UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                          to                                          .

Donegal Group Inc.

(Exact name of registrant as specified in its charter)

Delaware		23-2424711
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1195 River Road, P.O. Box 302, Marietta, PA 17547-0302
(Address of principal executive offices)     (Zip code)

(717) 426-1931

Not applicable

     Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   Noo

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso   Noþ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 19,894,961 shares of Class A Common Stock, par value $0.01 per share, and 5,576,775 shares of Class B Common Stock, par value $0.01 per share, outstanding on April 30, 2008.

 

 

Part I. Financial Information

Item 1. Financial Statements.

Donegal Group Inc. and Subsidiaries
Consolidated Balance Sheets

		March 31, 2008				December 31, 2007
		(Unaudited)
Assets
Investments
Fixed maturities
Held to maturity, at amortized cost		$	134,112,632			$	154,290,119
Available for sale, at fair value			403,249,918				336,317,901
Equity securities, available for sale, at fair value			32,267,954				36,360,526
Investments in affiliates			8,869,002				8,648,818
Short-term investments, at cost, which approximates fair value			51,994,565				70,252,223
Total investments			630,494,071				605,869,587
Cash			3,951,337				4,289,365
Accrued investment income			5,525,664				5,874,908
Premiums receivable			55,932,903				51,038,253
Reinsurance receivable			76,870,911				78,897,154
Deferred policy acquisition costs			28,963,633				26,235,072
Deferred tax asset, net			9,233,614				7,026,441
Prepaid reinsurance premiums			49,550,645				47,286,336
Property and equipment, net			5,772,432				5,608,129
Accounts receivable — securities			—				602,191
Due from affiliate			1,007,417				—
Other			1,322,368				1,368,320
Total assets		$	868,624,995			$	834,095,756
Liabilities and Stockholders’ Equity
Liabilities
Losses and loss expenses		$	228,807,600			$	226,432,402
Unearned premiums			223,361,960				203,430,560
Accrued expenses			10,256,902				12,313,428
Reinsurance balances payable			1,439,163				2,105,501
Federal income taxes payable			1,685,112				375,736
Cash dividends declared to stockholders			—				2,210,298
Subordinated debentures			30,929,000				30,929,000
Accounts payable — securities			12,728,213				1,820,016
Due to affiliate			—				241,918
Drafts payable			563,640				717,540
Other			2,157,811				829,166
Total liabilities			511,929,401				481,405,565
Stockholders’ Equity
Preferred stock, $1.00 par value, authorized 2,000,000 shares; none issued			—				—
Class A common stock, $.01 par value, authorized 30,000,000 shares, issued 20,368,997 and 20,167,999 shares and outstanding 19,869,429 and 19,756,643 shares			203,690				201,680
Class B common stock, $.01 par value, authorized 10,000,000 shares, issued 5,649,240 shares and outstanding 5,576,775 shares			56,492				56,492
Additional paid-in capital			159,178,214				156,850,666
Accumulated other comprehensive income			3,474,840				6,974,411
Retained earnings			200,490,392				193,806,855
Treasury stock			(6,708,034	)			(5,199,913	)
Total stockholders’ equity			356,695,594				352,690,191
Total liabilities and stockholders’ equity		$	868,624,995			$	834,095,756

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)

		Three Months Ended March 31,
		2008				2007
Revenues:
Net premiums earned		$	82,007,766			$	76,697,819
Investment income, net of investment expenses			5,691,741				5,504,059
Net realized investment gains			695,356				104,785
Lease income			244,113				261,532
Installment payment fees			1,153,127				1,113,821
Total revenues			89,792,103				83,682,016
Expenses:
Net losses and loss expenses			53,529,831				50,595,427
Amortization of deferred policy acquisition costs			13,719,000				12,418,000
Other underwriting expenses			12,403,152				12,185,738
Policy dividends			270,438				248,151
Interest			612,476				708,491
Other expenses			499,226				491,734
Total expenses			81,034,123				76,647,541
Income before income tax expense			8,757,980				7,034,475
Income tax expense			2,032,997				1,544,537
Net income		$	6,724,983			$	5,489,938
Earnings per common share:
Class A common stock — basic		$	0.27			$	0.22
Class A common stock — diluted		$	0.27			$	0.22
Class B common stock — basic and diluted		$	0.25			$	0.20

Consolidated Statements of Comprehensive Income
(Unaudited)

		Three Months Ended March 31,
		2008				2007
Net income		$	6,724,983			$	5,489,938
Other comprehensive income (loss), net of tax Unrealized gains (loss) on securities:
Unrealized holding gain (loss) during the period, net of income tax			(3,047,590	)			378,874
Reclassification adjustment, net of income tax			(451,981	)			(68,110	)
Other comprehensive income (loss)			(3,499,571	)			310,764
Comprehensive income		$	3,225,412			$	5,800,702

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Unaudited)
Three Months Ended March 31, 2008

																						Accumulated
																		Additional				Other												Total
																		Paid-In				Comprehensive				Retained				Treasury				Stockholders’
		Class A Shares				Class B Shares				Class A Amount				Class B Amount				Capital				Income				Earnings				Stock				Equity
Balance, December 31, 2007			20,167,999				5,649,240			$	201,680			$	56,492			$	156,850,666			$	6,974,411			$	193,806,855			$	(5,199,913	)		$	352,690,191
Issuance of common stock (stock compensation plans)			200,998								2,010								1,662,651																1,664,661
Net income																											6,724,983								6,724,983
Cash dividends																											(1,482	)							(1,482	)
Grant of stock options																			39,964								(39,964	)							—
Tax benefit on exercise of stock options																			624,933																624,933
Purchase of treasury stock																															(1,508,121	)			(1,508,121	)
Other comprehensive loss																							(3,499,571	)											(3,499,571	)
Balance, March 31, 2008			20,368,997				5,649,240			$	203,690			$	56,492			$	159,178,214			$	3,474,840			$	200,490,392			$	(6,708,034	)		$	356,695,594

See accompanying notes to consolidated financial statements.

