Donegal (DGICA) 8-K Donegal Group Inc. Announces Fourth Quarter and Full Year Earnings

DONEGAL GROUP INC. ANNOUNCES FOURTH QUARTER AND FULL YEAR EARNINGS

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

For Immediate Release

     MARIETTA, Pennsylvania, February 23, 2006 – Donegal Group Inc. (Nasdaq: DGICA and DGICB) today reported net income for the fourth quarter and year ended December 31, 2005.

     Net income for the fourth quarter of 2005 increased 36.4% to $9,851,977, or $.52 per share on a diluted basis, compared to $7,224,890, or $.40 per share on a diluted basis, for the fourth quarter of 2004. The Company’s fourth quarter earnings continued to reflect the solid revenue growth and excellent underwriting results achieved throughout 2005. Revenues for the fourth quarter of 2005 were $81,709,601, an increase of 8.3% over a year earlier, with premiums earned of $74,713,365, a 7.2% increase over the fourth quarter of 2004.

     Net investment income grew 20.9% to $5,159,030 for the fourth quarter of 2005, compared to $4,266,222 for the fourth quarter of 2004. Tax-exempt interest income increased as the Company continued to shift its invested asset mix from short-term investments to tax-exempt municipal bonds. This strategic shift resulted in an increase in the Company’s average pre-tax investment yield to 3.8% in the fourth quarter of 2005, compared to 3.4% in the fourth quarter of 2004, and further allowed the Company to maintain a comparable effective tax rate in both periods notwithstanding the substantial increase in income before income tax expense in the fourth quarter of 2005 compared to the comparable period in 2004.

     The Company’s combined ratio improved to 89.4% for the fourth quarter of 2005, compared to 92.7% for the fourth quarter of 2004. The Company’s loss ratio for the fourth quarter of 2005 was 60.4%, slightly higher than the loss ratio of 59.6% posted for the fourth quarter of 2004. The Company’s expense ratio decreased to 28.4% for the fourth quarter of 2005, compared to 32.5% for the fourth quarter of 2004. The reduction in the expense ratio for the fourth quarter of 2005 reflected lower levels of incentive compensation due to the slight increase in the loss ratio during the quarter and a reduction in estimated guaranty fund assessments.

     Net income for the year ended December 31, 2005 increased 41.2% to $36,949,497, or $1.98 per share on a diluted basis, compared to $26,168,599, or $1.44 per share on a diluted basis, before extraordinary item for the year ended December 31, 2004. Net income for the year 2004 was $31,614,269, or $1.74 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.

     “We are pleased that our emphasis on quality growth and underwriting discipline led to a continuation of excellent operating results in the fourth quarter, and we are especially pleased to report a record level of profitability in 2005 for the fourth consecutive year,” stated Donald H. Nikolaus, President and Chief Executive Officer of Donegal Group Inc.

     The Company’s combined ratio for the full year 2005 was 89.5%, compared to a combined ratio of 93.1% for 2004. The Company’s loss ratio for the full year 2005 improved to 56.9%, compared to 61.7% for 2004.

     The steady revenue growth and excellent operating results throughout 2005 contributed to an increase in the Company’s book value to $15.07 per common share at December 31, 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 effected in the form of a 33 1/3% stock dividend on March 28, 2005.

     The Company will hold a conference call and webcast on Thursday, February 23, 2006, beginning at 11:00 A.M. Eastern Time. You may participate in the conference call by calling 1-866-700-0161 (Passcode 58064750) or listen via Internet by accessing the “Earnings Release Webcast” link in the Investor Relations area of the Company’s web site atwww.donegalgroup.com. An instant replay of the conference call will be available until March 6, 2006 by calling 1-888-286-8010 (Passcode 27386733).

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

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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 December 31
	2005		2004*
Net premiums earned	$	74,713,365	$	69,682,332
Investment income, net of investment expenses		5,159,030		4,266,222
Net realized investment gains		567,561		373,855
Total revenues		81,709,601		75,480,902
Net income	$	9,851,977	$	7,224,890
Net income per common share:
Basic	$	0.54	$	0.41
Diluted	$	0.52	$	0.40

