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

DONEGAL GROUP INC. ANNOUNCES SECOND QUARTER EARNINGS

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

For Immediate Release

     MARIETTA, Pennsylvania, July 21, 2006 — Donegal Group Inc. (Nasdaq: DGICA and DGICB) today reported that its net income for the second quarter ended June 30, 2006 increased 14.8% to $10,220,583, or $.40 per share on a diluted basis, compared to $8,903,275, or $.36 per share on a diluted basis, for the second quarter of 2005. Net income for the second quarter of 2006 represented record earnings for any quarterly period in the Company’s history.

     The Company’s second quarter net income reflected a continuation of excellent underwriting results in all lines of business. These results were achieved in spite of an increase in weather-related claims of approximately $1.0 million in the second quarter of 2006 compared to the second quarter of 2005, primarily related to the impact of several significant weather events in the Midwest and Mid-Atlantic regions. Revenues for the second quarter of 2006 were $81,860,487, an increase of 3.0% over the year-earlier period, with net premiums earned of $75,061,105, a 2.2% increase over the second quarter of 2005.

     The Company’s combined ratio reached a record quarterly low of 88.0% for the second quarter of 2006, comparing favorably to the 89.6% reported for the second quarter of 2005. The Company’s loss ratio for the second quarter of 2006 was 54.3%, relatively unchanged from the record low loss ratio of 54.2% posted for the second quarter of 2005. The Company’s expense ratio decreased to 33.5% for the second quarter of 2006, compared to 35.0% for the second quarter of 2005, reflecting savings from expense controls initiated in 2005 and a decrease in estimated guaranty fund assessments.

     Net investment income increased to $5,054,284 for the second quarter of 2006, an increase of 16.0% over the $4,356,628 reported for the second quarter of 2005. Continuing improvements in the short-term interest rate environment contributed to an increase in the Company’s average pre-tax investment yield to 3.6% in the second quarter of 2006, compared to 3.4% in the second quarter of 2005. The Company’s shift in asset mix to tax-exempt municipal bonds in 2005 allowed the Company to lower its effective tax rate in the second quarter of 2006 to 29.3%, compared to 29.9% in the second quarter

of 2005, notwithstanding an increase in income before income tax expense in the second quarter of 2006.

     Net income for the six months ended June 30, 2006 was $19,350,770, or $.76 per share on a diluted basis, an increase of 11.7% over the $17,320,363, or $.71 per share on a diluted basis, reported for the six months ended June 30, 2005.

     The Company’s combined ratio for the first six months of 2006 was 89.2%, compared to the combined ratio of 90.1% for the comparable period in 2005. The Company’s loss ratio was 56.2% for the first six months of 2006, virtually unchanged from the 56.0% reported for the first six months of 2005.

     “We are pleased to report a record level of earnings in the second quarter, and attribute our favorable results in the first six months of 2006 to our ongoing focus on underwriting discipline in increasingly challenging market conditions. We remain committed to the pursuit of profitable premium growth, whether organic or through various acquisition methods available to us,” stated Donald H. Nikolaus, President and Chief Executive Officer of Donegal Group Inc.

     The operating results for the second quarter of 2006 contributed to an increase in the Company’s book value to $11.85 per common share at June 30, 2006, representing an increase of 9.9% over the Company’s book value of $10.78 per common share at June 30, 2005.

     The Company’s board of directors yesterday approved a quarterly cash dividend payable August 15, 2006 of $.0825 per share of Class A common stock and $.07 per share of Class B common stock to stockholders of record as of the close of business on August 1, 2006.

     All 2005 share and per share information has been restated to reflect the effect of a 4-for-3 stock split effected in the form of a 33 1/3% stock dividend on April 26, 2006.

     The Company will hold a conference call and webcast on Friday, July 21, 2006, beginning at 11:00 A.M. Eastern Time. You may participate in the conference call by calling 1-800-510-0178 (Passcode 21473844) 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 July 28, 2006 by calling 1-888-286-8010 (Passcode 84963058).

     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).