Donegal Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

		Three Months Ended March 31,
		2008				2007
Cash Flows from Operating Activities:
Net income		$	6,724,983			$	5,489,938
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			599,320				636,805
Net realized investment gains			(695,356	)			(104,785	)
Changes in assets and liabilities:
Losses and loss expenses			2,375,198				(750,362	)
Unearned premiums			19,931,400				5,668,645
Premiums receivable			(4,894,650	)			(3,407,563	)
Deferred acquisition costs			(2,728,561	)			(432,529	)
Deferred income taxes			(322,787	)			(47,236	)
Reinsurance receivable			2,026,243				1,048,887
Prepaid reinsurance premiums			(2,264,309	)			(2,447,389	)
Accrued investment income			349,244				309,949
Due from affiliate			(1,249,335	)			(1,829,483	)
Reinsurance balances payable			(666,338	)			26,592
Current income taxes			1,309,376				2,500,456
Accrued expenses			(2,056,526	)			(2,965,755	)
Other, net			1,220,694				508,401
Net adjustments			12,933,613				(1,285,367	)
Net cash provided by operating activities			19,658,596				4,204,571
Cash Flows from Investing Activities:
Purchases of fixed maturities:
Available for sale			(87,231,024	)			(16,525,653	)
Purchases of equity securities, available for sale			(503,765	)			(5,879,084	)
Maturity of fixed maturities:
Held to maturity			20,021,499				3,813,583
Available for sale			14,969,487				7,718,016
Sales of fixed maturities:
Available for sale			13,063,738				—
Sales of equity securities, available for sale			3,254,419				3,073,116
Net decrease in investment in affiliates			18,426				9,067
Net purchase of property and equipment			(416,755	)			(197,884	)
Net sale of short-term investments			18,257,658				7,221,406
Net cash used in investing activities			(18,566,317	)			(767,433	)
Cash Flows from Financing Activities:
Cash dividends paid			(2,211,780	)			(2,442,958	)
Issuance of common stock			1,664,661				440,159
Purchase of treasury stock			(1,508,121	)			(96,823	)
Tax benefit on exercise of stock options			624,933				29,777
Net cash used in financing activities			(1,430,307	)			(2,069,845	)
Net increase (decrease) in cash			(338,028	)			1,367,293
Cash at beginning of period			4,289,365				531,756
Cash at end of period		$	3,951,337			$	1,899,049
Cash paid during period — Interest		$	695,745			$	732,440
Net cash paid (received) during period — Taxes		$	425,000			$	(950,000	)

See accompanying notes to consolidated financial statements.

DONEGAL GROUP INC. AND SUBSIDIARIES
(Unaudited)
Notes to Consolidated Financial Statements

1 — Organization

Donegal Mutual Insurance Company (“Donegal Mutual”) organized us as an insurance holding company on August 26, 1986. Our insurance subsidiaries, Atlantic States Insurance Company (“Atlantic States”), Southern Insurance Company of Virginia (“Southern”), Le Mars Insurance Company (“Le Mars”) and the Peninsula Insurance Group (“Peninsula”), which consists of Peninsula Indemnity Company and The Peninsula Insurance Company, write personal and commercial lines of property and casualty insurance exclusively through a network of independent insurance agents in certain Mid-Atlantic, Midwest and Southern states. The personal lines products consist primarily of homeowners and private passenger automobile policies. The commercial lines products consist primarily of commercial automobile, commercial multi-peril and workers’ compensation policies. Donegal Mutual and our insurance subsidiaries conduct business together as the Donegal Insurance Group. We also own approximately 48% of the outstanding stock of Donegal Financial Services Corporation (“DFSC”), a thrift holding company that owns Province Bank FSB. Donegal Mutual owns the remaining approximately 52% of the outstanding stock of DFSC.

     At March 31, 2008, Donegal Mutual held approximately 42% of our outstanding Class A common stock and approximately 74% of our outstanding Class B common stock.

     Atlantic States, our largest subsidiary, and Donegal Mutual have a pooling agreement under which each company places all of its direct written business in the pool and both companies proportionately share the underwriting results of the pool, excluding certain reinsurance assumed by Donegal Mutual from our other insurance subsidiaries. From July 1, 2000 through February 29, 2008, Atlantic States had a 70% share of the results of the pool, and Donegal Mutual had a 30% share of the results of the pool. Effective March 1, 2008, Donegal Mutual and Atlantic States amended the pooling agreement to increase Atlantic States’ share of the results of the pool to 80%. In connection with this amendment to the pooling agreement, Donegal Mutual transferred approximately $11.9 million in cash and net liabilities to Atlantic States. See Note 4 – Reinsurance for more information regarding the pooling agreement.

     On March 7, 2007, our board of directors authorized a share repurchase program, pursuant to which we may purchase up to 500,000 shares of our Class A common stock at market prices prevailing from time to time in the open market subject to the provisions of Securities and Exchange Commission (“SEC”) Rule 10b-18 and in privately negotiated transactions. We purchased 88,212 and 5,700 shares of our Class A common stock under this program during the three months ended March 31, 2008 and 2007, respectively. We have purchased a total of 354,638 shares of our Class A common stock under this program through March 31, 2008.

2 — Basis of Presentation

     Our financial information for the interim periods included herein is unaudited; however, such information reflects all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods included herein. Our results of operations for the three months ended March 31, 2008 are not necessarily indicative of our results of operations to be expected for the twelve months ending December 31, 2008.

     These interim financial statements should be read in conjunction with the financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2007.

3 — Earnings Per Share

     We have two classes of common stock, which we refer to as Class A common stock and Class B common stock. Holders of our Class A common stock are entitled to cash dividends that are at least 10% higher than those declared and paid on our Class B common stock. Accordingly, we use the two-class method for the computation of earnings per common share pursuant to Statement of Financial Accounting

Standards No. 128, “Earnings Per Share.” The two-class method is an earnings allocation formula that determines earnings per share separately for each class of common stock based on dividends declared and an allocation of remaining undistributed earnings using a participation percentage reflecting the dividend rights of each class. A reconciliation of the numerators and denominators used in the basic and diluted per share computations is presented below for each class of stock:

		For the Three Months Ended March 31:
		(dollars in thousands, except per share data)
		2008								2007
		Class A				Class B				Class A				Class B
Basic net income per share:
Numerator:
Allocation of net income		$	5,354			$	1,371			$	4,367			$	1,123
Denominator:
Weighted-average shares outstanding			19,787,849				5,576,775				19,712,200				5,576,775
Basic net income per share		$	0.27			$	0.25			$	0.22			$	0.20
Diluted net income per share:
Numerator:
Allocation of net income		$	5,354			$	1,371			$	4,367			$	1,123
Denominator:
Number of shares used in basic computation			19,787,849				5,576,775				19,712,200				5,576,775
Weighted-average effect of dilutive securities Add: Director and employee stock options			142,831				—				404,025				—
Number of shares used in per share computations			19,930,680				5,576,775				20,116,225				5,576,775
Diluted net income per share		$	0.27			$	0.25			$	0.22			$	0.20

