1.04
Net income per common share after extraordinary item:
Basic	$	1.51	$	1.40
Diluted	$	1.46	$	1.34

* Per share information restated for 4-for-3 stock split

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Supplementary Financial Analysts’ Data

	Nine Months Ended September 30
	2005		2004*
Weighted average number of shares outstanding:
Basic		17,971,806		17,448,265
Diluted		18,560,997		18,127,131
Net written premiums	$	232,372	$	213,270
Book value per common share	$	14.72	$	13.34

* Per share information restated for 4-for-3 stock split

Consolidated Balance Sheets
(unaudited; in thousands)

	September 30,		December 31,
	2005		2004
ASSETS:
Investments:
Fixed maturities:
Held to maturity, at amortized cost	$	182,017	$	182,574
Available for sale, at fair value		287,890		226,757
Equity securities, at fair value		36,960		33,505
Investments in affiliates		8,565		8,865
Short-term investments, at cost, which approximates fair value		15,629		47,368
Total investments		531,061		499,069
Cash		3,023		7,350
Premiums receivable		48,761		44,267
Reinsurance receivable		94,667		98,479
Accrued investment income		5,052		4,961
Deferred policy acquisition costs		24,258		22,258
Prepaid reinsurance premiums		42,239		35,907
Property and equipment, net		5,443		5,509
Deferred tax asset, net		12,736		10,922
Due from affiliate		1,928		—
Other assets		3,737		6,693
Total assets	$	772,905	$	735,415

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Consolidated Balance Sheets (continued)
(unaudited; in thousands)

	September 30,			December 31,
	2005			2004
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Losses and loss expenses	$	263,277		$	267,190
Unearned premiums		193,378			174,458
Accrued expenses		13,896			13,414
Subordinated debentures		30,929			30,929
Due to affiliate		—			241
Other liabilities		6,369			6,479
Total liabilities		507,849			492,711
Stockholders’ equity:
Preferred stock		—			—
Class A common stock		139			139
Class B common stock		42			42
Additional paid-in capital		135,432			131,980
Accumulated other comprehensive income		2,447			4,750
Retained earnings		127,888			106,685
Treasury stock, at cost		(892	)		(892	)
Total stockholders’ equity		265,056			242,704
Total liabilities and stockholders’ equity	$	772,905		$	735,415

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