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     All statements contained in this press release that are not historic facts are based on current expectations. Such statements are forward-looking in nature (as defined in the Private Securities Litigation Reform Act of 1995) and necessarily involve 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, the availability and cost of reinsurance, 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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Donegal Group Inc.
Financial Highlights

	Three Months Ended June 30
	2006		2005*
Net premiums earned	$	75,061,105	$	73,438,090
Investment income, net of investment expenses		5,054,284		4,356,628
Net realized investment gains		407,248		420,061
Total revenues		81,860,487		79,492,080
Net income	$	10,220,583	$	8,903,275
Net income per common share:
Basic	$	0.41	$	0.37
Diluted	$	0.40	$	0.36

	Six Months Ended June 30
	2006		2005*
Net premiums earned	$	149,574,954	$	145,200,613
Investment income, net of investment expenses		10,038,812		8,764,096
Net realized investment gains		882,047		1,110,352
Total revenues		163,143,382		157,571,138
Net income	$	19,350,770	$	17,320,363
Net income per common share:
Basic	$	0.78	$	0.72
Diluted	$	0.76	$	0.71

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

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Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)

	Quarter Ended June 30
	2006		2005*
Net premiums earned	$	75,061	$	73,438
Investment income, net of investment expenses		5,054		4,357
Net realized investment gains		407		420
Lease income		242		236
Installment payment fees		1,096		1,041
Total revenues		81,860		79,492
Net losses and loss expenses		40,784		39,808
Amortization of deferred policy acquisition costs		11,982		11,736
Other underwriting expenses		13,115		13,991
Other expenses		671		460
Policyholder dividends		150		256
Interest		692		543
Total expenses		67,394		66,794
Income before income tax expense		14,466		12,698
Income tax expense		4,245		3,795
Net income	$	10,221	$	8,903
Net income per common share:
Basic	$	0.41	$	0.37
Diluted	$	0.40	$	0.36
Supplementary Financial Analysts’ Data
Weighted average number of shares outstanding:
Basic		24,902,458		23,966,427
Diluted		25,550,751		24,715,696
Net written premiums	$	80,091	$	80,309
Book value per common share at end of period	$	11.85	$	10.78

*Share and per share information restated for 4-for-3 stock split

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Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)

	Six Months Ended June 30
	2006		2005*
Net premiums earned	$	149,575	$	145,201
Investment income, net of investment expenses		10,039		8,764
Net realized investment gains		882		1,110
Lease income		484		465
Installment payment fees		2,163		2,031
Total revenues		163,143		157,571
Net losses and loss expenses		84,072		81,346
Amortization of deferred policy acquisition costs		23,868		23,222
Other underwriting expenses		25,017		25,645
Other expenses		1,064		890
Policyholder dividends		522		608
Interest		1,336		1,041
Total expenses		135,879		132,752
Income before income tax expense		27,264		24,819
Income tax expense		7,913		7,499
Net income	$	19,351	$	17,320
Net income per common share:
Basic	$	0.78	$	0.72
Diluted	$	0.76	$	0.71
Supplementary Financial Analysts’ Data
Weighted average number of shares outstanding:
Basic		24,772,961		23,947,927
Diluted		25,443,092		24,673,537
Net written premiums	$	156,269	$	154,807
Book value per common share at end of period	$	11.85	$	10.78

*Share and per share information restated for 4-for-3 stock split

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Donegal Group Inc.
Consolidated Balance Sheets
(unaudited; in thousands)

	June 30,		December 31,
	2006		2005*
ASSETS:
Investments:
Fixed maturities:
Held to maturity, at amortized cost	$	177,171	$	180,182
Available for sale, at fair value		300,273		295,097
Equity securities, at fair value		41,356		33,371
Investments in affiliates		7,998		8,442
Short-term investments, at cost, which approximates fair value		34,456		30,654
Total investments		561,254		547,746
Cash		3,152		3,811
Premiums receivable		49,337		47,124
Reinsurance receivable		104,269		94,137
Accrued investment income		5,353		5,521
Deferred policy acquisition costs		24,378		23,477
Prepaid reinsurance premiums		43,798		40,063
Property and equipment, net		5,184		5,234
Deferred tax asset, net		13,435		11,533
Due from affiliate		1,834		—
Other assets		6,692		2,776
Total assets	$	818,686	$	781,422

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Donegal Group Inc.
Consolidated Balance Sheets (continued)
(unaudited; in thousands)

	June 30,			December 31,
	2006			2005*
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Losses and loss expenses	$	272,823		$	265,730
Unearned premiums		197,089			186,660
Accrued expenses		10,268			12,706
Subordinated debentures		30,929			30,929
Due to affiliate		—			728
Other liabilities		10,209			6,773
Total liabilities		521,318			503,526
Stockholders’ equity:
Preferred stock		—			—
Class A common stock		197			192
Class B common stock		56			56
Additional paid-in capital		147,868			141,933
Accumulated other comprehensive income (loss)		(1,254	)		2,532
Retained earnings		151,393			134,075
Treasury stock, at cost		(892	)		(892	)
Total stockholders’ equity		297,368			277,896
Total liabilities and stockholders’ equity	$	818,686		$	781,422

*Capital accounts restated for 4-for-3 stock split

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