Options to purchase the following number of shares of Class A common stock were not included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price during the relevant period:

		Three Months Ended
		March 31,
		2008				2007
Number of shares			1,032,667				1,051,667

4 — Reinsurance

     Atlantic States has participated in an inter-company pooling agreement with Donegal Mutual since 1986. Both Atlantic States and Donegal Mutual place all of their direct business into the pool, and Atlantic States and Donegal Mutual then proportionately share the pooled business in accordance with the terms of the pooling agreement. From July 1, 2000 through February 29, 2008, Atlantic States had a 70% share of the results of the pool, and Donegal Mutual had a 30% share of the results of the pool. Effective March 1, 2008, Donegal Mutual and Atlantic States amended the pooling agreement to increase Atlantic States’ share of the results of the pool to 80%. In connection with this amendment to the pooling agreement, Donegal Mutual transferred approximately $11.9 million of cash and net liabilities to Atlantic States. Net liabilities transferred as of March 1, 2008 consisted of the following:

		(dollars in thousands)
Unearned premiums (net of reinsurance)		$	13,626
Less: Ceding commissions			(1,709	)
Net liabilities transferred		$	11,917

     Atlantic States, Southern and Donegal Mutual purchase third-party reinsurance on a combined basis. Le Mars and Peninsula have separate third-party reinsurance programs that provide similar types of coverage and that are commensurate with their relative size and exposures. Several different reinsurers are

used, all of which, consistent with Donegal Insurance Group’s requirements, have an A.M. Best rating of A- (Excellent) or better or, with respect to foreign reinsurers, have a financial condition that, in the opinion of our management, is equivalent to a company with at least an A- rating. The following information relates to the external reinsurance Atlantic States, Southern and Donegal Mutual has in place during 2008:

	•		excess of loss reinsurance, under which losses are automatically reinsured, through a series of contracts, over a set retention ($600,000 for 2008), and
	•		catastrophic reinsurance, under which Donegal Insurance Group recovers, through a series of contracts, 100% of an accumulation of many losses resulting from a single event, including natural disasters, over a set retention ($3.0 million for 2008).

     Our insurance subsidiaries and Donegal Mutual also purchase facultative reinsurance to cover exposures from losses that exceed the limits provided by their respective treaty reinsurance.

     In addition to the pooling agreement and third-party reinsurance, Atlantic States, Southern, Le Mars and Peninsula have various reinsurance agreements with Donegal Mutual.

     Our 2008 reinsurance program was renewed at lower rates compared to 2007, largely attributable to our decision to increase our excess of loss reinsurance retention from $400,000 to $600,000 effective January 1, 2008. There were no other significant changes to third-party reinsurance or other reinsurance agreements between our insurance subsidiaries and Donegal Mutual during the three months ended March 31, 2008.

5 — Investments

     We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at March 31, 2008 as follows:

		Less than 12 months								12 months or longer
		Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses
		(dollars in thousands)
Obligations of states and political subdivisions		$	91,764			$	4,062			$	29,860			$	546
Corporate securities			1,321				181				2,211				320
Mortgage-backed securities			10,420				48				6,411				48
Equity securities			7,052				1,153				3,981				1,308
Totals		$	110,557			$	5,444			$	42,463			$	2,222

     We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at March 31, 2007 as follows:

		Less than 12 months								12 months or longer
		Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses
		(dollars in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	4,939			$	16			$	78,798			$	1,553
Obligations of states and political subdivisions			27,202				115				51,972				537
Corporate securities			1,004				1				8,183				164
Mortgage-backed securities			15,331				130				36,320				856
Equity securities			8,379				369				1,249				84
Totals		$	56,855			$	631			$	176,522			$	3,194

     Of the total fixed maturity securities with an unrealized loss at March 31, 2008, we classified securities with a fair value of $124.9 million and an unrealized loss of $4.8 million as available for sale and carried them at fair value on our balance sheet, while we classified securities with a fair value of $17.1 million and an unrealized loss of $437,123 as held to maturity on our balance sheet and carried them at amortized cost.

     Of the total fixed maturity securities with an unrealized loss at March 31, 2007, we classified securities with a fair value of $127.7 million and an unrealized loss of $1.7 million as available for sale and carried them at fair value on our balance sheet, while we classified securities with a fair value of $96.1 million and an unrealized loss of $1.7 million as held to maturity on our balance sheet and carried them at amortized cost.

     We have no direct exposure to sub-prime residential mortgage-backed securities and hold no collateralized debt obligations. Substantially all of the unrealized losses within our fixed maturity investment portfolio resulted from general market conditions and the related impact on our fixed maturity investment valuations. Increases in municipal bond market yields resulted in overall market value declines in our municipal bond holdings as of March 31, 2008. When determining possible impairment of the debt securities we own, we consider unrealized losses that are due to the impact of general market conditions to be temporary in nature because we have the ability and intent to hold the debt securities we own to maturity. The majority of the unrealized losses within our equity portfolio related to common stock investments in companies within the financial services industry, which have been adversely affected by market developments within the past year. We evaluated the near-term prospects of the issuers of those investments in relation to the severity and duration of impairment. Based upon that evaluation and our ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value, we did not consider those investments to be other than temporarily impaired at March 31, 2008.

