Donegal Group Inc. Announces Second Quarter 2013 Results

Donegal Group Inc. Announces Second Quarter 2013 Results

MARIETTA, Pa., July 26, 2013 (GLOBE NEWSWIRE) -- Donegal Group Inc.
(Nasdaq:DGICA) (Nasdaq:DGICB) today reported its financial results for the
second quarter and first half of 2013. Highlights include:

  *Net income of $2.6 million for the second quarter of 2013, compared to
    $2.0 million for second quarter of 2012, with the increase primarily
    attributable to improved underwriting results
  *7.2% increase in net premiums written to $140.6 million, reflecting
    continuing organic growth in commercial lines and the impact of premium
    rate increases
  *100.6% statutory combined ratio^1 for the second quarter of 2013, compared
    to 103.5% for the second quarter of 2012
  *Operating income^1 of $1.8 million for the second quarter of 2013,
    compared to operating income of $1.0 million for the second quarter of
    2012
  *Book value per share of $14.84 at June 30, 2013, compared to $15.63 at
    year-end 2012, with the decrease primarily attributable to a reduction in
    unrealized gains on available-for-sale bonds

                Three Months Ended June 30,    Six Months Ended June 30,
                2013       2012       % Change 2013       2012       % Change
                (dollars in thousands, except per share amounts)
                                                                
Income Statement                                                 
Data
Net premiums     $ 126,963 $ 117,569 8.0%     $ 251,665 $ 232,261 8.4%
earned
Investment       4,671     4,919     -5.0    9,486     10,009    -5.2
income, net
Realized gains   1,254     1,528     -17.9   2,595     3,838     -32.4
Total revenues   135,508   127,299   6.4     269,380   252,647   6.6
Net income      2,629     2,023     30.0    9,104     10,033    -9.3
Operating        1,801     1,030     74.9    7,392     7,538     -1.9
income
                                                                
Per Share Data                                                   
Net income–
Class A          $0.10    $0.08    25.0%    $0.35    $0.39    -10.3%
(diluted)
Net income–     0.09      0.07      28.6    0.32      0.36      -11.1
Class B
Operating
income– Class A 0.07      0.04      75.0    0.28      0.30      -6.7
(diluted)
Operating        0.07      0.04      75.0    0.26      0.27      -3.7
income– Class B
Book value       14.84     15.36     -3.4    14.84     15.36     -3.4

^1The "Definitions of Non-GAAP and Operating Measures" section of this release
defines and reconciles data that the Company has prepared on an accounting
basis other than U.S. generally accepted accounting principles ("GAAP").

Donald H. Nikolaus, the President and Chief Executive Officer of Donegal Group
Inc., noted, "Our achievement of overall growth and improved profitability for
our insurance operations in 2013 illustrates the success of several of our key
initiatives. In particular, we continue to see strong commercial lines
premium growth, with commercial lines writings rising to 42.3% of our total
writings for the first half of this year. Commercial lines renewal premium
increases remain in the 5-10% range on average, while new business growth
within this sector continues to be strong. We remain focused on increasing our
share of business within our existing independent agencies and expanding the
reach of our commercial products in regions where we have acquired companies
that historically offered primarily personal lines of insurance. Because the
risk characteristics of the commercial lines business we are adding through
these initiatives remain similar to our historic writings, we believe our
expanded commercial book of business will be similarly profitable in the long
run."

"We are seeing measurable progress toward our targeted profitability levels in
our personal lines insurance.Our results have benefited from rate increases
and our continuing underwriting initiatives. We believe these actions will
allow us to continue offering quality insurance products that meet the needs
of our policyholders, while providing a sufficient return for our
stockholders," Mr. Nikolaus noted.

Mr. Nikolaus continued, "Over the long term, Donegal Group has generated
strong operating and financial results.We believe our strategy will allow us
to attain our objectives of outperforming the property and casualty industry
in terms of service, profitability and growth in book value.

"We remain confident in our ability to achieve our established corporate goals
of increasing profits, building our financial strength and enhancing the value
of our stockholders' investment," Mr. Nikolaus concluded.

At June 30, 2013, book value per share for Donegal Group was $14.84, compared
to $15.63 at December 31, 2012, and $15.36 at June 30, 2012. The lower book
value per share at June 30, 2013 reflects a reduction in net unrealized gains
in the fair value of the Company's available-for-sale fixed-income securities
portfolio due to increased market interest rates.

