##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2003

or

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

For the transition period from _______________ to ______________

Commission File Number: 000-50360

DIRECT GENERAL CORPORATION




(Exact name of registrant as specified in its charter)


|                                                                |  |                                     
|--------------------------------------------------------------- |  | ------------------------------------
|Tennessee                                                       |  | 62-1564496                          
|                                                                |  |                                     
|(State or other jurisdiction of

incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                                |  |                                     
|1281 Murfreesboro Road, Nashville, TN                           |  | 37217                               
|                                                                |  |                                     
|(Address of principal executive offices)                        |  | (Zip Code)                          

(615) 399-0600
(Registrants telephone number, including area code)

Indicate by check mark whether the 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 [   ] No
[ ü ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
[   ] No
[ ü ]

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date: 21,350,640 shares of common
stock, no par value, at September 22, 2003.





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TABLE OF CONTENTS



|                                      |                                                                                               |  |  |  |  |  |  | 
|------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART IFINANCIAL INFORMATION         
|                                      | Item 1. Financial Statements                                                                 
|                                      | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                      | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                      | Item 4. Controls and Procedures                                                              
|PART. II. OTHER INFORMATION          
|                                      | Item 1. Legal Proceedings                                                                    
|                                      | Item 2. Changes in Securities and Use of Proceeds                                            
|                                      | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                      | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                           
|EX-10.31  STOCK PURCHASE AGREEMENT   
|EX-31.1  302 CERTIFICATION OF THE CEO
|EX-31.2  302 CERTIFICATION OF THE CFO
|EX-32.1  906 CERTIFICATION OF THE CEO
|EX-32.2  906 CERTIFICATION OF THE CFO



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##### Table of Contents






PART IFINANCIAL INFORMATION




Item 1. Financial Statements.

DIRECT GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                  |                                               |                                             |      |                                           |        |                  |      |        |        |      |      |         |         |   |      |        |        | 
|--------------------------------- | --------------------------------------------- | ------------------------------------------- | ---- | ----------------------------------------- | ------ | ---------------- | ---- | ------ | ------ | ---- | ---- | ------- | ------- | - | ---- | ------ | ------ | 
|                                  |                                               |                                             |      | Three Months Ended                        |        | Six Months Ended
|                                  |                                               |                                             |      | June 30                                   |        | June 30         
|                                  |                                               |                                             |      |                                           |        |                 
|                                  |                                               |                                             |      | 2003                                      |        | 2002             |      | 2003   |        | 2002
|                                  |                                               |                                             |      |                                           |        |                  |      |        |        |     
|                                  |                                               |                                             |      | (In thousands  except per share amounts)
|Revenues                          |                                               |                                             |      |                                           |        |                  |      |        |        |      |      |         |         |   |      |       
|                                  | Premiums earned                               |                                             | $    | 53,776                                    |        |                  | $    | 35,217 |        |      | $    | 101,451 |         |   | $    | 66,104 |       
|                                  | Finance income                                |                                             |      | 11,220                                    |        |                  |      | 8,593  |        |      |      | 22,447  |         |   |      | 17,228 |       
|                                  | Commission and service fee income             |                                             |      | 7,499                                     |        |                  |      | 5,724  |        |      |      | 15,998  |         |   |      | 13,807 |       
|                                  | Net investment income                         |                                             |      | 1,550                                     |        |                  |      | 1,395  |        |      |      | 2,931   |         |   |      | 2,608  |       
|                                  | Net realized gains (losses) on securities     |                                             |      | 1,655                                     |        |                  |      | (1,109 | )      |      |      | 1,921   |         |   |      | (1,151 | )     
|                                  |                                               |                                             |      |                                           |        |                  |      |        |        |      |      |         |         |   |      |       
|                                  |                                               | Total revenues                              |      |                                           | 75,700 |                  |      |        | 49,820 |      |      |         | 144,748 |   |      |        | 98,596 | 
|                                  |                                               |                                             |      |                                           |        |                  |      |        |        |      |      |         |         |   |      |       
|Expenses                          |                                               |                                             |      |                                           |        |                  |      |        |        |      |      |         |         |   |      |       
|                                  | Insurance losses and loss adjustment expenses |                                             |      | 40,191                                    |        |                  |      | 24,507 |        |      |      | 74,989  |         |   |      | 47,151 |       
|                                  | Selling, general and administrative costs     |                                             |      | 17,651                                    |        |                  |      | 14,566 |        |      |      | 34,982  |         |   |      | 32,390 |       
|                                  | Interest expense                              |                                             |      | 1,805                                     |        |                  |      | 1,626  |        |      |      | 3,372   |         |   |      | 3,235  |       
|                                  |                                               |                                             |      |                                           |        |                  |      |        |        |      |      |         |         |   |      |       
|                                  |                                               | Total expenses                              |      |                                           | 59,647 |                  |      |        | 40,699 |      |      |         | 113,343 |   |      |        | 82,776 | 
|                                  |                                               |                                             |      |                                           |        |                  |      |        |        |      |      |         |         |   |      |       
|                                  | Income before income taxes                    |                                             |      | 16,053                                    |        |                  |      | 9,121  |        |      |      | 31,405  |         |   |      | 15,820 |       
|                                  | Income tax expense                            |                                             |      | 5,919                                     |        |                  |      | 3,287  |        |      |      | 11,461  |         |   |      | 5,449  |       
|                                  |                                               |                                             |      |                                           |        |                  |      |        |        |      |      |         |         |   |      |       
|                                  |                                               | Net income                                  |      |                                           | 10,134 |                  |      |        | 5,834  |      |      |         | 19,944  |   |      |        | 10,371 | 
|                                  |                                               |                                             |      |                                           |        |                  |      |        |        |      |      |         |         |   |      |       
|                                  | Preferred stock dividends  Series B          |                                             |      | 141                                       |        |                  |      | 141    |        |      |      | 281     |         |   |      | 281    |       
|                                  |                                               |                                             |      |                                           |        |                  |      |        |        |      |      |         |         |   |      |       
|                                  |                                               | Net income available to common stockholders |      | $                                         | 9,993  |                  |      | $      | 5,693  |      |      | $       | 19,663  |   |      | $      | 10,090 | 
|                                  |                                               |                                             |      |                                           |        |                  |      |        |        |      |      |         |         |   |      |       
|Earnings per Share                |                                               |                                             |      |                                           |        |                  |      |        |        |      |      |         |         |   |      |       
|Basic earnings per common share   |                                               | $                                           | 0.82 |                                           |        | $                | 0.42 |        |        | $    | 1.62 |         |         | $ | 0.75 |       
|                                  |                                               |                                             |      |                                           |        |                  |      |        |        |      |      |         |         |   |      |       
|Diluted earnings per common share |                                               | $                                           | 0.58 |                                           |        | $                | 0.31 |        |        | $    | 1.14 |         |         | $ | 0.56 |       
|                                  |                                               |                                             |      |                                           |        |                  |      |        |        |      |      |         |         |   |      |       

See notes to consolidated financial statements.