6 — Segment Information

     We evaluate the performance of our personal lines and commercial lines segments based upon the underwriting results of our insurance subsidiaries as determined under statutory accounting principles prescribed or permitted by various state insurance departments (“SAP”), which our management uses to measure performance for the total business of our insurance subsidiaries. Financial data by segment is as follows:

		Three Months Ended
		March 31,
		2008				2007
		(dollars in thousands)
Revenues:
Premiums earned:
Commercial lines		$	28,848			$	28,580
Personal lines			53,160				48,118
Net premiums earned			82,008				76,698
Net investment income			5,692				5,504
Realized investment gains			695				105
Other			1,397				1,375
Total revenues		$	89,792			$	83,682
Income before income taxes:
Underwriting income:
Commercial lines		$	3,154			$	2,955
Personal lines			(4,215	)			(2,517	)
			(4,215	)
SAP underwriting income (loss)			(1,061	)			438
GAAP adjustments (1)			3,146				813
GAAP underwriting income			2,085				1,251
Net investment income			5,692				5,504
Realized investment gains			695				105
Other			286				174
Income before income taxes		$	8,758			$	7,034

7 — Subordinated Debentures

     On May 15, 2003, we received $15.0 million in net proceeds from the issuance of subordinated debentures. The debentures mature on May 15, 2033 and are callable at our option, at par, after May 15, 2008. The debentures carry an interest rate equal to the three-month LIBOR rate plus 4.10%, which is adjustable quarterly. At March 31, 2008, the interest rate on the debentures was 7.17%.

     On October 29, 2003, we received $10.0 million in net proceeds from the issuance of subordinated debentures. The debentures mature on October 29, 2033 and are callable at our option, at par, after October 29, 2008. The debentures carry an interest rate equal to the three-month LIBOR rate plus 3.85%, which is adjustable quarterly. At March 31, 2008, the interest rate on the debentures was 7.16%.

     On May 24, 2004, we received $5.0 million in net proceeds from the issuance of subordinated debentures. The debentures mature on May 24, 2034 and are callable at our option, at par, after May 24, 2009. The debentures carry an interest rate equal to the three-month LIBOR rate plus 3.85%, which is adjustable quarterly. At March 31, 2008, the interest rate on the debentures was 6.94%.

8 — Share–Based Compensation

     Effective January 1, 2006, we adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. In determining the expense to be recorded for stock options granted to directors and employees of our subsidiaries and affiliates other than Donegal Mutual, the fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The significant assumptions utilized in applying the Black-Scholes option pricing model are a risk-free interest rate, expected term, dividend yield and expected volatility.

     Under SFAS No. 123(R), the compensation expense for our stock compensation plans that has been charged against income before income taxes was $43,626 and $60,535 for the three months ended March 31, 2008 and 2007, respectively, with a corresponding income tax benefit of $15,269 and $21,187, respectively. As of March 31, 2008, our total unrecognized compensation cost related to nonvested share-based compensation granted under our stock compensation plans was $216,282. This cost is expected to be recognized over a weighted average period of 2.7 years.

     SFAS No. 123(R) does not set accounting requirements for share-based compensation to nonemployees. We continue to account for share-based compensation to employees and directors of Donegal Mutual under the provisions of FIN No. 44 and EITF 00-23, which state that when employees of a controlling entity are granted share-based compensation, the entity granting the share-based compensation should measure the fair value of the award at the grant date and recognize the fair value as a dividend to the controlling entity. These provisions apply to options granted to employees and directors of Donegal Mutual, the employer of record for the majority of employees that provide services to us. We recorded implied dividends of $39,964 and $33,972 for the three months ended March 31, 2008 and 2007, respectively.

     Cash received from option exercises under all stock compensation plans for the three months ended March 31, 2008 and 2007 was $1,344,798 and $110,270, respectively. The actual tax benefit realized for the tax deductions from option exercises of share-based compensation was $624,933 and $29,777 for the three months ended March 31, 2008 and 2007, respectively.

9 — Fair Value Measurements

     As of January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and requires expanded disclosures about fair value measurements. The SFAS No. 157 hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value and requires financial assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

Level 1 – quoted prices in active markets for identical assets and liabilities

Level 2 – inputs other than Level 1 quoted prices that are directly or indirectly observable

Level 3 – unobservable inputs that are not corroborated by market data

     We evaluate assets and liabilities on a recurring basis to determine the appropriate level at which to classify them for each reporting period. The following table presents our fair value measurements for our investments in available-for-sale fixed maturity and equity securities as of March 31, 2008:

						Fair Value Measurements Using
						Quoted
						Prices in
						Active				Significant
						Markets for				Other				Significant
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
		(dollars in thousands)
Fixed maturities – available for sale		$	403,250			$	—			$	403,250			$	—
Equity securities			32,268				18,768				13,500				—
Totals		$	435,518			$	18,768			$	416,750			$	—

     We also adopted FASB Staff Position (“FSP”) No. 157-2, which allowed us to defer the effective date of SFAS No. 157 for certain nonfinancial assets and liabilities to January 1, 2009.

10 – Impact of New Accounting Standards

          In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115,” which permits companies to choose to measure many financial instruments and certain other items at fair value at specified election dates. Upon adoption, an entity reports unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Most of the provisions apply only to entities that elect the fair value option. However, the amendment of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities with available-for-sale and trading securities. Effective January 1, 2008, we adopted SFAS No. 159. The adoption of this statement had no effect on our results of operations, financial condition or liquidity.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The following information should be read in conjunction with the historical financial information and the notes thereto included in this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2007 as filed with the SEC on March 13, 2008.

Critical Accounting Policies and Estimates

     Our financial statements are combined with those of our insurance subsidiaries and are presented on a consolidated basis in accordance with generally accepted accounting principles in the United States (“GAAP”).

     Our insurance subsidiaries make estimates and assumptions that can have a significant effect on amounts and disclosures that we report in our financial statements. The most significant estimates relate to the reserves of our insurance subsidiaries for property and casualty insurance unpaid losses and loss expenses, valuation of investments and our insurance subsidiaries’ policy acquisition costs. While we believe our estimates and the estimates of our insurance subsidiaries are appropriate, the ultimate amounts may differ from the estimates provided. We regularly review these estimates and reflect any adjustment considered necessary in our current results of operations.

Liability for Losses and Loss Expenses

     Liabilities for losses and loss expenses are estimates at a given point in time of the amounts an insurer expects to pay with respect to policyholder claims based on facts and circumstances then known. An insurer recognizes at the time of establishing its estimates that its ultimate liability for losses and loss expenses will exceed or be less than such estimates. Our insurance subsidiaries base their estimates of liabilities for losses and loss expenses on assumptions as to future loss trends and expected claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, our insurance subsidiaries may learn additional facts regarding individual claims, and consequently it often becomes necessary for our insurance subsidiaries to refine and adjust their estimates of liability. Our insurance subsidiaries reflect any adjustments to their liabilities for losses and loss expenses in their results of operations in the period in which the changes in estimates are made.