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 June 30,    Six Months Ended June 30,
                2013       2012       % Change 2013       2012       % Change
                (dollars in thousands)                             
                                                                
Net Premiums                                                     
Written
Personal lines:                                                  
Automobile       $50,242  $50,211  0.1%     $98,864  $98,221  0.7%
Homeowners       29,089    26,996    7.8    50,944    47,228    7.9
Other            4,263     4,187     1.8    7,633     7,826     (2.5)
Total personal   83,594    81,394    2.7    157,441   153,275   2.7
lines
Commercial                                                       
lines:
Automobile       15,726    13,950    12.7   31,189    26,810    16.3
Workers'         19,707    16,330    20.7   42,918    34,983    22.7
compensation
Commercial       19,963    17,450    14.4   39,657    33,875    17.1
multi-peril
Other            1,575     2,011     (21.7)  1,826     3,511     (48.0)
Total commercial 56,971    49,741    14.5   115,590   99,179    16.5
lines
Total net        $ 140,565 $ 131,135 7.2%     $ 273,031 $ 252,454 8.2%
premiums written

The Company's net premiums written increased 7.2% for the second quarter of
2013 compared to the second quarter of 2012.This increase represented the
combination of 14.5% growth in commercial lines writings and 2.7% growth in
personal lines writings.The $9.4 million growth in net premiums written for
the second quarter of 2013 compared to the second quarter of 2012 included:

  *$2.6 million, or 2.0% of total net premiums written, related to a change
    in the Michigan Insurance Company ("MICO") quota-share reinsurance
    agreement that continues to reduce the amount of business MICO cedes to
    external reinsurers. The Company acquired MICO in December 2010.
  *$5.8 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
    have written throughout their operating regions.
  *$1.0 million in personal lines premiums, excluding the MICO quota-share
    reinsurance change.The modest increase reflects the premium rate
    increases and underwriting initiatives the Company has implemented over
    the past four quarters.

The Company's net premiums written increased 8.2% in the first half of 2013.
The increase included $5.4 million related to a reduction in the percentage of
the premiums MICO ceded under its quota-share reinsurance agreement with
external reinsurers in the first half of 2013 compared to 2012.Excluding the
quota-share reinsurance change, commercial lines premiums rose $13.3 million
and personal lines premiums rose $1.9 million for the first six months of 2013
compared to the first six months of 2012.

                                  Three Months Ended Six Months Ended
                                  June 30,           June 30,
                                  2013      2012     2013     2012
                                                           
Statutory Combined Ratios                                   
Personal Lines:                                             
Automobile                         100.2%    105.8%   102.2%   106.3%
Homeowners                         101.6    116.3   95.3    105.9
Other                              88.3     89.6    85.6    83.5
Total personal lines               100.2    108.4   99.2    105.0
Commercial Lines:                                           
Automobile                         99.8     108.6   101.2   100.9
Workers' compensation              108.1    89.8    104.9   91.8
Commercial multi-peril             103.1    95.4    100.8   91.9
Other                              NM^2      41.2    NM^2     35.6
Total commercial lines             101.4    95.1    99.9    92.0
Total lines                        100.6%    103.5%   99.3%    100.2%
                                                           
GAAP Combined Ratios (Total Lines)                          
Loss ratio (non-weather)           63.1%     63.8%    63.6%    63.1%
Loss ratio (weather-related)       7.4      9.6     6.0     7.1
Expense ratio                      32.3     31.9    31.5    32.1
Dividend ratio                     0.3      0.1     0.3     0.2
Combined ratio                     103.1%    105.4%   101.4%   102.5%
                                                                         
^2Not meaningful.                                           

Mr. Nikolaus commented, "Compared to the prior-year quarter, we benefited from
less severe weather in our marketing regions during the second quarter of
2013.In addition, the higher premium rates we have been able to implement
continue to contribute to our improved results in selected lines of business,
particularly personal automobile and homeowners.We are pleased that these
business lines are trending toward our long-established profitability
objectives. We expect to continue to request further rate increases in these
business lines as market conditions permit.

"Results for our commercial lines of business have been somewhat variable in
recent quarters. In part, this variability reflects changes we made in 2013 to
our reinsurance agreements to increase the losses we retain in exchange for
lower reinsurance premiums. In addition, we have experienced an increased
number of severe bodily injury and other liability claims that has resulted in
accelerated loss ratios in our workers' compensation and commercial
multi-peril lines of business.We are monitoring this uptick as part of our
ongoing underwriting review process and have not identified any concerns with
respect to the integrity of our underwriting controls or the quality of our
book of business," Mr. Nikolaus noted.

For the second quarter of 2013, the Company's statutory loss ratio declined to
70.8%, compared to 74.1% for the second quarter of 2012. For the first six
months of 2013, the Company's statutory loss ratio declined to 69.9% from
70.3%. Large fire losses totaling $5.7 million in the second quarter of 2013,
or 4.4 percentage points of the Company's loss ratio, declined from the $6.9
million, or 5.9 percentage points of the Company's loss ratio, that the
Company experienced during the second quarter of 2012.

