Donegal Group Inc. Announces Third Quarter 2013 Results

Donegal Group Inc. Announces Third Quarter 2013 Results

MARIETTA, Pa., Oct. 25, 2013 (GLOBE NEWSWIRE) -- Donegal Group Inc.
(Nasdaq:DGICA) (Nasdaq:DGICB) today reported its financial results for the
third quarter and first nine months of 2013. Highlights include:

  *Net income of $7.7 million for the third quarter of 2013, as improved
    underwriting results contributed to an 11.9% increase over net income for
    the third quarter of 2012
  *8.0% increase in net premiums earned and 5.7% increase in net premiums
    written for the third quarter of 2013, reflecting continuing organic
    growth in commercial lines and the impact of premium rate increases
  *96.0% statutory combined ratio^1 for the third quarter of 2013,
    representing the lowest combined ratio for any quarterly period in the
    past five years
  *Operating income^1 of $7.4 million for the third quarter of 2013,
    representing a 24.0% increase over operating income of $6.0 million for
    the third quarter of 2012
  *Book value per share of $14.95 at September 30, 2013, increasing from
    $14.84 at June 30, 2013

                Three Months Ended September   Nine Months Ended September
                 30,                            30,
                2013       2012       % Change 2013       2012       % Change
                (dollars in thousands, except per share amounts)

Income Statement                                                 
Data
Net premiums     $ 130,645 $ 120,917 8.0%     $ 382,310 $ 353,178 8.2%
earned
Investment       4,624     4,715     -1.9    14,110    14,724    -4.2
income, net
Realized gains   349       1,312     -73.4   2,944     5,150     -42.8
Total revenues   138,335   130,432   6.1     407,715   383,079   6.4
Net income      7,654     6,839     11.9    16,758    16,873    -0.7
Operating        7,423     5,986     24.0    14,815    13,525    9.5
income
                                                                
Per Share Data                                                   
Net income–
Class A          $0.30    $0.27    11.1%    $0.65    $0.66    -1.5%
(diluted)
Net income–     0.27      0.25      8.0     0.60      0.61      -1.6
Class B
Operating
income– Class A 0.29      0.24      20.8    0.58      0.53      9.4
(diluted)
Operating        0.26      0.22      18.2    0.53      0.49      8.2
income– Class B
Book value       14.95     15.74     -5.0    14.95     15.74     -5.0

^1The "Definitions of Non-GAAP and Operating Measures" section of this release
defines and reconciles data that the Company prepares 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, "During the third quarter of 2013, our insurance operations
benefitted from favorable insurance market conditions within our operating
regions and a continuation of positive momentum in the achievement of our
growth objectives. Further, our GAAP and statutory combined ratios both were
the best we have achieved for any quarter during the past five years.

"Our quarterly results reflect the continuing implementation of a strategic
business plan that includes long-term objectives of outperforming the property
and casualty insurance industry in terms of service, profitability and book
value growth," Mr. Nikolaus noted. "We continue to focus on expanding our
commercial lines business, achieving solid new business growth and renewal
premium increases in the 5-7% range. Our regional focus, independent agency
relationships and proven commitment to the small to mid-size commercial
insurance market are important advantages that contributed to a 93.0%
statutory combined ratio for this business segment for the third quarter of
2013."

Mr. Nikolaus continued, "The absence of significant catastrophe weather events
and fewer large fire losses in the third quarter of 2013 clearly enhanced the
performance of our personal lines insurance operations. However, we believe
our strategic underwriting initiatives were also an important factor in our
achievement of a 97.9% statutory combined ratio for this business segment.
Personal lines net written premium growth of 2.1% consisted almost entirely of
rate increases we have implemented over the past year.

"Our organic growth and profit improvement initiatives have been integral to
our favorable underwriting results. We believe those initiatives will drive
further improvement in future periods. In addition, we continue to pursue
appropriate acquisition opportunities to add scale to our operations and to
help us achieve our long-term performance objectives," Mr. Nikolaus added.

Mr. Nikolaus concluded by noting, "On September 17, 2013, the A.M. Best
Company affirmed its A (Excellent) financial strength rating and stable
ratings outlook for the members of the Donegal Insurance Group. In its report,
the A.M. Best Company stated that it based the ratings affirmation of the
Donegal Insurance Group members on the Donegal Insurance Group's supportive
risk-adjusted capitalization, sound balance sheet liquidity, generally
positive earnings, and a history of successful strategic acquisitions and
affiliations, among other factors."

