Donegal Group Inc. Announces Significantly Improved Fourth Quarter and Full Year 2012 Results

Donegal Group Inc. Announces Significantly Improved Fourth Quarter and Full
Year 2012 Results

MARIETTA, Pa., Feb. 22, 2013 (GLOBE NEWSWIRE) -- Donegal Group Inc.
(Nasdaq:DGICA) (Nasdaq:DGICB) today reported its financial results for the
fourth quarter and full year 2012. Highlights include:

  *Net income of $23.1 million for the full year 2012 and $6.2 million for
    the fourth quarter of 2012 represented significant improvements from the
    comparable periods in 2011
  *9.3% increase in full year net premiums written to $496.4 million,
    reflecting organic growth, rate increases and the continuing benefits of
    our past acquisitions
  *99.8% statutory combined ratio^1 for the full year 2012, improved
    significantly from 107.9% for the full year 2011
  *Operating income^1 of $5.1 million for the fourth quarter of 2012,
    primarily attributable to improved underwriting results, compared to an
    operating loss of $4.3 million for the prior-year fourth quarter
  *Book value per share of $15.63 at year-end 2012, compared to $15.01 at
    year-end 2011

                                                                         
          Three Months Ended December  Year Ended December 31,
           31,
          2012       2011       %      2012       2011       %
                                 Change                       Change
          (dollars in thousands, except per share amounts)

Income
Statement                                                
Data
Net
premiums   $121,824 $114,177 6.7%   $475,002 $431,470 10.1%
earned
Investment
income,    5,445     5,165     5.4   20,169    20,858    -3.3
net
Realized   1,709     5,134     -66.7 6,859     12,281    -44.1
gains
Total      131,904   127,215   3.7   514,983   475,018   8.4
revenues
Net income 6,220     (879)     NM^2   23,093    453       NM
(loss)
Operating
income     5,092     (4,267)   NM     18,565    (7,653)   NM
(loss)
                                                        
Per Share                                                
Data
Net income
(loss) –   $0.25    $(0.03)  NM    $0.91    $0.02    NM
Class A
(diluted)
Net income
(loss) –   0.22      (0.03)    NM    0.83      0.01      NM
Class B
Operating
income
(loss) –   0.20      (0.17)    NM    0.73      (0.30)    NM
Class A
(diluted)
Operating
income     0.18      (0.16)    NM    0.67      (0.28)    NM
(loss) –
Class B
Book value 15.63     15.01     4.1   15.63     15.01     4.1
                                                                         

^1The "Definitions of Non-GAAP and Operating Measures" section of this release
defines and reconciles data that the Company has not prepared in accordance
with U.S. generally accepted accounting principles ("GAAP").

^2Not meaningful.

Donald H. Nikolaus, President and Chief Executive Officer of Donegal Group
Inc., noted, "For each quarter of 2012, we reported substantially improved
results from the year-earlier quarter, and the dramatic improvement in our
full year 2012 results compared to 2011 reflected that consistent
progress.This trend reinforces our belief that we are on the correct path and
that the continuing implementation of our business strategies will allow us to
attain our long-term objectives of outperforming the property and casualty
insurance industry in terms of service, profitability and growth in book
value."

Mr. Nikolaus added, "Our top-line growth continued to represent a healthy
combination of premiums from strong organic growth in our commercial lines of
insurance, the benefits of the premium rate increases we have implemented over
the past several years and our Michigan Insurance Company ("MICO")
acquisition. We have achieved solid growth by writing new commercial lines
accounts across our operating regions, and we intend to focus even more
resources on commercial lines opportunities to leverage the steady firming of
commercial lines premiums in our regional markets."

Mr. Nikolaus noted, "We also expect our 2013 premium growth to benefit again
from our MICO acquisition.Similar to the reinsurance change we made for last
year, we amended MICO's quota-share reinsurance agreement to reduce the
percentage of premiums MICO cedes to external reinsurers to 30% effective
January 1, 2013, from 40% in 2012.We expect this reinsurance change will add
approximately $10.0 million to our net written premiums in 2013."