     Our insurance subsidiaries maintain liabilities for the payment of losses and loss expenses with respect to both reported and unreported claims. It is our intent that the liabilities for loss expenses will cover the ultimate costs of settling all losses, including investigation and litigation costs from such losses. Our insurance subsidiaries base the amount of their liability for reported losses primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss. Our insurance subsidiaries determine the amount of their liability for unreported claims and loss expenses on the basis of historical information by line of insurance. Our insurance subsidiaries account for inflation in the reserving function through analysis of costs and trends and reviews of historical reserving results. Our insurance subsidiaries closely monitor their liabilities and recompute them periodically using new information on reported claims and a variety of statistical techniques. Our insurance subsidiaries do not discount their liabilities for losses and loss expenses.

     Liability estimates can change over time because of unexpected changes in assumptions related to our insurance subsidiaries’ external environment and, to a lesser extent, assumptions as to our insurance subsidiaries’ internal operations. Assumptions related to our insurance subsidiaries’ external environment include the absence of significant changes in tort law and the legal environment that increase liability exposure, consistency in judicial interpretations of insurance coverage and policy provisions and stability in economic conditions and the rate of loss cost inflation. For example, our insurance subsidiaries have experienced a decrease in claims frequency on bodily injury liability claims during the past several years while claims severity has gradually increased. These trend changes give rise to greater uncertainty as to the pattern of future loss settlements on bodily injury claims. Related uncertainties regarding future trends include the cost of medical technologies and procedures and changes in the utilization of medical procedures. Internal assumptions include accurate measurement of the impact of rate changes and changes in policy provisions and consistency in the quality and characteristics of business written within a given line of business, among other items. To the extent our insurance subsidiaries determine that underlying factors impacting their assumptions have changed, our insurance subsidiaries attempt to make appropriate adjustments for such changes in their liabilities. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses and loss expenses will likely differ from the amount recorded at March 31, 2008. For every 1% change in our estimate of our insurance subsidiaries’ liability for losses and loss expenses, net of reinsurance recoverable, the effect on our pre-tax results of operations would be approximately $1.5 million.

     The establishment of appropriate liabilities is an inherently uncertain process, and there can be no assurance that the ultimate liability of our insurance subsidiaries will not exceed our insurance subsidiaries’ loss and loss expense reserves and have an adverse effect on our results of operations and financial condition. Furthermore, the timing, frequency and extent of adjustments to our insurance subsidiaries’ estimated future liabilities cannot be predicted, since the historical conditions and events that serve as a basis for our insurance subsidiaries’ estimates of ultimate claim costs may change. As is the case for substantially all property and casualty insurance companies, our insurance subsidiaries have found it necessary in the past to increase their estimated future liabilities for losses and loss expenses in certain periods, and in other periods their estimates have exceeded their actual liabilities. Further adjustments could be required in the future. However, on the basis of our insurance subsidiaries’ internal procedures, which analyze, among other things, their prior assumptions, their experience with similar cases and historical trends such as reserving patterns, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes, we believe that our insurance subsidiaries have made adequate provision for their liability for losses and loss expenses.

     Excluding the impact of isolated catastrophic weather events, our insurance subsidiaries have noted slight downward trends in the number of claims incurred and the number of claims outstanding at period

ends relative to their premium base in recent years across most of their lines of business. However, the amount of the average claim outstanding has increased gradually over the past several years as the property and casualty insurance industry has experienced increased litigation trends, periods in which economic conditions extended the estimated length of disabilities, increased medical loss cost trends and a general slowing of settlement rates in litigated claims.

     Because of Atlantic States’ participation in the pool with Donegal Mutual, Atlantic States is exposed to adverse loss development on the business of Donegal Mutual included in the pool. However, pooled business represents the predominant percentage of the net underwriting activity of both companies, and Donegal Mutual and Atlantic States would proportionately share any adverse risk development of the pooled business. Since substantially all of the business of Atlantic States and Donegal Mutual is pooled and the results shared by each company according to its participation level under the terms of the pooling agreement, the underwriting pool is intended to produce a more uniform and stable underwriting result from year to year for each company than either would experience individually and to spread the risk of loss among each company. The risk profiles of the business written by Atlantic States and Donegal Mutual historically have been, and continue to be, substantially similar. The products, classes of business underwritten, pricing practices and underwriting standards of both companies are determined and administered by the same management and the same underwriting personnel. In addition, as the Donegal Insurance Group, Donegal Mutual and our insurance subsidiaries share a combined business plan to achieve market penetration and underwriting profitability objectives. The products marketed by our insurance subsidiaries and Donegal Mutual are generally complementary, thereby allowing Donegal Insurance Group to offer a broader range of products to a given market and to expand Donegal Insurance Group’s ability to service an entire personal lines or commercial lines account. Distinctions within the products of Donegal Mutual and our insurance subsidiaries generally relate to specific risk profiles targeted within similar classes of business, such as preferred tier compared to standard tier products, but we do not allocate all of the standard risk gradients to one company. Therefore, the underwriting profitability of the business directly written by the individual companies will vary. However, as the risk characteristics of all business written directly by Donegal Mutual and Atlantic States are homogenized within the pool and each company shares the results according to its participation level, each company realizes its pro-rata share of the underwriting profitability of the pool.

     Our insurance subsidiaries’ liability for losses and loss expenses by major line of business as of March 31, 2008 and December 31, 2007 consisted of the following:

		March 31,				December 31,
		2008				2007
		(dollars in thousands)
Commercial lines:
Automobile		$	19,365			$	20,274
Workers’ compensation			36,818				36,309
Commercial multi-peril			26,338				24,847
Other			1,584				1,780
Total commercial lines			84,105				83,210
Personal lines:
Automobile			57,616				55,796
Homeowners			11,008				10,121
Other			1,400				1,025
Total personal lines			70,024				66,942
Total commercial and personal lines			154,129				150,152
Plus reinsurance recoverable			74,679				76,280
Total liability for losses and loss expenses		$	228,808			$	226,432

     We have evaluated the effect on our insurance subsidiaries’ loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables considered in establishing loss and loss expense reserves. We established the range of reasonably likely changes based on a review of changes in accident year development by line of business and applied to our insurance subsidiaries’ loss reserves as a whole. The selected range does not necessarily indicate what could be the potential best or

worst case or the most likely scenario. The following table sets forth the effect on our insurance subsidiaries’ loss and loss expense reserves and our stockholders’ equity in the event of reasonably likely changes in the variables considered in establishing loss and loss expense reserves:

		Adjusted Loss and
		Loss Expense								Adjusted Loss and
Change in Loss		Reserves Net of				Percentage Change				Loss Expense				Percentage Change
and Loss Expense		Reinsurance as of				in Equity as of				Reserves Net of				in Equity as of
Reserves Net of		March 31,				March 31,				Reinsurance as of				December 31,
Reinsurance		2008				2008(1)				December 31, 2007				2007(1)
(dollars in thousands)
(10.0)%		$	138,716				2.8	%		$	135,137				2.8	%
(7.5)			142,569				2.1				138,891				2.1
(5.0)			146,423				1.4				142,644				1.4
(2.5)			150,276				0.7				146,398				0.7
Base			154,129				—				150,152				—
2.5			157,982				-0.7				153,906				-0.7
5.0			161,835				-1.4				157,660				-1.4
7.5			165,689				-2.1				161,413				-2.1
10.0			169,542				-2.8				165,167				-2.8

Investments

     We make estimates concerning the valuation of our investments and the recognition of other than temporary declines in the value of our investments. When we consider the decline in value of an individual investment to be other than temporary, we write down the investment to its estimated net realizable value, and the amount of the write-down is reflected as a realized loss in our results of operations. We individually monitor all investments for other than temporary declines in value. Generally, if an individual equity security has depreciated in value by more than 20% of original cost, and has been in such an unrealized loss position for more than six months, we assume there has been an other than temporary decline in value.  We held 62 equity securities that were in an unrealized loss position at March 31, 2008. A substantial number of these equity securities have declined in value by less than 20% of original cost or have been in an unrealized loss position for less than six months. Certain of these equity securities have declined in value by more than 20% of original cost but have traded at a value exceeding 80% of original cost within the past six months or have been in an unrealized loss position for more than six months but have declined in value by less than 20% of original cost. Based upon our analysis of general market conditions and underlying factors impacting these equity securities, we consider these declines in value to be temporary. With respect to debt securities, we assume there has been an other than temporary decline in value if it is probable that we will not receive contractual payments. In addition, we may write down securities in an unrealized loss position based on a number of other factors, including the fair value of the investment being significantly below its cost, the deteriorating financial condition of the issuer of a security and the occurrence of industry, company and geographic events that have negatively impacted the value of a security or rating agency downgrades. We determined that certain investments trading below cost had declined on an other than temporary basis during the first three months of 2008. We included losses of $71,500 and $0 in net realized investment gains for these investments in the first three months of 2008 and 2007, respectively.

Policy Acquisition Costs

     We defer policy acquisition costs, consisting primarily of commissions, premium taxes and certain other underwriting costs that vary with and are primarily related to the production of business, and amortize them over the period in which our insurance subsidiaries earn the premiums. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premiums to be earned, related investment income, losses and loss expenses and certain other costs we expect to incur as our insurance subsidiaries earn the premiums. Estimates in the calculation of policy acquisition costs have not shown material variability because of uncertainties in applying accounting principles or as a result of sensitivities to changes in key assumptions.

Results of Operations — Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

     Net Premiums Written. Net premiums written for the three months ended March 31, 2008 were $99.7 million, an increase of $19.8 million, or 24.7%, over the $79.9 million of net premiums written for the comparable period in 2007. Net premiums written for the first quarter of 2008 included a $13.6 million transfer of unearned premiums related to the change in the pooling agreement between Atlantic States and Donegal Mutual effective March 1, 2008. Net premiums written in the first quarter of 2008 also reflected the impact of the increased pooling allocation of approximately $2.5 million for the month of March 2008 and benefited from the renewal of our 2008 reinsurance program at lower rates compared to 2007. The lower reinsurance rates were largely due to our decision to increase our per loss retention from $400,000 to $600,000 effective January 1, 2008. Personal lines net premiums written increased $13.2 million, or 27.8%, in the first quarter of 2008 compared to the comparable period in 2007. Commercial lines net premiums written increased $6.6 million, or 20.3%, in the first quarter of 2008 compared to the comparable period in 2007.

     Net Premiums Earned. Net premiums earned increased to $82.0 million for the first quarter of 2008, an increase of $5.3 million, or 6.9%, over the first quarter of 2007. Our insurance subsidiaries earn premiums and recognize them as revenue over the terms of their policies, which are one year or less in duration. Therefore, increases or decreases in net premiums earned generally reflect increases or decreases in net premiums written in the preceding twelve-month period compared to the comparable period one year earlier. Net premiums earned in the first quarter of 2008 reflected the impact of the increased pooling allocation of approximately $2.5 million for the month of March 2008 and benefited from the renewal of our 2008 reinsurance program at lower rates compared to 2007.

     Investment Income. For the three months ended March 31, 2008, our net investment income increased 3.4% to $5.7 million, compared to $5.5 million for the comparable period one year ago. An increase in average invested assets from $591.9 million in the first quarter of 2007 to $618.2 million in the first quarter of 2008 accounted for the increase in net investment income. The increase in our annualized average rate of return on investments was primarily due to improved yields generated from the reinvestment of maturity proceeds of lower-yielding bonds. These improved yields were offset in part by lower before-tax yields generated from our increased holdings of tax-exempt fixed maturities in our investment portfolio during the first quarter of 2008 compared to the comparable period a year earlier. The increased holdings of tax-exempt fixed maturities in 2008 resulted from a continuing shift from taxable to tax-exempt fixed maturities in order to obtain more favorable after-tax yields.

     Net Realized Investment Gains. Net realized investment gains in the first quarter of 2008 were $695,356, compared to $104,785 for the comparable period in 2007. During the first quarter of 2008, impairment losses of $71,500 were included in net realized investment gains.

     Losses and Loss Expenses. The loss ratio of our insurance subsidiaries, which is the ratio of incurred losses and loss expenses to premiums earned, for the first quarter of 2008 was 65.3%, a slight improvement from the 66.0% loss ratio for the first quarter of 2007. However, losses and loss expenses increased for the first quarter of 2008, as we experienced significant weather-related claim activity and increased severity in several casualty lines of business compared to the comparable period in 2007. The commercial lines loss ratio decreased to 52.8% for the first quarter of 2008, compared to 56.0% for the first quarter of 2007, primarily due to decreases in the commercial multi-peril and commercial automobile loss ratios related to decreases in claim frequency and severity in those lines of business. The personal lines loss ratio increased slightly from 72.1% for the first quarter of 2007 to 72.3% for the first quarter of 2008. We experienced significant weather-related claim activity in both quarterly periods.