At September 30, 2013, the Company's book value per share was $14.95, compared
to $15.63 at December 31, 2012 and $15.74 at September 30, 2012. The lower
book value per share at September 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 September 30, Nine Months Ended September
                                                  30,
                2013        2012        % Change 2013       2012     % Change
                (dollars in thousands)                             
                                                                
Net Premiums                                                     
Written
Personal lines:                                                  
Automobile       $50,838   $51,351   -1.0%    $ 149,702 $       0.1%
                                                             149,572
Homeowners       29,768     27,550     8.1    80,712    74,778  7.9
Other            4,238      4,219      0.5    11,871    12,045  (1.4)
Total personal   84,844     83,120     2.1    242,285   236,395 2.5
lines
Commercial                                                       
lines:
Automobile       14,029     12,484     12.4   45,218    39,294  15.1
Workers'         18,344     16,088     14.0   61,262    51,071  20.0
compensation
Commercial       18,038     15,883     13.6   57,695    49,758  16.0
multi-peril
Other            1,375      1,721      (20.1)  3,201     5,232   (38.8)
Total commercial 51,786     46,176     12.1   167,376   145,355 15.1
lines
Total net        $ 136,630  $ 129,296  5.7%     $ 409,661 $       7.3%
premiums written                                             381,750

The Company's net premiums written increased 5.7% for the third quarter of
2013 compared to the third quarter of 2012. This increase represented the
combination of 12.1% growth in commercial lines writings and 2.1% growth in
personal lines writings. The $7.3 million growth in net premiums written for
the third quarter of 2013 compared to the third quarter of 2012 included:

  *$2.3 million, or 1.8% of total net premiums written, related to a change
    in the Michigan Insurance Company ("MICO") quota-share reinsurance
    agreement that continues to increase the amount of business MICO retains.
    The Company acquired MICO in December 2010.
  *$4.3 million in commercial lines premiums, excluding the MICO 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.
  *$679,000 in personal lines premiums, excluding the MICO 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 7.3% in the first nine months of
2013. The increase included $7.8 million related to the MICO reinsurance
change. Excluding the MICO reinsurance change, commercial lines premiums rose
$17.6 million and personal lines premiums increased $2.6 million for the first
nine months of 2013 compared to the first nine months of 2012.

                                  Three Months Ended Nine Months Ended
                                  September 30,      September 30,
                                  2013      2012     2013     2012
                                                           
Statutory Combined Ratios                                   
Personal Lines:                                             
Automobile                         101.9%    100.0%   102.1%   104.2%
Homeowners                         93.0     102.6   94.5    104.8
Other                              77.5     106.5   82.8    91.3
Total personal lines               97.9     101.3   98.7    103.7
Commercial Lines:                                           
Automobile                         109.0    99.0    103.9   100.2
Workers' compensation              93.4     93.4    100.8   92.2
Commercial multi-peril             87.1     90.8    96.0    91.5
Other                              NM^2      25.9    NM^2     32.3
Total commercial lines             93.0     91.4    97.5    91.7
Total lines                        96.0%     97.6%    98.2%    99.3%
                                                           
GAAP Combined Ratios (Total Lines)                          
Loss ratio (non-weather)           57.8%     58.6%    61.6%    61.5%
Loss ratio (weather-related)       7.2      9.3     6.4     7.9
Expense ratio                      32.3     31.4    31.8    31.9
Dividend ratio                     0.3      0.3     0.3     0.2
Combined ratio                     97.6%     99.6%    100.1%   101.5%
                                                           
^2Not meaningful.                                           

Mr. Nikolaus commented, "Less severe weather and a lower incidence of large
fire losses were clearly factors in the overall improvement in our third
quarter results compared to the prior-year third quarter. We also continue to
see the positive impact of higher premium rates on the results of many of our
lines of business, including personal auto and homeowners. We expect to make
continued progress toward our performance objectives for our personal lines of
insurance as we continue to file for rate increases in most of our regions.

"Our third quarter of 2013 commercial lines underwriting results benefited
from solid performance in our workers' compensation and commercial multi-peril
lines of business. For commercial automobile, our results were influenced by a
few large losses, as well as the receipt of new information that resulted in
increased reserves for prior year losses. Our ongoing review process routinely
includes a close look at underwriting controls on risks with substantial
losses, but our reviews did not identify any concerns with respect to these
situations," Mr. Nikolaus noted.

For the third quarter of 2013, the Company's statutory loss ratio declined to
65.1%, compared to 68.2% for the third quarter of 2012. For the first nine
months of 2013, the Company's statutory loss ratio declined to 68.2% from
69.6% for the first nine months of 2012.