Weather-related losses of $9.4 million for the second quarter of 2013,
representing 7.4 percentage points of the Company's loss ratio, compared
favorably to $11.3 million in weather-related losses for the second quarter of
2012, or 9.6 percentage points of the Company's loss ratio.Development of
reserves for losses incurred in prior accident years added 3.7 percentage
points to the Company's loss ratios for the second quarter of 2013, compared
to 1.9 percentage points for the second quarter of 2012.

The Company's statutory expense ratio^1 of 29.5% for the second quarter of
2013 was comparable to the 29.3% statutory expense ratio for the second
quarter of 2012.

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
92.4% of its consolidated investment portfolio in diversified, highly rated
and marketable fixed-maturity securities at June 30, 2013.

                                          June 30, 2013     December 31, 2012
                                          Amount     %      Amount     %
                                          (dollars in thousands)
Fixed maturities, at carrying value:                                 
U.S. Treasury securities and obligations
of U.S. government corporations and        $85,534  11.1%  $72,311  9.0%
agencies
Obligations of states and political        440,317   57.0  457,896   56.8
subdivisions
Corporate securities                       66,911    8.7   77,356    9.6
Residential mortgage-backed securities     120,647   15.6  129,047   16.0
Total fixed maturities                     713,409   92.4  736,610   91.4
Equity securities, at fair value           8,906     1.2   8,757     1.1
Investments in affiliates                  35,667    4.6   37,236    4.6
Short-term investments, at cost            14,913    1.8   23,826    2.9
Total investments                          $ 772,895 100.0% $ 806,429 100.0%
                                                                    
Average investment yield                   2.4%             2.5%       
Average tax-equivalent investment yield    3.4%             3.5%       
Average fixed-maturity duration (years)    5.6             4.8       

A 5.0% decrease in net investment income for the second quarter of 2013
primarily reflected the impact of the lower average investment yield on the
Company's fixed-maturity securities portfolio compared to the second quarter
of 2012.Netrealized investment gains were $1.3 million for the second
quarter of 2013, compared to $1.5 million for the second quarter of 2012.The
Company had no impairments in its investment portfolio that it considered to
be other than temporary during the second quarter of 2013 or 2012.

Jeffrey D. Miller, Senior Vice President and Chief Financial Officer of
Donegal Group Inc., in commenting on the Company's investment operations,
noted, "Despite the impact of higher rates on the reported value of our
fixed-maturity securities, Donegal Group – and the entire insurance industry
–stands to benefit from rising interest rates. We currently intend to retain a
high percentage of our bond holdings until their stated maturity.As a result,
modest swings in the reported market value of our investment portfolio do not
disconcert us. Instead, we look forward to opportunities to invest new money
at improving rates as they become available for securities that meet our
investment parameters."

The Company owns 48.2% of the outstanding stock of Donegal Financial Services
Corporation ("DFSC"), which owns all of the outstanding capital stock of Union
Community Bank.The Company accounts for its investment in DFSC using the
equity method of accounting.The Company's equity in the earnings of DFSC was
$675,568 for the second quarter of 2013, compared to $1.1 million for the
second quarter of 2012.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
provide value 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 to operating
income:

                      Three Months Ended June 30, Six Months Ended June 30,
                      2013      2012     % Change 2013     2012      % Change
                      (dollars in thousands, except per share amounts)
                                                                
Reconciliation of Net
Income to Operating                                              
Income
Net income             $2,629  $2,023 30.0%    $9,104 $10,033 -9.3%
Realized gains (after  (828)    (993)   -16.6   (1,712) (2,495)  -31.4
tax)
Operating income       $1,801  $1,030 74.9%    $7,392 $7,538  -1.9%
                                                                
Per Share
Reconciliation of Net                                            
Income to Operating
Income
Net income – Class A   $0.10   $0.08  25.0%    $0.35  $0.39   -10.3%
(diluted)
Realized gains (after  (0.03)   (0.04)  -25.0   (0.07)  (0.09)   -22.2
tax)
Operating income –     $0.07   $0.04  75.0%    $0.28  $0.30   -6.7%
Class A
                                                                
Net income – Class B   $0.09   $0.07  28.6%    $0.32  $0.36   -11.1%
Realized gains (after  (0.02)   (0.03)  -33.3   (0.06)  (0.09)   -33.3
tax)
Operating income–     $0.07   $0.04  75.0%    $0.26  $0.27   -3.7%
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 and Webcast

The Company will hold a conference call and webcast on Friday, July 26, 2013,
beginning at 11:00 A.M. Eastern Time. You may listen via the Internet by
accessing the webcast link on the Company's web site at
http://investors.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 the NASDAQ Global Select Market 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 formation 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.