Mr. Nikolaus continued, "For the full year of 2012, substantial improvement in
underwriting profitability was the primary driver of our positive net and
operating income.We are clearly benefiting from continuing growth in our
premium revenue, less severe weather conditions and lower claims frequency."

"As the execution of our business plan and strategies resulted in earnings
growth during the past year, we are pleased that our return on equity also has
been trending upward.Improving returns will provide support for our
commitment to creating long-term value for our stockholders.We plan to
continue to pursue appropriate acquisition opportunities that will complement
the organic initiatives contributing to our performance in 2012.We fully
expect Donegal Group to generate increasing profits and higher book value over
time," Mr. Nikolaus concluded.

At December 31, 2012, Donegal Group had a book value per share of $15.63,
compared to $15.01 at December 31, 2011. The Company attributes the increase
in its book value per share to its positive operating results and unrealized
gains in its available-for-sale bond portfolio.The Company repurchased 42,700
shares of its Class A common stock during the fourth quarter of 2012 at an
average price of $13.50 per share.

Insurance Operations

Donegal Group is an insurance holding company whose insurance subsidiaries
offer personal and commercial property and casualty lines of insurance in four
Mid-Atlantic states (Delaware, Maryland, New York and Pennsylvania), three New
England states (Maine, New Hampshire and Vermont), seven Southeastern states
(Alabama, Georgia, North Carolina, South Carolina, Tennessee, Virginia and
West Virginia) and eight Midwestern states (Indiana, Iowa, Michigan, Nebraska,
Ohio, Oklahoma, South Dakota and Wisconsin). The insurance subsidiaries of
Donegal Group conduct business together with Donegal Mutual Insurance Company
as the Donegal Insurance Group.

                                                                            
            Three Months Ended December   Year Ended December 31,
             31,
            2012       2011       %       2012       2011       %
                                   Change                        Change
            (dollars in thousands)
                                                           
Net Premiums                                                
Written
Personal                                                    
lines:
Automobile   $45,559  $44,624  2.1%    $195,131 $188,072 3.8%
Homeowners   22,340    22,233    0.5   97,118    89,539    8.5
Other        4,027     3,805     5.8   16,072    14,986    7.2
Total
personal     71,926    70,662    1.8   308,321   292,597   5.4
lines
Commercial                                                  
lines:
Automobile   11,966    10,626    12.6  51,260    44,639    14.8
Workers'     14,326    10,997    30.3  65,397    51,910    26.0
compensation
Commercial   14,719    13,447    9.5   64,477    57,990    11.2
multi-peril
Other        1,760     1,971     (10.7) 6,992     6,915     1.1
Total
commercial   42,771    37,041    15.5  188,126   161,454   16.5
lines
Total net
premiums     $114,697 $107,703 6.5%    $496,447 $454,051 9.3%
written
                                                                            

The Company's net premiums written increased 6.5% for the fourth quarter of
2012 compared to the fourth quarter of 2011.This increase reflected 15.5%
growth in commercial lines writings and 1.8% growth in personal lines
writings.The $7.0 million growth in net premiums written for the fourth
quarter of 2012 compared to the fourth quarter of 2011 included:

  *$2.2 million, or 1.9% of total net premiums written, related to a change
    in MICO's quota-share reinsurance agreement that reduces the amount of
    business MICO ceded to external reinsurers in 2012. The Company acquired
    MICO in December 2010.
  *$4.5 million in commercial lines premiums, excluding the MICO quota-share
    reinsurance change, that the Company attributes primarily to premium rate
    increases and new commercial accounts the Company's insurance subsidiaries
    wrote throughout their operating regions.
  *$278,000 in personal lines premiums, excluding the MICO quota-share
    reinsurance change.The modest increase reflected the premium rate
    increases the Company implemented over the past four quarters, a planned
    de-emphasis on personal lines growth in selected geographies and a $1.6
    million increase in reinsurance costs.The increased reinsurance costs
    were related to higher reinsurance reinstatement premiums in the fourth
    quarter of 2012.