     Underwriting Expenses. The expense ratio, which is the ratio of policy acquisition costs and other underwriting expenses to premiums earned, for the first quarter of 2008 and 2007 was 31.9% and 32.1%, respectively. The expense ratios in both periods reflected decreased expenses incurred for underwriting-based incentive compensation costs as a result of higher loss ratios compared to the prior full year results.

     Combined Ratio. The combined ratio of our insurance subsidiaries was 97.5% and 98.4% for the three months ended March 31, 2008 and 2007, respectively. The combined ratio represents the sum of the loss ratio, expense ratio and dividend ratio, which is the ratio of workers’ compensation policy dividends incurred to premiums earned.

     Interest Expense. Interest expense for the first quarter of 2008 was $612,476, compared to $708,491 for the first quarter of 2007, and reflected a decrease in average interest rates on our subordinated debentures in the first quarter of 2008 compared to the comparable period in 2007.

     Income Taxes. Income tax expense was $2.0 million for the first quarter of 2008, representing an effective tax rate of 23.2%, compared to $1.5 million for the first quarter of 2007, representing an effective tax rate of 22.0%. The change in effective tax rates is primarily due to tax-exempt interest income representing a lesser proportion of net income before taxes in the 2008 period compared to the 2007 period.

     Net Income and Earnings Per Share. Our net income for the first quarter of 2008 was $6.7 million, or $.27 per share of Class A common stock and $.25 per share of Class B common stock on a diluted basis, an increase of 21.8% over net income of $5.5 million, or $.22 per share of Class A common stock and $.20 per share of Class B common stock on a diluted basis, reported for the first quarter of 2007. Our fully diluted Class A shares outstanding for the first quarter of 2008 decreased to 19.9 million, compared to 20.1 million for the first quarter of 2007, as a result of our repurchase of treasury stock. Our Class B shares outstanding were unchanged at 5.6 million.

Liquidity and Capital Resources

     Liquidity is a measure of an entity’s ability to secure enough cash to meet its contractual obligations and operating needs as they arise. Our major sources of funds from operations are the net cash flows generated from our insurance subsidiaries’ underwriting results, investment income and maturing investments.

     We have historically generated sufficient net positive cash flow from our operations to fund our commitments and build our investment portfolio, thereby increasing future investment returns. The impact of the pooling agreement between Donegal Mutual and Atlantic States has historically been cash flow positive because of the historical underwriting profitability of the pool. The pool is settled monthly, thereby resulting in cash flows substantially similar to cash flows that would result from the underwriting of direct business. We have not experienced any unusual variations in the timing of claim payments associated with the loss reserves of our insurance subsidiaries. We maintain a high degree of liquidity in our investment portfolio in the form of readily marketable fixed maturities, equity securities and short-term investments. Our fixed-maturity investment portfolio is structured following a “laddering” approach, so that projected cash flows from investment income and principal maturities are evenly distributed from a timing perspective, thereby providing an additional measure of liquidity to meet our obligations should an unexpected variation occur in the future. Net cash flows provided by operating activities in the first three months of 2008 and 2007 were $19.7 million and $4.2 million, respectively. The net cash flows provided by operating activities in the first three months of 2008 included an $11.9 million transfer of cash from Donegal Mutual discussed in Note 4 – Reinsurance.

     On November 25, 2003, we entered into a credit agreement with Manufacturers and Traders Trust Company (“M&T”) relating to a four-year $35.0 million unsecured, revolving line of credit. On July 20, 2006, we amended the agreement with M&T to extend the credit agreement for four years from the date of amendment on substantially the same terms. As of March 31, 2008, we have the ability to borrow $35.0 million at interest rates equal to M&T’s current prime rate or the then current LIBOR rate plus between 1.50% and 1.75%, depending on our leverage ratio. In addition, we pay a fee of 0.15% per annum on the loan commitment amount, regardless of usage. The credit agreement requires our compliance with certain covenants, which include minimum levels of our net worth, leverage ratio and statutory surplus and A.M. Best ratings of our insurance subsidiaries. During the three months ended March 31, 2008, we had no borrowings outstanding under the credit agreement, and we were in compliance with all requirements of the credit agreement.

     The following table shows our expected payments for significant contractual obligations as of March 31, 2008.

										1-3
		Total				Less than 1 year				years				4-5 years				After 5 years
		(dollars in thousands)
Net liability for unpaid losses and loss expenses of our insurance subsidiaries		$	154,129			$	67,072			$	70,043			$	7,899			$	9,115
Subordinated debentures			30,929				—				—				—				30,929
Total contractual obligations		$	185,058			$	67,072			$	70,043			$	7,899			$	40,044

     We estimate the timing of the amounts for the net liability for unpaid losses and loss expenses of our insurance subsidiaries based on historical experience and expectations of future payment patterns. The liability is shown net of reinsurance recoverable on unpaid losses and loss expenses to reflect expected future cash flows related to such liability. Amounts assumed by Atlantic States from the pooling agreement with Donegal Mutual represent a substantial portion of our insurance subsidiaries’ gross liability for unpaid losses and loss expenses, and amounts ceded by Atlantic States to the pooling agreement represent a substantial portion of our insurance subsidiaries’ reinsurance recoverable on unpaid losses and loss expenses. Future cash settlement of Atlantic States’ assumed liability from the pool will be included in monthly settlements of pooled activity, wherein amounts ceded to and assumed from the pool are netted. Although Donegal Mutual and we do not anticipate any changes in the pool participation levels in the foreseeable future, any such change would be prospective in nature and therefore would not impact the timing of expected payments for Atlantic States’ proportionate liability for pooled losses occurring in periods prior to the effective date of such change.

     The timing of the amounts for the subordinated debentures is based on their contractual maturities. The debentures are redeemable at our option, at par, after five years from their issuance dates as discussed in Note 6 — Subordinated Debentures. Our subordinated debentures carry interest rates that vary based upon the three-month LIBOR rate and adjust quarterly. Based upon the interest rates in effect as of March 31, 2008, our annual interest cost associated with our subordinated debentures is approximately $2.1 million. For every 1% change in the three-month LIBOR rate, the effect on our annual interest cost would be approximately $300,000.