2



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DIRECT GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         |                |         |              |         |        |         |  
|---------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------- | ------- | -------------- | ------- | ------------ | ------- | ------ | ------- | -
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         | (Unaudited)    |         |              |         |       
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         | June 30,       |         | December 31,
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         | 2003           |         | 2002        
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         |                |         |             
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         | (In thousands)
|Assets                                                           |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         |                |         |             
|                                                                 | Investments:                                                                                     |                                                                                         |                                                                                                        |                                                                        |         |                |         |              |        
|                                                                 |                                                                                                  | Debt securities available-for-sale at fair value (amortized cost $169,754 and $119,292) |                                                                                                        | $                                                                      | 174,207 |                |         | $            | 123,576 |       
|                                                                 |                                                                                                  | Short-term investments                                                                  |                                                                                                        |                                                                        |        |                |         |              | 2,745   |       
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         |                |         |             
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        | Total investments                                                      |         |                | 174,207 |              |         |        | 126,321 |  
|                                                                 | Cash and cash equivalents                                                                        |                                                                                         |                                                                                                        | 111,372                                                                |         |                |         | 87,027       |        
|                                                                 | Finance receivables, net                                                                         |                                                                                         |                                                                                                        | 203,992                                                                |         |                |         | 166,935      |        
|                                                                 | Reinsurance balances receivable                                                                  |                                                                                         |                                                                                                        | 52,610                                                                 |         |                |         | 50,874       |        
|                                                                 | Prepaid reinsurance premiums                                                                     |                                                                                         |                                                                                                        | 102,498                                                                |         |                |         | 82,648       |        
|                                                                 | Deferred policy acquisition costs                                                                |                                                                                         |                                                                                                        | 8,853                                                                  |         |                |         | 8,165        |        
|                                                                 | Deferred income taxes                                                                            |                                                                                         |                                                                                                        | 15,995                                                                 |         |                |         | 12,740       |        
|                                                                 | Property and equipment                                                                           |                                                                                         |                                                                                                        | 12,148                                                                 |         |                |         | 12,791       |        
|                                                                 | Goodwill, net                                                                                    |                                                                                         |                                                                                                        | 7,409                                                                  |         |                |         | 7,409        |        
|                                                                 | Other assets                                                                                     |                                                                                         |                                                                                                        | 19,395                                                                 |         |                |         | 14,210       |        
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         |                |         |             
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        | Total assets                                                           |         | $              | 708,479 |              |         | $      | 569,120 |  
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         |                |         |             
|Liabilities, Redeemable Preferred Stock and Stockholders Equity |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         |                |         |             
|                                                                 | Loss and loss adjustment expense reserves                                                        |                                                                                         | $                                                                                                      | 101,456                                                                |         |                | $       | 86,898       |        
|                                                                 | Unearned premiums                                                                                |                                                                                         |                                                                                                        | 215,318                                                                |         |                |         | 172,971      |        
|                                                                 | Reinsurance balances payable and funds held                                                      |                                                                                         |                                                                                                        | 90,412                                                                 |         |                |         | 76,722       |        
|                                                                 | Accounts payable and accrued expenses                                                            |                                                                                         |                                                                                                        | 12,665                                                                 |         |                |         | 13,629       |        
|                                                                 | Income taxes payable                                                                             |                                                                                         |                                                                                                        | 723                                                                    |         |                |         | 3,182        |        
|                                                                 | Notes payable                                                                                    |                                                                                         |                                                                                                        | 168,895                                                                |         |                |         | 126,880      |        
|                                                                 | Capital lease obligations                                                                        |                                                                                         |                                                                                                        | 4,159                                                                  |         |                |         | 4,310        |        
|                                                                 | Other liabilities                                                                                |                                                                                         |                                                                                                        | 30,331                                                                 |         |                |         | 19,648       |        
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         |                |         |             
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        | Total liabilities                                                      |         |                | 623,959 |              |         |        | 504,240 |  
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         |                |         |             
|                                                                 | Redeemable Series A preferred stock, no par; authorized, issued and outstanding shares 
2,937.7 |                                                                                         |                                                                                                        | 5,685                                                                  |         |                |         | 5,685        |        
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         |                |         |             
|                                                                 | Stockholders equity                                                                             |                                                                                         |                                                                                                        |                                                                        |         |                |         |              |        
|                                                                 |                                                                                                  |                                                                                         | Series B preferred stock, no par; authorized shares  2,700.0; issued and
outstanding shares  2,078.2 |                                                                        |         | 9,219          |         |              |         | 9,219  |        
|                                                                 |                                                                                                  |                                                                                         | Preferred stock, no par; authorized shares  4,362.3; no shares issued                                 |                                                                        |         |               |         |              |         |       |        
|                                                                 |                                                                                                  |                                                                                         | Common stock, no par; authorized shares  100,000.0; issued shares  13,447.5                          |                                                                        |         | 9,037          |         |              |         | 9,037  |        
|                                                                 |                                                                                                  |                                                                                         | Retained earnings                                                                                      |                                                                        |         | 63,505         |         |              |         | 43,842 |        
|                                                                 |                                                                                                  |                                                                                         | Accumulated other comprehensive income:                                                                |                                                                        |         |                |         |              |         |        |        
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        | Net unrealized appreciation on investment securities                   |         |                | 2,895   |              |         |        | 2,789   |  
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        | Net loss on cash flow hedge                                            |         |                | (1,273  | )            |         |        | (1,144  | )
|                                                                 |                                                                                                  |                                                                                         | Treasury stock, at cost; 1,328.4 shares at June 30, 2003 and December 31, 2002                         |                                                                        |         | (4,548         | )       |              |         | (4,548 | )      
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         |                |         |             
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        | Total stockholders equity                                             |         |                | 78,835  |              |         |        | 59,195  |  
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         |                |         |             
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        | Total liabilities, redeemable preferred stock and stockholders equity |         | $              | 708,479 |              |         | $      | 569,120 |  
|                                                                 |                                                                                                  |                                                                                         |                                                                                                        |                                                                        |         |                |         |             

See notes to consolidated financial statements.