The Company's net premiums written increased 9.3% for the full year 2012. The
increase included $9.9 million related to a reduction in the percentage of
premiums MICO ceded to external reinsurers under its quota-share reinsurance
agreement in the full year 2012 compared to the full year 2011. Excluding the
quota-share reinsurance change, commercial lines premiums rose $21.3 million
and personal lines premiums rose $11.2 million for the full year 2012 compared
to the full year 2011.

Mr. Nikolaus noted, "An acceleration of organic premium growth in our
commercial lines of business during 2012 reflected our continuing strategic
efforts to grow that segment of our business. We also took aggressive steps
during 2012 to restore our personal lines profitability, and we are continuing
to implement rate increases and other underwriting actions where profitability
has not returned to targeted levels."

                                                                      
                                  Three Months Ended Year Ended
                                   December 31,       December 31,
                                  2012      2011     2012   2011
                                                         
Statutory Combined Ratios                                 
Personal Lines:                                           
Automobile                         120.4%    113.4%   108.1% 106.9%
Homeowners                         89.3     125.0   100.9 126.3
Other                              83.9     106.0   89.4  103.6
Total personal lines               108.9    116.7   105.0 112.6
Commercial Lines:                                         
Automobile                         76.5     118.1   94.5  105.4
Workers' compensation              113.5    109.8   98.1  96.0
Commercial multi-peril             87.5     93.7    90.5  103.0
Other                              -36.5    75.1    15.0  46.1
Total commercial lines             88.5     105.5   91.2  99.0
Total lines                        101.2%    112.8%   99.8%  107.9%
                                                         
GAAP Combined Ratios (Total Lines)                        
Loss ratio (non-weather)           68.2%     71.6%    63.2%  66.7%
Loss ratio (weather-related)       3.9      10.6    6.9   12.2
Expense ratio                      29.3     30.5    31.2  31.4
Dividend ratio                     0.3      0.5     0.3   0.3
Combined ratio                     101.7%    113.2%   101.6% 110.6%
                                                                      

Mr. Nikolaus commented, "Growth in premium revenue remained a significant
factor in the improvement in our results for the fourth quarter and full year
2012.We believe our continuing efforts to ensure rate adequacy and maintain
conservative underwriting standards will lead to further improvement in our
underwriting profitability over time."

Mr. Nikolaus added, "With respect to the full year of 2012, our statutory loss
ratio^1 improved to 70.3% from 78.6% in 2011. In addition to the benefits of
higher premium levels, lower weather-related losses were a significant driver
of the improvement in 2012.We also continued to experience improvement in the
underlying profitability of our commercial automobile and workers'
compensation lines of business due to a marked decrease in the number of
reported claims.The effect of large fire losses on our loss ratio was 4.9
percentage points, relatively unchanged from 2011. Prior-accident-year loss
reserve development added a modest 1.6 percentage points to our 2012 full-year
loss ratio."

For the fourth quarter of 2012, the Company's statutory loss ratio declined to
72.1%, compared to 82.2% for the fourth quarter of 2011.Weather-related
losses of $4.7 million for the fourth quarter of 2012, or 3.9 percentage
points of the Company's loss ratio, compared favorably to $12.1 million in
weather-related losses for the fourth quarter of 2011, or 10.6 percentage
points of the Company's loss ratio.Although the Company experienced losses
from the superstorm Sandy catastrophe event as that massive storm system
tracked through the Mid-Atlantic region in late October 2012, no other major
weather events affected the Company's results for the fourth quarter of
2012.The fourth quarter of 2012 impact of superstorm Sandy was a relatively
modest $3.1 million in net incurred losses and reinsurance reinstatement
premiums of $1.0 million. The Company's claims unit performed admirably in
providing excellent service to impacted policyholders, as over 95% of claims
that were received as of year-end 2012 have already been paid. 

The Company's results for the fourth quarter of 2012 also benefitted from a
lower number of reported claims in its casualty lines of business.Partially
offsetting the lower number of reported claims were four workers' compensation
claims the Company received in the fourth quarter of 2012 that totaled $2.4
million.Large fire losses were comparable to the level of large fire losses
the Company sustained during the fourth quarter of 2011.