	Year Ended December 31
	2005		2004*
Net premiums earned	$	294,498,023	$	265,838,594
Investment income, net of investment expenses		18,471,963		15,906,728
Net realized investment gains		1,802,809		1,466,220
Total revenues		319,847,194		287,788,638
Income before extraordinary item	$	36,949,497	$	26,168,599
Net income after extraordinary item	$	36,949,497	$	31,614,269
Income per common share before extraordinary item:
Basic	$	2.05	$	1.49
Diluted	$	1.98	$	1.44
Net income per common share after extraordinary item:
Basic	$	2.05	$	1.80
Diluted	$	1.98	$	1.74

*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 December 31
	2005		2004*
Net premiums earned	$	74,713	$	69,682
Investment income, net of investment expenses		5,159		4,266
Net realized investment gains		568		374
Lease income		243		228
Installment payment fees		1,027		931
Total revenues		81,710		75,481
Net losses and loss expenses		45,125		41,524
Amortization of deferred policy acquisition costs		11,943		11,186
Other underwriting expenses		9,249		11,446
Other expenses		496		237
Policyholder dividends		440		435
Interest expense		636		499
Total expenses		67,889		65,327
Income before income tax expense		13,821		10,154
Income tax expense		3,969		2,929
Net income	$	9,852	$	7,225
Net income per common share:
Basic	$	0.54	$	0.41
Diluted	$	0.52	$	0.40
Supplementary Financial Analysts’ Data
Weighted average number of shares outstanding:
Basic		18,258,424		17,836,735
Diluted		18,815,397		18,335,917
Net written premiums	$	70,172	$	70,012
Book value per common share	$	15.07	$	13.53

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

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

	Year Ended December 31
	2005		2004*
Net premiums earned	$	294,498	$	265,838
Investment income, net of investment expenses		18,472		15,907
Net realized investment gains		1,803		1,466
Lease income		951		890
Installment payment fees		4,123		3,687
Total revenues		319,847		287,788
Net losses and loss expenses		167,542		164,141
Amortization of deferred policy acquisition costs		47,234		39,434
Other underwriting expenses		47,163		42,544
Other expenses		1,676		1,700
Policyholder dividends		1,621		1,301
Interest expense		2,266		1,614
Total expenses		267,502		250,734
Income before income tax expense and extraordinary item		52,345		37,054
Income tax expense		15,396		10,885
Income before extraordinary item		36,949		26,169
Extraordinary item		—		5,445
Net income	$	36,949	$	31,614
Income per common share before extraordinary item:
Basic	$	2.05	$	1.49
Diluted	$	1.98	$	1.44
Net income per common share after extraordinary item:
Basic	$	2.05	$	1.80
Diluted	$	1.98	$	1.74

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

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Supplementary Financial Analysts’ Data

	Year Ended December 31
	2005		2004*
Weighted average number of shares outstanding:
Basic		18,044,049		17,545,913
Diluted		18,625,185		18,180,229
Net written premiums	$	302,544	$	283,282
Book value per common share	$	15.07	$	13.53

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

Consolidated Balance Sheets
(unaudited; in thousands)

	December 31,
	2005		2004
ASSETS:
Investments:
Fixed maturities:
Held to maturity, at amortized cost	$	180,182	$	182,574
Available for sale, at fair value		295,097		226,757
Equity securities, at fair value		33,371		33,505
Investments in affiliates		8,442		8,865
Short-term investments, at cost, which approximates fair value		30,654		47,368
Total investments		547,746		499,069
Cash		3,811		7,350
Premiums receivable		47,124		44,267
Reinsurance receivable		94,137		98,479
Accrued investment income		5,521		4,961
Deferred policy acquisition costs		23,477		22,258
Prepaid reinsurance premiums		40,063		35,907
Property and equipment, net		5,234		5,509
Deferred tax asset, net		11,533		10,922
Other assets		2,776		6,693
Total assets	$	781,422	$	735,415

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

	December 31,
	2005			2004
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Losses and loss expenses	$	265,730		$	267,190
Unearned premiums		186,660			174,458
Accrued expenses		12,706			13,414
Subordinated debentures		30,929			30,929
Due to affiliate		728			241
Other liabilities		6,773			6,479
Total liabilities		503,526			492,711
Stockholders’ equity:
Preferred stock		—			—
Class A common stock		144			139
Class B common stock		42			42
Additional paid-in capital		141,933			131,980
Accumulated other comprehensive income		2,532			4,750
Retained earnings		134,137			106,685
Treasury stock, at cost		(892	)		(892	)
Total stockholders’ equity		277,896			242,704
Total liabilities and stockholders’ equity	$	781,422		$	735,415

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