Despite Weather, Donegal Group Reports Solid 1st Quarter

Donegal Group Inc. reported continued positive underwriting results and an increase in net income of 8.5 percent, bringing it to $9.1 million or $.36 per share, for the first quarter.

That compared to $8,417,088, or $.34 per share on a diluted basis, for the first quarter of 2005.

The company said its first quarter 2006 earnings reflected “continued excellent underwriting results,” which were achieved in spite of an increase in weather-related claims of approximately $1.1 million in the first quarter of 2006 compared to the first quarter of 2005.

Revenues for the first quarter of 2006 were $81,282,895, an increase of 4.1 percent over the year earlier period, with net premiums earned of $74,513,849, a 3.8 percent increase over the first quarter of 2005.

The company said its net premiums earned in the first quarter of 2006 were impacted by an increase in the company’s reinsurance costs, primarily due to increases in reinsurance rates and the purchase of additional reinsurance coverages that are expected to reduce losses retained by the company.

All 2006 and 2005 share and per share information included below has been restated to reflect the effect of the previously announced declaration of a 4-for-3 stock split to be effected in the form of a 33-1/3% stock dividend payable on April 26, 2006 to stockholders of record at the close of business on April 17, 2006.

Net investment income increased to $4,984,528 for the first quarter of 2006, an increase of 13.1 percent over the $4,407,468 reported for the first quarter of 2005. Improvements in the short-term interest rate environment contributed to an increase in the company’s average pre-tax investment yield to 3.6 percent in the first quarter of 2006, compared to 3.5 percent in the first quarter of 2005. The company said its shift in asset mix to tax-exempt municipal bonds over the past year impacted the average investment yield in the current quarter. However, this shift allowed the company to lower its effective tax rate in the first quarter of 2006 to 28.7 percent, compared to 30.6 percent in the first quarter of 2005, notwithstanding an increase in income before income tax expense in the 2006 quarter.

The company’s combined ratio was 90.5 for the first quarter of 2006, comparable to the 90.6 posted for the first quarter of 2005. Its loss ratio for the first quarter of 2006 was 58.1, relatively unchanged from the loss ratio of 57.9 posted for the first quarter of 2005, with the increase reflecting increased weather-related claim activity in the 2006 quarter. The company’s expense ratio decreased slightly to 31.9 for the first quarter of 2006, compared to 32.2 for the first quarter of 2005.

“We are pleased to report a continuation of profitable operating results in the first quarter. We remain focused on maintaining rate adequacy and attracting quality premium growth in a competitive marketplace. Our WritePro and WriteBiz automated underwriting and policy issuance systems for personal lines and commercial lines, respectively, continue to be implemented throughout our operating regions, and we are optimistic that these systems will contribute to additional premium growth as the year progresses,” stated Donald H. Nikolaus, president and chief executive officer of Donegal Group Inc.

The operating results for the first quarter of 2006 contributed to an increase in the company’s book value to $11.62 per common share at March 31, 2006, compared to $11.30 per common share at December 31, 2005.

The company’s board of directors approved a quarterly cash dividend payable May 15, 2006 of $.0825 per share of Class A common stock and $.07 per share of its Class B common stock to stockholders of record as of May 1, 2006. These dividends represent a percentage increase of 10% for the Class A common stock and 9.8 percent for the Class B common stock compared to the previous quarterly cash dividend when adjusted for the stock split.

Donegal Group Inc. is an insurance holding company based in Pennsylvania whose insurance subsidiaries offer personal and commercial property and casualty lines of insurance in five Mid-Atlantic states (Delaware, Maryland, New Hampshire, New York and Pennsylvania), eight Southeastern states (Alabama, Georgia, Louisiana, North Carolina, South Carolina, Tennessee, Virginia and West Virginia) and five Midwestern states (Iowa, Nebraska, Ohio, Oklahoma and South Dakota).