Large fire losses totaling $3.1 million for the third quarter of 2013, or 2.4
percentage points of the Company's loss ratio, declined from the $6.6 million,
or 5.5 percentage points of the Company's loss ratio, during the third quarter
of 2012.Weather-related losses of $9.4 million for the third quarter of 2013,
representing 7.2 percentage points of the Company's loss ratio, compared
favorably to $11.3 million in weather-related losses for the third quarter of
2012, or 9.3 percentage points of the Company's loss ratio. Weather loss
activity in the third quarter of 2013 nearly matched the Company's five-year
average for third quarter weather losses of $9.3 million and included losses
from several localized wind and hail events in the Midwest region. Development
of reserves for losses incurred in prior accident years added 2.4 percentage
points to the Company's loss ratios for the third quarter of 2013 and 2012.

The Company's statutory expense ratio^1 was 30.6% for the third quarter of
2013, compared to 29.1% for the third quarter of 2012. The increase in the
Company's expense ratio reflected increased underwriting-based incentive costs
for the third quarter of 2013.

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
88.8% of its consolidated investment portfolio in diversified, highly rated
and marketable fixed-maturity securities at September 30, 2013.

                                         September 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       $71,657   9.1%   $72,311  9.0%
agencies
Obligations of states and political       433,055    54.9  457,896   56.8
subdivisions
Corporate securities                      56,117     7.1   77,356    9.6
Residential mortgage-backed securities    139,188    17.7  129,047   16.0
Total fixed maturities                    700,017    88.8  736,610   91.4
Equity securities, at fair value          13,400     1.7   8,757     1.1
Investments in affiliates                 36,347     4.6   37,236    4.6
Short-term investments, at cost           38,680     4.9   23,826    2.9
Total investments                         $ 788,444  100.0% $ 806,429 100.0%
                                                                    
Average investment yield                  2.4%              2.5%       
Average tax-equivalent investment yield   3.3%              3.5%       
Average fixed-maturity duration (years)   5.3              4.8       

A 1.9% decrease in net investment income for the third quarter of 2013
primarily reflected the impact of the lower average investment yield on the
Company's fixed-maturity securities portfolio compared to the third quarter of
2012. Netrealized investment gains were $349,000 for the third quarter of
2013, compared to $1.3 million for the third quarter of 2012. The Company had
no impairments in its investment portfolio that it considered to be other than
temporary during the third 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, "The broader investment markets have been unsettled in recent months,
leading to swings in reported market values for many of our fixed-maturity
holdings. We generally intend to hold our fixed-maturity securities until
their stated maturity, so we are able to look beyond modest changes in value
due to outside factors. During the third quarter of 2013, we increased our
cash position to enable us to take advantage of potential shifts in market
rates. For the near term, we plan to focus our new money investments on
shorter duration fixed maturities and dividend-paying equity securities as
opportunities arise."

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
$735,000 for the third quarter of 2013, compared to $1.3 million for the third
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 the measure of
other companies.

The following table provides a reconciliation of the Company's net income to
the Company's operating income for the periods indicated:

                 Three Months Ended September Nine Months Ended September 30,
                  30,
                 2013       2012     % Change 2013       2012       % Change
                 (dollars in thousands, except per share amounts)

Reconciliation of Net Income                                     
to Operating Income
Net income        $7,654    $6,839 11.9%    $16,758  $16,873  -0.7%
Realized gains    (231)     (853)   -72.9   (1,943)   (3,348)   -42.0
(after tax)
Operating income  $7,423   $5,986 24.0%    $14,815  $13,525  9.5%
                                                               
Per Share Reconciliation of Net                                   
Income to Operating Income
Net income –      $0.30    $0.27  11.1%    $0.65    $0.66    -1.5%
Class A (diluted)
Realized gains    (0.01)    (0.03)  -66.7   (0.07)    (0.13)    -46.2
(after tax)
Operating income  $0.29    $0.24  20.8%    $0.58    $0.53    9.4%
– Class A
                                                               
Net income –      $0.27    $0.25  8.0%     $0.60    $0.61    -1.6%
Class B
Realized gains    (0.01)    (0.03)  -66.7   (0.07)    (0.12)    -41.7
(after tax)
Operating         $0.26    $0.22  18.2%    $0.53    $0.49    8.2%
income– 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, October 25,
2013, beginning at 10:00 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 property and casualty insurance 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 September 30,
                                              2013          2012
                                                           