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DIRECT GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)

|                            |                                           |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |               |       |             |       |   |        |       |   |   |        |        |        |  
|--------------------------- | ----------------------------------------- | ----------------------------------------------------------------------------------- | ----- | ----------------------------------------------- | - | ------ | ----- | -------- | - | ------------- | ------ | -------- | ------ | ------------- | ----- | ----------- | ----- | - | ------ | ----- | - | - | ------ | ------ | ------ | -
|                            |                                           |                                                                                     |       | For the Six Months Ended June 30, 2003 and 2002
|                            |                                           |                                                                                     |       |                                                
|                            |                                           |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |               |       | Accumulated |       |   |        |       |   |   |        |       
|                            |                                           |                                                                                     |       | Series B                                        |   |        |       |          |   |               |        |          |        | Other         |       |             |       |   |        | Total
|                            |                                           |                                                                                     |       | Preferred                                       |   | Common |       | Retained |   | Comprehensive |        | Treasury |        | Stockholders
|                            |                                           |                                                                                     |       | Stock                                           |   | Stock  |       | Earnings |   | Income (Loss) |        | Stock    |        | Equity       
|                            |                                           |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |              
|                            |                                           |                                                                                     |       | (In thousands)                                 
|Balances at January 1, 2003 |                                           | $                                                                                   | 9,219 |                                                 |   | $      | 9,037 |          |   | $             | 43,842 |          |        | $             | 1,645 |             |       | $ | (4,548 | )     |   | $ | 59,195 |       
|                            | Comprehensive income:                     |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |               |       |             |       |   |        |       |   |   |        |        |       
|                            |                                           | Net income                                                                          |       |                                                 |  |        |       |          |  |               |        |          | 19,944 |               |       |             |      |   |        |       |  |   |        |        | 19,944 |  
|                            |                                           | Net unrealized
appreciation on
securities
available-for-sale, net
of deferred taxes |       |                                                 |  |        |       |          |  |               |        |          |       |               |       |             | 106   |   |        |       |  |   |        |        | 106    |  
|                            |                                           | Net change during the
period related to cash
flow hedge                             |       |                                                 |  |        |       |          |  |               |        |          |       |               |       |             | (129  | ) |        |       |  |   |        |        | (129   | )
|                            |                                           |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |               |       |             |       |   |        |       |   |   |        |       
|                            | Total comprehensive income                |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |               |       |             |       |   |        |       |   |   |        | 19,921 |       
|                            |                                           |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |               |       |             |       |   |        |       |   |   |        |       
|                            | Dividends on preferred stock              |                                                                                     |       |                                                |   |        |       |         |   |               |        | (281     | )      |               |       |            |       |   |        |      |   |   |        | (281   | )     
|                            |                                           |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |               |       |             |       |   |        |       |   |   |        |       
|Balances at June 30, 2003   |                                           | $                                                                                   | 9,219 |                                                 |   | $      | 9,037 |          |   | $             | 63,505 |          |        | $             | 1,622 |             |       | $ | (4,548 | )     |   | $ | 78,835 |       
|                            |                                           |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |               |       |             |       |   |        |       |   |   |        |       
|Balances at January 1, 2002 |                                           | $                                                                                   | 9,219 |                                                 |   | $      | 9,037 |          |   | $             | 13,366 |          |        | $             | (615  | )           |       | $ |       |       |   | $ | 31,007 |       
|                            | Comprehensive income:                     |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |               |       |             |       |   |        |       |   |   |        |        |       
|                            |                                           | Net income                                                                          |       |                                                 |  |        |       |          |  |               |        |          | 10,371 |               |       |             |      |   |        |       |  |   |        |        | 10,371 |  
|                            |                                           | Net unrealized
appreciation on
securities
available-for-sale, net
of deferred taxes |       |                                                 |  |        |       |          |  |               |        |          |       |               |       |             | 1,938 |   |        |       |  |   |        |        | 1,938  |  
|                            |                                           | Net change during the
period related to cash
flow hedge                             |       |                                                 |  |        |       |          |  |               |        |          |       |               |       |             | (535  | ) |        |       |  |   |        |        | (535   | )
|                            |                                           |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |               |       |             |       |   |        |       |   |   |        |       
|                            | Total comprehensive income                |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |               |       |             |       |   |        |       |   |   |        | 11,774 |       
|                            |                                           |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |               |       |             |       |   |        |       |   |   |        |       
|                            | Dividends on preferred stock              |                                                                                     |       |                                                |   |        |       |         |   |               |        | (281     | )      |               |       |            |       |   |        |      |   |   |        | (281   | )     
|                            | Purchase of treasury stock
(108.0 shares) |                                                                                     |       |                                                |   |        |       |         |   |               |        |         |        |               |       |            |       |   |        | (248  | ) |   |        | (248   | )     
|                            |                                           |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |               |       |             |       |   |        |       |   |   |        |       
|Balances at June 30, 2002   |                                           | $                                                                                   | 9,219 |                                                 |   | $      | 9,037 |          |   | $             | 23,456 |          |        | $             | 788   |             |       | $ | (248   | )     |   | $ | 42,252 |       
|                            |                                           |                                                                                     |       |                                                 |   |        |       |          |   |               |        |          |        |               |       |             |       |   |        |       |   |   |        |       

See notes to consolidated financial statements.