Further, the Company incurred $1.9 million in development for losses occurring
in prior accident years for the fourth quarter of 2012.The loss reserve
development added 1.6 percentage points to the Company's loss ratio for the
fourth quarter of 2012.

The Company's statutory expense ratio^1 decreased modestly for both the fourth
quarter and full year of 2012.The declines in the expense ratios primarily
reflected the impact of increased net premium writings compared to the
prior-year periods.

Investment Operations

Donegal Group's investment strategy is to generate an appropriate amount of
after-tax income on its invested assets while minimizing credit risk through
investment in high-quality securities. As a result, the Company had invested
91.4% of its consolidated investment portfolio in diversified, highly rated
and marketable fixed-maturity securities at December 31, 2012.

                                                                         
                                  December 31, 2012 December 31, 2011
                                  Amount     %      Amount     %
                                  (dollars in thousands)
Fixed maturities, at carrying                                
value:
U.S. Treasury securities and
obligations of U.S. government     $72,311  9.0%   $61,978  7.9%
corporations and agencies
Obligations of states and          457,896   56.8  455,843   58.0
political subdivisions
Corporate securities               77,356    9.6   64,363    8.2
Residential mortgage-backed        129,047   16.0  122,904   15.7
securities
Total fixed maturities             736,610   91.4  705,088   89.8
Equity securities, at fair value   8,757     1.1   7,438     0.9
Investments in affiliates          37,236    4.6   32,322    4.1
Short-term investments, at cost    23,826    2.9   40,461    5.2
Total investments                  $806,429 100.0% $785,309 100.0%
                                                            
Average investment yield           2.5%             2.8%       
Average tax-equivalent investment  3.5%             3.8%       
yield
Average fixed-maturity duration    4.8             4.5       
(years)
                                                                         

A 5.4% increase in net investment income for the fourth quarter of 2012
primarily reflected lower investment expenses compared to the fourth quarter
of 2011 as well as higher average invested assets.However, due to lower
investment yields, net investment income declined for the full year in line
with the Company's expectations.Netrealized investment gains were $1.7
million for the fourth quarter of 2012, compared to $5.1 million for the
fourth quarter of 2011.The Company had no impairments in its investment
portfolio that it considered to be other than temporary during the full year
2012 or 2011.

Mr. Nikolaus, in commenting on the Company's investment operations, noted, "We
continue to manage our investment portfolio under the assumption that
prevailing interest rates will remain low for the next several years. We are
continuing to stay the course in terms of targeted asset classes and
investment strategy."

The Company owns 48.2% of the outstanding stock of Donegal Financial Services
Corporation ("DFSC"), which owns Union Community Bank FSB.The Company
accounts for its investment in DFSC using the equity method of accounting.The
Company's equity in the earnings of DFSC was $912,000 and $4.5 million for the
fourth quarter and full year 2012, respectively.Donegal Mutual Insurance
Company owns the remaining 51.8% of the outstanding stock of DFSC.

Definitions of Non-GAAP and Operating Measures

The Company prepares its consolidated financial statements on the basis of
GAAP.The Company's insurance subsidiaries also prepare financial statements
based on statutory accounting principles state insurance regulators prescribe
or permit ("SAP").In addition to using GAAP-based performance measurements,
the Company also utilizes certain non-GAAP financial measures that it believes
are valuable in managing its business and for comparison to the financial
results of its peers.These non-GAAP measures are operating income (loss) and
statutory combined ratio.

Operating income (loss) is a non-GAAP financial measure investors in insurance
companies commonly use. The Company defines operating income (loss) as net
income (loss) excluding after-tax net realized investment gains or losses.
Because the Company's calculation of operating income (loss) may differ from
similar measures other companies use, investors should exercise caution when
comparing the Company's measure of operating income (loss) to that of other
companies.

