Donegal Expects Q4 Loss

February 5, 2002

Pennsylvania-based Donegal Group Inc. announced that it expects a fourth quarter operating loss of between $.03 and $.08 per share on a diluted basis resulting in operating income for the full-year 2001 of between $.69 and $.74 per share on a diluted basis. The Company expects a net loss of between $.06 and $.11 per share on a diluted basis for the fourth quarter.

“The fourth quarter’s operating results were impacted by loss and loss expense reserve strengthening of approximately $4.2 million, or $.30 per diluted share, and by the impact of charges related to guaranty fund assessments of approximately $.04 per diluted share, resulting from the insolvency of Reliance Insurance Company, the company stated.

Donegal said the losses and the reserve strengthening were due primarily to weakness in workers’ compensation, commercial auto liability and commercial multiple peril lines of business, which became evident during the fourth quarter. It strengthened case basis reserves by approximately $1.7 million for losses prior to 2001 and added bulk reserves of approximately $2.5 million in the fourth quarter for losses incurred in 2001.

Donegal Group President Donegal H. Nikolaus stated that the “strengthening of reserves was necessary to address the loss development trends in our casualty lines of business particularly in our commercial business. We firmly believe the scope of the reserve strengthening is the appropriate action to put the development issue behind us. Donegal has a history of strong reserving practices and this strengthening of reserves is consistent with our record of fully addressing reserving issues if and when they arise.”

The company announced that it was taking “other actions” to return to underwriting profitability, and anticipated “rate increases effective for 2002 renewals in personal lines which will average approximately 8% and increases averaging 15% to 20% in commercial lines for 2002 renewals.” It’s also implementing a number of steps to reduce operating costs.

The company’s official results for the fourth quarter will be announced on February 25.

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