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DIRECT GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                     |                                                                                   |                                                  |                                             |  |                |  |   |         |                          |         |      |         |         |         |   |  |  |  | 
|-------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------- |  | -------------- |  | - | ------- | ------------------------ | ------- | ---- | ------- | ------- | ------- | - |  |  |  | 
|                     |                                                                                   |                                                  |                                             |  |                |  |   |         | Six Months Ended June 30 |         |      |         |        
|                     |                                                                                   |                                                  |                                             |  |                |  |   |         |                          |         |      |         |        
|                     |                                                                                   |                                                  |                                             |  |                |  |   |         | 2003                     |         | 2002 |         |         |         |  
|                     |                                                                                   |                                                  |                                             |  |                |  |   |         |                          |         |      |         |         |         |  
|                     |                                                                                   |                                                  |                                             |  | (In thousands)
|Operating activities |                                                                                   |                                                  |                                             |  |                |  |   |         |                          |         |      |        
|                     | Net income                                                                        |                                                  |                                             |  |                |  | $ | 19,944  |                          |         | $    | 10,371  |        
|                     | Adjustments to reconcile net income to net cash provided by operating activities: |                                                  |                                             |  |                |  |   |         |                          |         |      |         |        
|                     |                                                                                   | Net realized (gains) losses on securities        |                                             |  |                |  |   |         | (1,921                   | )       |      |         | 1,151   |        
|                     |                                                                                   | Depreciation and amortization                    |                                             |  |                |  |   |         | 2,341                    |         |      |         | 2,470   |        
|                     |                                                                                   | Deferred income taxes                            |                                             |  |                |  |   |         | (4,256                   | )       |      |         | (2,250  | )      
|                     |                                                                                   | Changes in operating assets and liabilities:     |                                             |  |                |  |   |         |                          |         |      |         |         |        
|                     |                                                                                   |                                                  | Finance receivables                         |  |                |  |   |         |                          | (37,057 | )    |         |         | (39,058 | )
|                     |                                                                                   |                                                  | Reinsurance balances receivable             |  |                |  |   |         |                          | (1,736  | )    |         |         | (6,979  | )
|                     |                                                                                   |                                                  | Prepaid reinsurance premiums                |  |                |  |   |         |                          | (19,850 | )    |         |         | (11,804 | )
|                     |                                                                                   |                                                  | Deferred policy acquisition costs           |  |                |  |   |         |                          | (688    | )    |         |         | (2,411  | )
|                     |                                                                                   |                                                  | Income taxes recoverable/payable            |  |                |  |   |         |                          | (2,459  | )    |         |         | 5,085   |  
|                     |                                                                                   |                                                  | Loss and loss adjustment expense reserves   |  |                |  |   |         |                          | 14,558  |      |         |         | 7,857   |  
|                     |                                                                                   |                                                  | Unearned premiums                           |  |                |  |   |         |                          | 42,347  |      |         |         | 41,045  |  
|                     |                                                                                   |                                                  | Reinsurance balances payable and funds held |  |                |  |   |         |                          | 13,690  |      |         |         | 11,202  |  
|                     |                                                                                   |                                                  | Accounts payable and accrued expenses       |  |                |  |   |         |                          | (964    | )    |         |         | 1,772   |  
|                     |                                                                                   |                                                  | Other                                       |  |                |  |   |         |                          | 6,307   |      |         |         | 47      |  
|                     |                                                                                   |                                                  |                                             |  |                |  |   |         |                          |         |      |        
|                     |                                                                                   | Net cash provided by operating activities        |                                             |  |                |  |   |         | 30,256                   |         |      |         | 18,498  |        
|                     |                                                                                   |                                                  |                                             |  |                |  |   |         |                          |         |      |        
|Investing activities |                                                                                   |                                                  |                                             |  |                |  |   |         |                          |         |      |        
|                     | Proceeds from sales and maturities of debt securities available-for-sale          |                                                  |                                             |  |                |  |   | 49,948  |                          |         |      | 7,416   |        
|                     | Purchase of debt securities available-for-sale                                    |                                                  |                                             |  |                |  |   | (98,489 | )                        |         |      | (21,220 | )      
|                     | Net sales (purchases) of short-term investments                                   |                                                  |                                             |  |                |  |   | 2,745   |                          |         |      | (1,200  | )      
|                     | Purchase of property and equipment, net                                           |                                                  |                                             |  |                |  |   | (1,698  | )                        |         |      | (1,763  | )      
|                     |                                                                                   |                                                  |                                             |  |                |  |   |         |                          |         |      |        
|                     |                                                                                   | Net cash used in investing activities            |                                             |  |                |  |   |         | (47,494                  | )       |      |         | (16,767 | )      
|                     |                                                                                   |                                                  |                                             |  |                |  |   |         |                          |         |      |        
|Financing activities |                                                                                   |                                                  |                                             |  |                |  |   |         |                          |         |      |        
|                     | Proceeds from borrowings                                                          |                                                  |                                             |  |                |  |   | 45,218  |                          |         |      | 3,865   |        
|                     | Payment of principal on borrowings                                                |                                                  |                                             |  |                |  |   | (3,354  | )                        |         |      | (1,363  | )      
|                     | Payment of preferred stock dividends                                              |                                                  |                                             |  |                |  |   | (281    | )                        |         |      | (281    | )      
|                     | Purchase of treasury stock                                                        |                                                  |                                             |  |                |  |   |        |                          |         |      | (248    | )      
|                     |                                                                                   |                                                  |                                             |  |                |  |   |         |                          |         |      |        
|                     |                                                                                   | Net cash provided by financing activities        |                                             |  |                |  |   |         | 41,583                   |         |      |         | 1,973   |        
|                     |                                                                                   |                                                  |                                             |  |                |  |   |         |                          |         |      |        
|                     |                                                                                   | Net increase in cash and cash equivalents        |                                             |  |                |  |   |         | 24,345                   |         |      |         | 3,704   |        
|                     |                                                                                   | Cash and cash equivalents at beginning of period |                                             |  |                |  |   |         | 87,027                   |         |      |         | 39,458  |        
|                     |                                                                                   |                                                  |                                             |  |                |  |   |         |                          |         |      |        
|                     |                                                                                   |                                                  | Cash and cash equivalents at end of period  |  |                |  |   |         | $                        | 111,372 |      |         | $       | 43,162  |  
|                     |                                                                                   |                                                  |                                             |  |                |  |   |         |                          |         |      |        

See notes to consolidated financial statements.

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DIRECT GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Nature of Operations

Direct General Corporation, an insurance holding company, was incorporated
in Tennessee in 1993. Its principal operating subsidiaries provide nonstandard
personal automobile insurance, term life insurance and premium finance services
primarily on a direct basis throughout most of the southeastern United States.
Direct General Corporation owns four property/casualty insurance companies, one
life/health insurance company, a premium finance company, six insurance
agencies, two administrative service companies and one company that provides
non-insurance consumer products and services.

2. Basis of Presentation

These financial statements and the notes thereto should be read in
conjunction with the Companys audited financial statements and accompanying
notes included in the Companys final prospectus filed with the Commission on
August 12, 2003, pursuant to Rule 424(b)(4) under the Securities Act of 1933,
as amended, in connection with the Companys Registration Statement on Form S-1
(File No. 333-105505).

The consolidated financial statements reflect all normal recurring
adjustments which were, in the opinion of management, necessary to present a
fair statement of the results for the interim periods presented. The results
of operations for the period ended June 30, 2003, are not necessarily
indicative of the results expected for the full year.

Effective August 11, 2003, the Company effected a stock split pursuant to
which each outstanding share of the Companys common stock would become 12 new
shares of common stock. The Company has adjusted all share and per share
amounts in the accompanying financial statements to reflect the 12 for 1 split.

3. Notes Payable

The Company maintains a revolving credit facility with a consortium of
banks to fund the working capital of the Companys premium finance operations.
During the quarter ended June 30, 2003, the Company amended its loan agreement
increasing the maximum aggregate principal amount available to $180.0 million.
The amount outstanding on this facility at June 30, 2003 was $160.0 million.

4. Commitments

In June 2003, the Company entered into an agreement to acquire an inactive
life insurance company for a purchase price of $1.3 million for the insurance
licenses plus the market value of the debt securities at closing. The total
purchase price including debt securities is expected to be approximately $7.0
million. The only assets of this company are insurance licenses to conduct
life or accident and health insurance business in 44 states and debt
securities.