The following table provides a reconciliation of net income (loss) to
operating income (loss):

                                                                         
                  Three Months Ended December Year Ended December 31,
                   31,
                  2012         2011           2012        2011
                  (dollars in thousands, except per share amounts)
                                                       
Reconciliation of Net Income to Operating                 
Income (Loss)
Net income (loss)  $6,220     $(879)       $23,093   $453
Realized gains     (1,128)     (3,388)       (4,528)    (8,106)
(after tax)
Operating income   $5,092     $(4,267)     $18,565   $(7,653)
(loss)
                                                       
Per Share Reconciliation of Net Income to                 
Operating Income (Loss)
Net income (loss)
– Class A          $0.25      $(0.03)      $0.91     $0.02
(diluted)
Realized gains     (0.05)      (0.14)        (0.18)     (0.32)
(after tax)
Operating income   $0.20      $(0.17)      $0.73     $(0.30)
(loss) – Class A
                                                       
Net income (loss)  $0.22      $(0.03)      $0.83     $0.01
– Class B
Realized gains     (0.04)      (0.13)        (0.16)     (0.29)
(after tax)
Operating income   $0.18      $(0.16)      $0.67     $(0.28)
(loss) – Class B
                                                                         

Statutory combined ratio is a non-GAAP standard measurement of underwriting
profitability that is based upon amounts determined under SAP.The statutory
combined ratio is the sum of:

  *the statutory loss ratio, which is the ratio of calendar-year incurred
    losses and loss expenses to premiums earned;
  *the statutory expense ratio, which is the ratio of expenses incurred for
    net commissions, premium taxes and underwriting expenses to premiums
    written and
  *the statutory dividend ratio, which is the ratio of dividends to holders
    of workers' compensation policies to premiums earned.

The statutory combined ratio does not reflect investment income, federal
income taxes or other non-operating income or expense.A statutory combined
ratio of less than 100% generally indicates underwriting profitability.

Conference Call

The Company will hold a conference call and webcast on Friday, February 22,
2013, beginning at 11:00 A.M. Eastern Time. You may listen via the Internet by
accessing the webcast link in the Investors area of the Company's web site at
www.donegalgroup.com. A replay of the conference call will also be available
via the Company's web site.

About the Company

Donegal Group is an insurance holding company. The Company's Class A common
stock and Class B common stock trade on NASDAQ under the symbols DGICA and
DGICB, respectively. As an effective acquirer of small to medium-sized "main
street" property and casualty insurers, Donegal Group has grown profitably
since its inception in 1986. The Company continues to seek opportunities for
growth while striving to achieve its longstanding goal of outperforming the
industry in terms of service, profitability and growth in book value.

Safe Harbor

We base all statements contained in this release that are not historic facts
on our current expectations. These statements are forward-looking in nature
(as defined in the Private Securities Litigation Reform Act of 1995) and
involve a number of risks and uncertainties. Actual results could vary
materially. Factors that could cause actual results to vary materially
include: our ability to maintain profitable operations, the adequacy of the
loss and loss expense reserves of our insurance subsidiaries, business and
economic conditions in the areas in which we operate, interest rates,
competition from various insurance and other financial businesses, terrorism,
the availability and cost of reinsurance, adverse and catastrophic weather
events, legal and judicial developments, changes in regulatory requirements,
our ability to integrate and manage successfully the companies we may acquire
from time to time and other risks we describe from time to time in the
periodic reports we file with the Securities and Exchange Commission. You
should not place undue reliance on any such forward-looking statements. We
disclaim any obligation to update such statements or to announce publicly the
results of any revisions that we may make to any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or circumstances
after the date of such statements.

Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)
                                                              
                                                 Quarter Ended December 31,
                                                 2012          2011
                                                              
Net premiums earned                               $121,824    $114,177
Investment income, net of expenses                5,445        5,165
Net realized investment gains                     1,709        5,134
Lease income                                      225          250
Installment payment fees                          1,789        1,831
Equity in earnings of DFSC                        912          658
Total revenues                                    131,904      127,215
                                                              
Net losses and loss expenses                      87,772       93,816
Amortization of deferred acquisition costs        19,334       17,669
Other underwriting expenses                       16,297       17,098
Policyholder dividends                            542          711
Interest                                          574          596
Other expenses                                    362          531
Total expenses                                    124,881      130,421
                                                              
Income (loss) before income tax expense (benefit) 7,023        (3,206)
Income tax expense (benefit)                      803          (2,327)
                                                              
