Donegal Mutual and Subsidiary Atlantic States to Change Pooling Agreement

January 31, 2008

Donegal Group Inc., based in Marietta, Pa., is moving to amend the intercompany pooling agreement between Donegal Mutual and Atlantic States Insurance Co., its largest insurance subsidiary.

Subject to approval by the Pennsylvania Insurance Department, the proposed amendment will increase Atlantic States’ share of the intercompany pool from 70 percent to 80 percent effective March 1, 2008.

Donegal Mutual and Atlantic States have participated in a pooling agreement since 1986, whereby substantially all of their premiums, losses and expenses are pooled and each company is allocated a given percentage of the combined underwriting results. The pooling agreement is intended to produce more uniform and stable underwriting results from year to year for each company than they would experience individually and to spread the risk of loss among the companies based on their relative amount of surplus and access to capital. Each company has at its disposal the capacity of the entire pool, rather than being limited to policy exposures of a size commensurate with its own capital and surplus.

Based upon current pooled premium levels, Atlantic States is expected to receive an additional allocation of written and earned premiums of approximately $30 million annually. On the effective date of the amendment to the pooling agreement, Donegal Mutual will transfer approximately $12 million of cash and net unearned premium reserves to Atlantic States, which will result in a modest increase to Atlantic States’ investment income from that date forward.

“Since 1986, the intercompany pooling agreement has allowed Donegal Mutual and Atlantic States to fulfill their shared objective of growing their premium and surplus. Donegal Group Inc.’s three public stock offerings have provided capital necessary to support growth in Atlantic States’ share of the pooled business over time, and its stockholders, including Donegal Mutual, have benefited as the pool has grown substantially,” said Donald H. Nikolaus, president and chief executive officer. “As we continue to pursue quality premium growth, we believe this change in the pooling agreement will provide a continuation of the significant benefits that both Donegal Group Inc. and Donegal Mutual have realized over the past 21 years.”

Donegal Group Inc.’s subsidiaries operate 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).

Donegal Mutual owns approximately 42 percent and 74 percent of Donegal Group Inc.’s Class A common stock and Class B common stock, respectively.

Source: Donegal Insurance Group

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