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5. Earnings Per Share

The following table sets forth the computation of basic and diluted
earnings per share:

|                                  |                                                                                                        |   |                                          |          |                  |   |      |          |      |   |      |          |  |   |      |          | 
|--------------------------------- | ------------------------------------------------------------------------------------------------------ | - | ---------------------------------------- | -------- | ---------------- | - | ---- | -------- | ---- | - | ---- | -------- |  | - | ---- | -------- | 
|                                  |                                                                                                        |   | Three months ended                       |          | Six months ended
|                                  |                                                                                                        |   | June 30                                  |          | June 30         
|                                  |                                                                                                        |   |                                          |          |                 
|                                  |                                                                                                        |   | 2003                                     |          | 2002             |   | 2003 |          | 2002
|                                  |                                                                                                        |   |                                          |          |                  |   |      |          |     
|                                  |                                                                                                        |   | (In thousands, except per share amounts)
|Numerator:                        |                                                                                                        |   |                                          |          |                  |   |      |          |      |   |      |          |  |   |      |         
|                                  | Net income available to common shareholders                                                            |   | $                                        | 9,993    |                  |   | $    | 5,693    |      |   | $    | 19,663   |  |   | $    | 10,090   | 
|                                  | Dividends paid to preferred shareholders                                                               |   |                                          | 261      |                  |   |      | 261      |      |   |      | 521      |  |   |      | 521      | 
|                                  |                                                                                                        |   |                                          |          |                  |   |      |          |      |   |      |          |  |   |      |         
|                                  | Income for purposes of computing diluted
earnings per common share                                     |   | $                                        | 10,254   |                  |   | $    | 5,954    |      |   | $    | 20,184   |  |   | $    | 10,611   | 
|                                  |                                                                                                        |   |                                          |          |                  |   |      |          |      |   |      |          |  |   |      |         
|Denominator:                      |                                                                                                        |   |                                          |          |                  |   |      |          |      |   |      |          |  |   |      |         
|                                  | Weighted average common shares outstanding                                                             |   |                                          | 12,119.1 |                  |   |      | 13,339.5 |      |   |      | 12,119.1 |  |   |      | 13,383.7 | 
|                                  | Dilutive stock options                                                                                 |   |                                          | 310.7    |                  |   |      | 192.8    |      |   |      | 310.7    |  |   |      | 192.8    | 
|                                  | Dilutive preferred stock                                                                               |   |                                          | 5,264.0  |                  |   |      | 5,264.0  |      |   |      | 5,264.0  |  |   |      | 5,264.0  | 
|                                  |                                                                                                        |   |                                          |          |                  |   |      |          |      |   |      |          |  |   |      |         
|                                  | Weighted average common shares outstanding
for purposes of computing diluted earnings
per common share |   |                                          | 17,693.8 |                  |   |      | 18,796.3 |      |   |      | 17,693.8 |  |   |      | 18,840.5 | 
|                                  |                                                                                                        |   |                                          |          |                  |   |      |          |      |   |      |          |  |   |      |         
|Basic earnings per common share   |                                                                                                        | $ | 0.82                                     |          |                  | $ | 0.42 |          |      | $ | 1.62 |          |  | $ | 0.75 |         
|                                  |                                                                                                        |   |                                          |          |                  |   |      |          |      |   |      |          |  |   |      |         
|Diluted earnings per common share |                                                                                                        | $ | 0.58                                     |          |                  | $ | 0.31 |          |      | $ | 1.14 |          |  | $ | 0.56 |         
|                                  |                                                                                                        |   |                                          |          |                  |   |      |          |      |   |      |          |  |   |      |         

6. Subsequent Events

Initial Public Offering of Common Stock. In August 2003, the Company
completed the initial public offering of 7,972,276 shares of common stock
(after effect of a 12 for 1 stock split  see Note 2). The Company sold
3,750,000 shares and selling shareholders sold 4,222,276 shares resulting in
net proceeds to the Company (after deducting issuance costs) of approximately
$71.6 million. $7.7 million of the proceeds of the offering were used to repay
outstanding term loans with First Tennessee Bank National Association and
Hibernia National Bank. The Company intends to utilize the remaining $63.9
million in proceeds to capitalize its insurance subsidiaries, to complete the
acquisition of an inactive life insurance company (see Note 4) and for general
corporate purposes. (see Part II  OTHER INFORMATION, Item 2. Changes in
Securities and Use of Proceeds).

In conjunction with the Companys initial public offering of common stock,
all outstanding shares of preferred stock were converted into, and a common
stock warrant was exercised for, shares of common stock.

Exercise of Option to Acquire Florida Agency. In July 2003, the Company
exercised its option to acquire the assets of a 42-office independent agency
that has been producing business for the Company since 1999 in Florida. The
acquisition is expected to be closed on or before November 1, 2003. The
purchase price of the acquisition will be approximately $14.0 million, less
estimated prepaid amounts of $5.5 million and certain other reductions, with an
estimated additional $5.0 to $6.0 million due at closing.

Stock Option Grants. On August 11, 2003, the Company granted options to
purchase 924,000 shares of the Companys common stock under its 2003 Equity
Incentive Plan to certain of its executive officers and employees, the exercise
price of which equals the initial public offering price of $21 per share.

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

This Managements Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Companys
discussion presented under the caption Managements Discussion and Analysis of
Financial Condition and Results of Operations that is available in the final
prospectus filed with the Securities and Exchange Commission on August 12, 2003
pursuant to Rule 424(b) under the Securities Act of 1933 in connection with the
Companys Registration Statement on Form S-1 (Registration No. 333-105505).

Overview

We are a provider of non-standard personal automobile insurance, premium
finance and other insurance and non-insurance products and services. Our
operations are concentrated in the southeastern part of the United States. Our
business model integrates our insurance, premium finance and agency
subsidiaries under one organization. Our model also emphasizes the
distribution of our products and services through neighborhood sales offices
staffed by salaried employee-agents as opposed to commissioned agents. The
expansion of our neighborhood sales offices in selected states includes the use
of independent insurance agencies, which we generally have an option to
purchase in the future.

Measurement of Results

We evaluate our operations by monitoring key measures of growth and
profitability. We measure our growth by examining our gross revenues, which
comprise gross premiums written and revenues from all other sources produced by
our distribution system. We generally measure our operating results by
examining our net income, return on equity, and our loss, expense and combined
ratios. In addition, we evaluate our performance by comparing the level of our
ancillary income to premiums earned and to operating expenses. The following
provides further explanation of the key measures that we use to evaluate our
results:

Gross premiums written. Gross premiums written is the sum of direct
premiums written and assumed premiums written. Direct premiums written is the
sum of the total policy premiums, net of cancellations, associated with
policies underwritten and issued by our insurance subsidiaries. Assumed
premiums written is the sum of total premiums associated with the insurance
risk transferred to us by other insurance companies pursuant to reinsurance
contracts. We use gross premiums written, which excludes the impact of
premiums ceded to reinsurers, as a measure of the underlying growth of our
insurance business from period to period.