As Forbes reported, Donegal Group Inc. was named to a list of the 100 Most
Trustworthy Companies for 2013 and 2012, ranking the company among firms that
have consistently demonstrated transparent and conservative accounting
practices and solid corporate governance and management.A reprint of the
Forbes article is available as a "Featured Report" on the Company's web site.

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 June 30,
                                              2013        2012
                                                         
Net premiums earned                            $126,963  $117,569
Investment income, net of expenses             4,671      4,919
Net realized investment gains                  1,254      1,528
Lease income                                   210        245
Installment payment fees                       1,734      1,928
Equity in earnings of DFSC                     676        1,110
Total revenues                                 135,508    127,299
                                                         
Net losses and loss expenses                   89,519     86,385
Amortization of deferred acquisition costs     19,910     18,235
Other underwriting expenses                    21,129     19,240
Policyholder dividends                         341        109
Interest                                       334        631
Other expenses                                 1,413      584
Total expenses                                 132,646    125,184
                                                         
Income before income tax expense               2,862      2,115
Income tax expense                             233        92
                                                         
Net income                                    $2,629    $2,023
                                                         
Net income per common share:                              
Class A - basic                               $0.10     $0.08
Class A - diluted                              $0.10     $0.08
Class B - basic and diluted                    $0.09     $0.07
                                                         
Supplementary Financial Analysts' Data                    
                                                         
Weighted-average number of shares outstanding:            
Class A - basic                                21,202,571 20,041,887
Class A - diluted                              21,603,880 20,339,388
Class B - basic and diluted                    5,576,775  5,576,775
                                                         
Net written premiums                           $140,565  $131,135
                                                         
Book value per common share at end of period   $14.84    $15.36
                                                         
Annualized return on average equity            2.7%        2.1%


Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)
                                                          
                                              Six Months Ended June 30,
                                              2013         2012
                                                          
Net premiums earned                            $251,665   $232,261
Investment income, net of expenses             9,486       10,009
Net realized investment gains                  2,595       3,838
Lease income                                   426         492
Installment payment fees                       3,444       3,762
Equity in earnings of DFSC                     1,764       2,285
Total revenues                                 269,380     252,647
                                                          
Net losses and loss expenses                   175,052     162,995
Amortization of deferred acquisition costs     39,470      36,116
Other underwriting expenses                    39,881      38,486
Policyholder dividends                         816         398
Interest                                       821         1,201
Other expenses                                 2,395       1,488
Total expenses                                 258,435     240,684
                                                          
Income before income tax expense               10,945      11,963
Income tax expense                             1,841       1,930
                                                          
Net income                                    $9,104     $10,033
                                                          
Net income per common share:                               
Class A - basic                               $0.35      $0.40
Class A - diluted                              $0.35      $0.39
Class B - basic and diluted                    $0.32      $0.36
                                                          
Supplementary Financial Analysts' Data                     
                                                          
Weighted-average number of shares outstanding:             
Class A - basic                                20,637,801  20,019,086
Class A - diluted                              20,984,097  20,350,255
Class B - basic and diluted                    5,576,775   5,576,775
                                                          
Net written premiums                           $273,031   $252,453
                                                          
Book value per common share at end of period   $14.84     $15.36
                                                          
Annualized return on average equity            4.6%         5.2%


Donegal Group Inc.
Consolidated Balance Sheets
(in thousands)
                                                      
                                          June 30,     December 31,
                                          2013         2012
                                          (unaudited)  
                                                      
ASSETS
Investments:                                           
Fixed maturities:                                      
Held to maturity, at amortized cost        $34,371    $42,100
Available for sale, at fair value          679,038     694,510
Equity securities, at fair value           8,906       8,757
Investments in affiliates                  35,667      37,236
Short-term investments, at cost            14,913      23,826
Total investments                          772,895     806,429
Cash                                       24,994      19,801
Premiums receivable                        131,993     117,196
Reinsurance receivable                     240,528     215,893
Deferred policy acquisition costs          43,309      40,122
Prepaid reinsurance premiums               118,844     111,156
Other assets                               41,934      26,292
Total assets                               $1,374,497 $1,336,889
                                                      
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:                                           
Losses and loss expenses                   $489,650   $458,827
Unearned premiums                          392,142     363,088
Accrued expenses                           16,900      17,141
Borrowings under line of credit            61,500      52,000
Subordinated debentures                    5,000       20,465
Other liabilities                          24,504      25,334
Total liabilities                          989,696     936,855
Stockholders' equity:                                  
Class A common stock                       213         209
Class B common stock                       56          56
Additional paid-in capital                 181,372     176,417
Accumulated other comprehensive income     345         26,395
Retained earnings                          215,528     209,670
Treasury stock, at cost                    (12,713)    (12,713)
Total stockholders' equity                 384,801     400,034
Total liabilities and stockholders' equity $1,374,497 $1,336,889

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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