Net premiums earned                            $130,645    $120,917
Investment income, net of expenses             4,624        4,715
Net realized investment gains                  349          1,312
Lease income                                   213          236
Installment payment fees                       1,769        1,915
Equity in earnings of DFSC                     735          1,337
Total revenues                                 138,335      130,432
                                                           
Net losses and loss expenses                   84,883       82,105
Amortization of deferred acquisition costs     20,766       18,864
Other underwriting expenses                    21,455       19,131
Policyholder dividends                         457          402
Interest                                       432          584
Other expenses                                 828          473
Total expenses                                 128,821      121,559
                                                           
Income before income tax expense               9,514        8,873
Income tax expense                             1,860        2,034
                                                           
Net income                                    $7,654      $6,839
                                                           
Net income per common share:                                
Class A - basic and diluted                    $0.30       $0.27
Class B - basic and diluted                    $0.27       $0.25
                                                           
Supplementary Financial Analysts' Data                      
                                                           
Weighted-average number of shares outstanding:              
Class A - basic                                20,383,165   20,041,620
Class A - diluted                              20,607,611   20,310,096
Class B - basic and diluted                    5,576,775    5,576,775
                                                           
Net written premiums                           $136,630    $129,296
                                                           
Book value per common share at end of period   $14.95      $15.74
                                                           
Annualized return on average equity            7.9%          6.9%



Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)
                                                           
                                            Nine Months Ended September 30,
                                            2013            2012
                                                           
Net premiums earned                          $382,310      $353,178
Investment income, net of expenses           14,110         14,724
Net realized investment gains                2,944          5,150
Lease income                                 639            728
Installment payment fees                     5,212          5,677
Equity in earnings of DFSC                   2,500          3,622
Total revenues                               407,715        383,079
                                                           
Net losses and loss expenses                 259,935        245,100
Amortization of deferred acquisition costs   60,236         54,980
Other underwriting expenses                  61,336         57,617
Policyholder dividends                       1,272          800
Interest                                     1,253          1,785
Other expenses                               3,223          1,961
Total expenses                               387,255        362,243
                                                           
Income before income tax expense             20,460         20,836
Income tax expense                           3,702          3,963
                                                           
Net income                                  $16,758       $16,873
                                                           
Net income per common share:                                
Class A - basic                             $0.66         $0.67
Class A - diluted                            $0.65         $0.66
Class B - basic and diluted                  $0.60         $0.61
                                                           
Supplementary Financial Analysts' Data                       
                                                           
Weighted-average number of shares outstanding:
Class A - basic                              20,246,449     20,026,652
Class A - diluted                            20,551,826     20,336,769
Class B - basic and diluted                  5,576,775      5,576,775
                                                           
Net written premiums                         $409,661      $381,750
                                                           
Book value per common share at end of period $14.95        $15.74
                                                           
Annualized return on average equity          5.7%            5.7%



Donegal Group Inc.
Consolidated Balance Sheets
(in thousands)
                                                          
                                             September 30, December 31,
                                             2013          2012
                                             (unaudited)   
                                                          
ASSETS
Investments:                                               
Fixed maturities:                                          
Held to maturity, at amortized cost           $30,208     $42,100
Available for sale, at fair value             669,809      694,510
Equity securities, at fair value              13,400       8,757
Investments in affiliates                     36,347       37,236
Short-term investments, at cost               38,680       23,826
Total investments                            788,444      806,429
Cash                                          22,793       19,801
Premiums receivable                           130,496      117,196
Reinsurance receivable                        241,924      215,893
Deferred policy acquisition costs             44,601       40,122
Prepaid reinsurance premiums                  118,456      111,156
Other assets                                  42,932       26,292
Total assets                                  $1,389,646  $1,336,889
                                                          
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:                                               
Losses and loss expenses                      $496,478    $458,827
Unearned premiums                             397,739      363,088
Accrued expenses                              18,100       17,141
Borrowings under line of credit               64,500       52,000
Subordinated debentures                       5,000        20,465
Other liabilities                             18,750       25,334
Total liabilities                             1,000,567    936,855
Stockholders' equity:                                      
Class A common stock                          214          209
Class B common stock                          56           56
Additional paid-in capital                    182,728      176,417
Accumulated other comprehensive (loss) income (1,060)      26,395
Retained earnings                             219,914      209,670
Treasury stock, at cost                       (12,773)     (12,713)
Total stockholders' equity                    389,079      400,034
Total liabilities and stockholders' equity    $1,389,646  $1,336,889

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