Net premiums written.Net premiums written is the sum of direct and
assumed premiums written less ceded premiums written. Ceded premiums written
is the portion of our direct and assumed premiums that we transfer to our
reinsurers in accordance with the terms of our reinsurance contracts based upon
the risks they accept. We use net premiums written, primarily in relation to
gross premiums written, to measure the amount of business retained after
cessions to reinsurers.

Gross revenues (a non-GAAP financial measure).Gross revenues is the sum
of gross premiums written plus all other revenues (finance income, commission
and service fee income, net investment income, and net realized gains (losses)
on securities). We use gross revenues as the primary measure of the underlying
growth of our revenue streams from period to period. Gross revenues are
reconciled to total revenues in the Managements Discussion and Analysis of
Financial Condition and Results of Operations  Results of Operations.

Loss ratio. Loss ratio is the ratio (expressed as a percentage) of losses
and loss adjustment expenses incurred to premiums earned and measures the
underwriting profitability of a companys insurance business. Loss ratio
generally is measured on both a gross (direct and assumed) and net (gross less
ceded) basis. We use the gross loss ratio as a measure of the overall
underwriting profitability of the insurance business we write and to assess the
adequacy of our pricing. Our net loss ratio is meaningful in evaluating our
financial results, which are net of ceded reinsurance, as reflected in our
consolidated financial statements. Our loss ratios are generally calculated in
the same way for GAAP and statutory accounting purposes.

Expense ratio. Expense ratio is the ratio (expressed as a percentage) of
net operating expenses to premiums earned and measures a companys operational
efficiency in producing, underwriting and administering its insurance business.
For statutory accounting purposes, operating expenses of an insurance company
exclude investment expenses, and are reduced by other income. There is no such
industry definition for determining an expense ratio for GAAP purposes. As a
result, we apply the statutory concept of net operating expenses in calculating
our expense ratio on a GAAP basis. We reduce our operating expenses by
ancillary income (excluding net investment income and realized gains (losses)
on securities) to calculate our net operating expenses. Due to our
historically high levels of reinsurance, we calculate our expense ratio on both
a gross basis (before the effect of ceded reinsurance) and a net basis (after
the effect of ceded reinsurance). Although the net basis is meaningful in
evaluating our financial results that are net of ceded reinsurance, as
reflected in our consolidated financial statements, we believe that the gross
expense ratio best reflects the operational efficiency of the underlying
business and is a better measure of future trends.

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##### Table of Contents



Combined ratio. Combined ratio is the sum of the loss ratio and the
expense ratio and measures a companys overall underwriting profit. If the
combined ratio is at or above 100, an insurance company cannot be profitable
without investment income (and may not be profitable if investment income is
insufficient). We use the GAAP combined ratio in evaluating our overall
underwriting profitability and as a measure for comparison of our profitability
relative to the profitability of our competitors.

Ancillary income measures.We have developed measures of our ability to
generate ancillary income (finance income and commission and service fee
income) that reflect the differences between our business model and those used
by our competitors. We measure our ancillary income as a percentage of
premiums earned and as a percentage of our operating expenses.

Results of Operations

The table below summarizes certain operating results and key measures we
use in monitoring and evaluating our operations. The information provided is
intended to summarize and supplement information contained in our consolidated
financial statements and to assist the reader in gaining a better understanding
of our results of operations.

|                                                          |                      |             |                    |             |                  |      |       |      |   |   |        |       |   |   |       |       |  
|--------------------------------------------------------- | -------------------- | ----------- | ------------------ | ----------- | ---------------- | ---- | ----- | ---- | - | - | ------ | ----- | - | - | ----- | ----- | -
|                                                          |                      |             | Three months ended |             | Six months ended
|                                                          |                      |             | June 30,           |             | June 30,        
|                                                          |                      |             |                    |             |                 
|($ in millions)                                           |                      | 2003        |                    | 2002        |                  | 2003 |       | 2002
|                                                          |                      |             |                    |             |                  |      |       |     
|                                                          |                      | (unaudited) |                    | (unaudited)
|                                                          |                      |             |                    |             |                 
|Selected Financial Data                                   |                      |             |                    |             |                  |      |       |      |   |   |        |       |   |   |       |      
|Gross premiums written                                    |                      | $           | 87.9               |             |                  | $    | 68.5  |      |   | $ | 228.5  |       |   | $ | 174.0 |      
|Ancillary income                                          |                      |             | 18.7               |             |                  |      | 14.3  |      |   |   | 38.4   |       |   |   | 31.0  |      
|Net investment income and realized
capital gains (losses) |                      |             | 3.2                |             |                  |      | 0.3   |      |   |   | 4.9    |       |   |   | 1.5   |      
|                                                          |                      |             |                    |             |                  |      |       |      |   |   |        |       |   |   |       |      
|                                                          | Gross revenues       |             | $                  | 109.8       |                  |      | $     | 83.1 |   |   | $      | 271.8 |   |   | $     | 206.5 |  
|                                                          |                      |             |                    |             |                  |      |       |      |   |   |        |       |   |   |       |      
|Ceded premiums written                                    |                      |             | (39.9              | )           |                  |      | (31.4 | )    |   |   | (104.6 | )     |   |   | (78.6 | )    
|Change in net unearned premiums                           |                      |             | 5.8                |             |                  |      | (1.9  | )    |   |   | (22.5  | )     |   |   | (29.3 | )    
|                                                          |                      |             |                    |             |                  |      |       |      |   |   |        |       |   |   |       |      
|                                                          | Total revenues       |             | $                  | 75.7        |                  |      | $     | 49.8 |   |   | $      | 144.7 |   |   | $     | 98.6  |  
|                                                          |                      |             |                    |             |                  |      |       |      |   |   |        |       |   |   |       |      
|Net income                                                |                      | $           | 10.1               |             |                  | $    | 5.8   |      |   | $ | 19.9   |       |   | $ | 10.4  |      
|                                                          |                      |             |                    |             |                  |      |       |      |   |   |        |       |   |   |       |      
|Key Financial Ratios                                      |                      |             |                    |             |                  |      |       |      |   |   |        |       |   |   |       |      
|Loss ratio  net                                          |                      |             | 74.7               | %           |                  |      | 69.6  | %    |   |   | 73.9   | %     |   |   | 71.3  | %    
|Expense ratio  net                                       |                      |             | 1.4                | %           |                  |      | 5.3   | %    |   |   | (0.1   | %)    |   |   | 6.9   | %    
|                                                          |                      |             |                    |             |                  |      |       |      |   |   |        |       |   |   |       |      
|                                                          | Combined ratio  net |             |                    | 76.1        | %                |      |       | 74.9 | % |   |        | 73.8  | % |   |       | 78.2  | %
|                                                          |                      |             |                    |             |                  |      |       |      |   |   |        |       |   |   |       |      
|Ancillary income to gross premiums earned                 |                      |             | 19.0               | %           |                  |      | 20.4  | %    |   |   | 20.6   | %     |   |   | 23.3  | %    
|Ancillary income to net operating expenses                |                      |             | 95.9               | %           |                  |      | 88.3  | %    |   |   | 100.0  | %     |   |   | 87.1  | %    