Net income (loss)                                 $6,220      $(879)
                                                              
Net income (loss) per common share:                            
Class A - basic and diluted                       $0.25       $(0.03)
Class B - basic and diluted                       $0.22       $(0.03)
                                                              
Supplementary Financial Analysts' Data                         
                                                              
Weighted-average number of shares outstanding:                  
Class A - basic                                   20,045,761   19,973,398
Class A - diluted                                 20,217,567   20,119,392
Class B - basic and diluted                       5,576,775    5,576,775
                                                              
Net written premiums                              $114,697    $107,703
                                                              
Book value per common share at end of period      $15.63      $15.01
                                                              
Annualized return on average equity               6.2%          -0.9%


Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)
                                                       
                                            Year Ended December 31,
                                            2012        2011
                                                       
Net premiums earned                          $475,002  $431,470
Investment income, net of expenses           20,169     20,858
Net realized investment gains                6,859      12,281
Lease income                                 954        958
Installment payment fees                     7,466      7,428
Equity in earnings of DFSC                   4,533      2,023
Total revenues                               514,983    475,018
                                                       
Net losses and loss expenses                 332,872    340,503
Amortization of deferred acquisition costs   74,314     68,571
Other underwriting expenses                  73,915     66,924
Policyholder dividends                       1,342      1,240
Interest                                     2,359      2,127
Other expenses                               2,323      2,392
Total expenses                               487,125    481,757
                                                       
Income (loss) before income tax (benefit)    27,858     (6,739)
Income tax expense (benefit)                 4,765      (7,192)
                                                       
Net income                                   $23,093   $453
                                                       
Net income per common share:                            
Class A - basic                              $0.92     $0.02
Class A - diluted                            $0.91     $0.02
Class B - basic and diluted                  $0.83     $0.01
                                                       
Supplementary Financial Analysts' Data                  
                                                       
Weighted-average number of shares outstanding:           
Class A - basic                              20,031,455 19,997,146
Class A - diluted                            20,305,558 20,033,645
Class B - basic and diluted                  5,576,775  5,576,775
                                                       
Net written premiums                         $496,447  $454,051
                                                       
Book value per common share at end of period $15.63    $15.01
                                                       
Return on average equity                     5.9%        0.1%


Donegal Group Inc.
Consolidated Balance Sheets
(in thousands)
                                                      
                                          December 31, December 31,
                                           2012         2011
                                          (unaudited)  
                                                      
ASSETS
Investments:                                           
Fixed maturities:                                      
Held to maturity, at amortized cost        $42,100    $58,490
Available for sale, at fair value          694,510     646,598
Equity securities, at fair value           8,757       7,438
Investments in affiliates                  37,236      32,322
Short-term investments, at cost            23,826      40,461
Total investments                          806,429     785,309
Cash                                       19,801      13,245
Premiums receivable                        117,196     104,715
Reinsurance receivable                     215,893     209,824
Deferred policy acquisition costs          40,122      36,425
Prepaid reinsurance premiums               111,156     106,450
Other assets                               26,292      34,825
Total assets                               $1,336,889 $1,290,793
                                                      
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:                                           
Losses and loss expenses                   $458,827   $442,408
Unearned premiums                          363,088     336,937
Accrued expenses                           17,141      20,957
Borrowings under line of credit            52,000      54,500
Subordinated debentures                    20,465      20,465
Other liabilities                          25,334      32,075
Total liabilities                          936,855     907,342
Stockholders' equity:                                  
Class A common stock                       209         208
Class B common stock                       56          56
Additional paid-in capital                 176,417     170,837
Accumulated other comprehensive income     26,395      23,533
Retained earnings                          209,670     199,605
Treasury stock, at cost                    (12,713)    (10,788)
Total stockholders' equity                 400,034     383,451
Total liabilities and stockholders' equity $1,336,889 $1,290,793

CONTACT: For Further Information:
         Jeffrey D. Miller, Senior Vice President
         & Chief Financial Officer
         Phone: (717) 426-1931
         E-mail: investors@donegalgroup.com
 
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