     On March 7, 2007, our board of directors authorized a share repurchase program, pursuant to which we may purchase up to 500,000 shares of our Class A common stock at market prices prevailing from time to time in the open market subject to the provisions of SEC Rule 10b-18 and in privately negotiated transactions. During the first three months of 2008 and 2007, respectively, we purchased 88,212 and 5,700 shares of our Class A common stock under this program. We have purchased a total of 354,638 shares of our Class A common stock under this program to date.

     On April 17, 2008, our board of directors declared quarterly cash dividends of 10.5 cents per share for our Class A common stock and 9.25 cents per share for our Class B common stock, payable May 15, 2008 to stockholders of record as of the close of business on May 1, 2008. There are no regulatory restrictions on the payment of dividends to our stockholders, although there are state law restrictions on the payment of dividends from our insurance subsidiaries to us. Our insurance subsidiaries are required by law to maintain certain minimum surplus on a statutory basis, and are subject to regulations under which payment of dividends from statutory surplus is restricted and may require prior approval of the applicable domiciliary insurance regulatory authorities. Our insurance subsidiaries are subject to risk-based capital (“RBC”) requirements. At December 31, 2007, our insurance subsidiaries’ capital levels were each substantially above the applicable RBC requirements. At January 1, 2008, amounts available for distribution as dividends to us from our insurance subsidiaries without prior approval of their domiciliary insurance regulatory authorities were $24.1 million from Atlantic States, $5.0 million from Southern, $5.1 million from Le Mars and $3.7 million from Peninsula, all of which remained available at March 31, 2008.

     As of March 31, 2008, we had no material commitments for capital expenditures.

Equity Price Risk

     Our portfolio of marketable equity securities, which is carried on our consolidated balance sheets at estimated fair value, has exposure to the risk of loss resulting from an adverse change in prices. We manage this risk by performing an analysis of prospective investments and through regular reviews of our portfolio by our investment staff.

Credit Risk

     Our portfolio of fixed-maturity securities and, to a lesser extent, our portfolio of short-term investments is subject to credit risk, which we define as the potential loss in market value resulting from adverse changes in the borrower’s ability to repay the debt. We manage this risk by performing an analysis of prospective investments and through regular reviews of our portfolio by our investment staff. We also limit the percentage and amount of our total investment portfolio that can be invested in the securities of any one issuer.

     Our insurance subsidiaries provide property and liability insurance coverages through independent insurance agencies located throughout our operating area. The majority of this business is billed directly to the insured, although a portion of the commercial business is billed through agents to whom our insurance subsidiaries extend credit in the normal course of business.

     Because the pooling agreement does not relieve Atlantic States of primary liability as the originating insurer, Atlantic States is subject to a concentration of credit risk arising from business ceded to Donegal Mutual. Our insurance subsidiaries maintain reinsurance agreements in place with Donegal Mutual and with a number of other major unaffiliated authorized reinsurers.

Impact of Inflation

     Property and casualty insurance premium rates are established before the amount of losses and loss settlement expenses, or the extent to which inflation may impact such expenses, are known. Consequently, our insurance subsidiaries attempt, in establishing rates, to anticipate the potential impact of inflation.

Risk Factors

     The business, results of operations and financial condition, and, therefore, the value of our common stock, are subject to a number of risks. For a description of certain risks, reference is made to our 2007 annual report on Form 10-K filed with the SEC on March 13, 2008.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

     Our market risk generally represents the risk of gain or loss that may result from the potential change in the fair value of our investment portfolio as a result of fluctuations in prices and interest rates and, to a lesser extent, our debt obligations. We attempt to manage our interest rate risk by maintaining an appropriate relationship between the average duration of our investment portfolio and the approximate duration of liabilities, i.e., policy claims of our insurance subsidiaries and debt obligations.

     Other than our continuing shift from taxable to tax-exempt fixed maturity investments, we have maintained approximately the same investment mix and duration of our investment portfolio to our liabilities from December 31, 2007 to March 31, 2008.

     There have been no material changes to our quantitative or qualitative market risk exposure from December 31, 2007 through March 31, 2008.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

     We conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to SEC Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we (including our consolidated subsidiaries) are required to disclose in our periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

     There has been no change in our internal control over financial reporting during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

     Certain forward-looking statements contained herein involve risks and uncertainties. These statements include certain discussions relating to underwriting, premium and investment income volume, business strategies and our business activities during 2008 and beyond. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions. These forward-looking statements reflect our current views about future events, are based on assumptions that reflect current conditions and are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from those anticipated by these forward-looking statements. Many of the factors that will determine future events or our future results of operations are beyond our ability to control or predict.

Part II. Other Information

Item 1. Legal Proceedings.

            None.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

(d) Maximum

Number (or

(c) Total Number of

Approximate Dollar

Shares (or Units)

Value) of Shares (or

Purchased as Part

Units) that May Yet

(a) Total Number

(b) Average

of Publicly

Be Purchased Under

of Shares (or

Price Paid per

Announced Plans

the Plans or

Period

Units) Purchased

Share (or Unit)

or Programs

Programs

Month #1

Class A – None

Class A – None

Class A – None

January 1-31, 2008

Class B – None

Class B – None

Class B – None

Month #2

Class A – 2,000

Class A – $17.42

Class A – 2,000

February 1-29, 2008

Class B – None

Class B – None

Class B – None

(2

)

Class A – 95,000

Class A –$17.17

Class A – 95,000

(1

)

Month #3

Class A – 86,212

Class A –$17.09

Class A – 86,212

(2

)

March 1-31, 2008

Class B – 13,149

Class B – $20.50

Class B – 13,149

(1

)

Class A – 183,212

Class A – $17.14

Class A – 183,212

Total

Class B – 13,149

Class B – $20.50

Class B – 13,149

Item 3. Defaults upon Senior Securities.

            None.

Item 4. Submission of Matters to a Vote of Security Holders.

            None.

Item 5. Other Information.

            None.

Item 6. Exhibits.

Exhibit No.		Description
Exhibit 31.1		Certification of Chief Executive Officer
Exhibit 31.2		Certification of Chief Financial Officer
Exhibit 32.1		Statement of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of Title 18 of the United States Code
Exhibit 32.2		Statement of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of Title 18 of the United States Code

Signatures

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.