Overview of Operating Results

Net income increased 74.1% to $10.1 million or $0.58 per share, on a
diluted basis, for the three months ended June 30, 2003 and 91.3% to $19.9
million or $1.14 per share, on a diluted basis, for the six months ended June
30, 2003 compared to the same periods in 2002. The increase in net income was
primarily attributable to continued growth in premiums written and earned,
growth in ancillary income and an increase in net realized gains on securities,
all of which were partially offset by an increase in loss ratios.

9



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##### Table of Contents



Revenues

Premiums

The following table presents our gross premiums written in our major
markets and provides a summary of gross, ceded and net premiums written and
earned for the periods presented:

|                                                |                       |             |                    |             |                  |      |       |      |  |   |        |       |  |   |       |      | 
|----------------------------------------------- | --------------------- | ----------- | ------------------ | ----------- | ---------------- | ---- | ----- | ---- |  | - | ------ | ----- |  | - | ----- | ---- | 
|                                                |                       |             | Three months ended |             | Six months ended
|                                                |                       |             | June 30,           |             | June 30,        
|                                                |                       |             |                    |             |                 
|($ in millions)                                 |                       | 2003        |                    | 2002        |                  | 2003 |       | 2002
|                                                |                       |             |                    |             |                  |      |       |     
|                                                |                       | (unaudited) |                    | (unaudited)
|Gross premiums written                          |                       |             |                    |             |                  |      |       |      |  |   |        |       |  |   |       |     
|                                                | Florida               |             | $                  | 46.7        |                  |      | $     | 38.1 |  |   | $      | 117.6 |  |   | $     | 87.5 | 
|                                                | Tennessee             |             |                    | 13.2        |                  |      |       | 11.8 |  |   |        | 34.1  |  |   |       | 33.8 | 
|                                                | Georgia               |             |                    | 5.0         |                  |      |       | 5.6  |  |   |        | 16.9  |  |   |       | 16.2 | 
|                                                | Louisiana             |             |                    | 5.8         |                  |      |       | 4.6  |  |   |        | 16.3  |  |   |       | 12.2 | 
|                                                | Mississippi           |             |                    | 4.0         |                  |      |       | 3.9  |  |   |        | 12.4  |  |   |       | 11.2 | 
|                                                | All other states      |             |                    | 13.2        |                  |      |       | 4.5  |  |   |        | 31.2  |  |   |       | 13.1 | 
|                                                |                       |             |                    |             |                  |      |       |      |  |   |        |       |  |   |       |     
|Gross premiums written1                         |                       | $           | 87.9               |             |                  | $    | 68.5  |      |  | $ | 228.5  |       |  | $ | 174.0 |     
|Ceded premiums written                          |                       |             | (39.9              | )           |                  |      | (31.4 | )    |  |   | (104.6 | )     |  |   | (78.6 | )   
|                                                |                       |             |                    |             |                  |      |       |      |  |   |        |       |  |   |       |     
|                                                | Net premiums written1 |             | $                  | 48.0        |                  |      | $     | 37.1 |  |   | $      | 123.9 |  |   | $     | 95.4 | 
|                                                |                       |             |                    |             |                  |      |       |      |  |   |        |       |  |   |       |     
|Gross premiums earned                           |                       | $           | 98.4               |             |                  | $    | 70.2  |      |  | $ | 186.2  |       |  | $ | 132.9 |     
|Ceded premiums earned                           |                       |             | (44.7              | )           |                  |      | (35.0 | )    |  |   | (84.8  | )     |  |   | (66.8 | )   
|                                                |                       |             |                    |             |                  |      |       |      |  |   |        |       |  |   |       |     
|                                                | Net premiums earned   |             | $                  | 53.7        |                  |      | $     | 35.2 |  |   | $      | 101.4 |  |   | $     | 66.1 | 
|                                                |                       |             |                    |             |                  |      |       |      |  |   |        |       |  |   |       |     
|Net premiums written to gross premiums written  |                       |             | 54.6               | %           |                  |      | 54.2  | %    |  |   | 54.2   | %     |  |   | 54.8  | %   
|Gross premiums earned to gross premiums written |                       |             | 111.9              | %           |                  |      | 102.5 | %    |  |   | 81.5   | %     |  |   | 76.4  | %   
|Net premiums earned to net premiums written     |                       |             | 111.9              | %           |                  |      | 94.9  | %    |  |   | 81.8   | %     |  |   | 69.3  | %   
|                                                |                       |             |                    |             |                  |      |       |      |  |   |        |       |  |   |       |     



|1 |  | Our business is somewhat seasonal and the first
quarter of each year generally represents the highest
quarterly volume of written premiums, which we attribute
largely to an increase in our customers discretionary income
as a result of income tax refunds. Consequently, premiums
written are higher in the first quarter and generally lower
in the second quarter due to the seasonality and the impact
of normal cancellation rates on policies written in the first
quarter.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gross premiums written increased $19.4 million or 28.3% and $54.5 million
or 31.3% for the three months and six months ended June 30, 2003, compared to
2002. The increase in gross premiums written reflected growth in both new and
renewal policies. Gross written premiums from the sale of our core nonstandard
automobile insurance business increased 27.0% and 30.3% for the three and
six-month periods ended June 30, 2003, respectively, while gross premiums
written from the sale of our term life insurance business increased 78.1% to
$6.5 million for the first six months of 2003. Gross premiums earned, a
function of gross premiums written over the current and prior periods,
increased 40.2% in the second quarter of 2003 and 40.1% for the first six
months of 2003 as compared to the corresponding periods in the prior year.

For the six months ended June 30, 2003, gross premiums written increased
in each state in which we operate, with the majority of our growth occurring in
Florida, our largest state, where gross premiums written increased $30.1
million or 34.4%. Approximately 80% of the growth in Florida is attributable
to an increase in average policies inforce including a significant increase in
the number of renewal policies with the remaining 20% coming from an increase
in the average premiums per policy. In January 2003, we began our expansion
into the state of Texas and are assuming non-standard personal automobile
insurance policies underwritten by a Texas county mutual insurer. We assumed
$3.6 million and $5.4 million of gross premiums written in Texas during the
three and six-month periods ended June 30, 2003.

The growth in net premiums written and earned is a function of gross
premiums written and earned less ceded premiums written and earned. The ratio
of net premiums written to gross premiums written remained fairly constant at
approximately 54% to 55% for the three and six-month periods ended June 30,
2003 and 2002. However, we expect this percentage to increase throughout the
remainder of 2003 as we retain more of the business through the reduction in
our use of quota share reinsurance.

Ancillary Income

Ancillary income for the three and six-month periods ended June 30, 2003
was $18.7 million and $38.4 million, respectively, which represents an increase
of 30.8% and 23.9%, respectively, compared to the corresponding periods in
2002. This increase was

10



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##### Table of Contents



primarily due to an increase in premium finance income as a result of
increased premium volume and increased penetration in the sales of ancillary
insurance products. The ratio of ancillary income to gross premiums earned was
19.0% and 20.4% for the second quarter of 2003 and 2002, respectively, while
the ratio of ancillary income to operating expenses improved to 95.9% in the
2003 period from 88.3% in the 2002 period. For the six months ended June 30,
2003 and 2002, the ratio of ancillary income to gross premiums earned was 20.6%
and 23.3%, respectively, and the ratio of ancillary income to operating
expenses was 100.2% and 87.1%, respectively. The ratio of ancillary income to
gross premiums earned decreased slightly in the second quarter of 2003 because
we are not currently financing the insurance premiums in Texas.

Net Investment Income

Net investment income increased to $1.5 million from $1.4 million for the
three months ended June 30, 2003 compared to the same period of 2002. The
increase was due primarily to an increase in invested assets partially offset
by a decrease in investment yields. For the six months ended June 30, 2003,
net investment income increased to $2.9 million from $2.6 million in the
corresponding period in 2002. Average invested assets increased 31.5% to
$148.2 million in the six months of 2003 from $112.7 million in the first six
months of 2002.

Realized Gains (Losses) on Securities

We realized gross gains of $1.7 million and no gross losses on the sale of
securities for the three months ended June 30, 2003. Gross gains for the six
months ended June 30, 2003 increased to $1.9 million with no year to date gross
losses. The gross gains in the second quarter of 2003 were primarily
attributable to the sale of certain securities as we repositioned our bond
portfolio based on our investment guidelines for changes in market conditions
and other factors. In particular, one of our insurance subsidiaries had
historically maintained a significant portion of its investments in tax-exempt
securities in the state of Georgia in order to qualify for a reduction in
premium tax rates. Due to the growth in this investment portfolio, we believe
that the returns available by managing the portfolio without the limitations
inherent to achieve the premium tax savings outweighs the potential saving.
Accordingly, we began to reposition the portfolio and received proceeds on the
sale of Georgia bonds of $25.5 million, which generated net realized gains in
excess of $1.2 million during the second quarter of 2003. Comparatively, we
realized no gross gains during the three or six-month periods ended June 30,
2002; however, we recorded gross losses of $1.1 million for both of these
periods attributable to our investment in WorldCom, Inc. bonds that were
written down as a result of an adjustment for other than temporary impairment
of securities.

Expenses

Insurance Losses and Loss Adjustment Expenses

Insurance losses and loss adjustment expenses increased to $40.2 million
for the three months ended June 30, 2003 from $24.5 million for the same period
in 2002. The second quarter 2003 net loss ratio of 74.7% was increased by
approximately 2.2 points of weather related losses and increased by 0.5 points
of unfavorable development in prior year reserves that occurred during the
quarter. In comparison, the second quarter 2002 loss ratio of 69.6% was
decreased by 2.6 points of favorable development in prior year reserves and
offset by an increase of approximately 0.8 points in weather related losses
during the quarter.

For the six months ended June 30, 2003, insurance losses and loss
adjustment expenses increased to $75.0 million from $47.2 million in the
corresponding 2002 period. The six months ended June 30, 2003 loss ratio of
73.9% was increased by approximately 1.2 points in weather related losses that
were offset by 0.5 points of favorable development in prior year reserves. The
2002 net loss ratio of 71.3% was decreased by 2.6 points of favorable
development in prior year reserves that was partially offset by 0.4 points in
weather related losses.

Operating Expenses

Operating expenses increased 20.4% to $19.5 million for the three months
ended June 30, 2003, compared to $16.2 million for the same period of 2002.
The increase in operating expenses reflected a $1.2 million increase in
commissions paid to independent agents and a $2.1 million increase in other
operating costs associated with increased premium volumes.

For the six months ended June 30, 2003, operating expenses only increased
7.9% to $38.4 million from $35.6 million in the comparable period in 2002. The
increase in operating expenses was primarily attributable to an increase in
commissions paid to independent agents and other increases in operating costs
associated with increased premium volumes totaling of $5.5 million, which was
partially offset by a $2.7 million increase in net reinsurance commissions
received.

11



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##### Table of Contents



Income Taxes

Our effective tax rates were 36.9% and 36.5% for the three and six-month
periods ended June 30, 2003, respectively. These rates have increased slightly
over the effective tax rates in the corresponding periods in 2002 of 36.0% and
34.4% because our life insurance company will no longer qualify for the small
life insurance company deduction. In addition, our tax-exempt interest income
did not increase in proportion with the growth in pretax income.

Financial Condition

Liquidity and Capital Resources

Financing and Capital

In August 2003, we completed an initial public offering of our common
stock. In conjunction with this offering, our Board of Directors approved a 12
for 1 stock split and we issued shares of common stock based on the conversion
of the Series A redeemable preferred stock and Series B preferred stock and the
exercise of the common stock warrant. We sold 3,750,000 shares of common sock
in the offering and received net proceeds of $71.6 million after deducting the
underwriting discount and estimated offering expenses.

Our premium finance operations are supported by a revolving credit
agreement with a group of banks. The maximum aggregate amount available under
this facility was increased to $180.0 million during the quarter and the amount
outstanding was $160.0 million as of June 30, 2003.

Direct General Corporation had two capital loans outstanding as of June
30, 2003. The aggregate principal amounts outstanding of $5.0 million and $2.7
million were repaid in full on August 15, 2003 with the proceeds from our
public offering.

Reinsurance

We ceded 45.8% and 45.2% of our gross premiums written to reinsurers in
the six months ended June 30, 2003 and 2002, respectively. Since a significant
portion of the net proceeds received from our initial public offering will be
used to increase the capitalization of our insurance subsidiaries, we elected
to reduce this percentage in the third quarter of 2003 to approximately 30% and
intend to reduce this percentage to approximately 15% for the fourth quarter of
2003.

Investments

We had total cash and invested assets of $285.6 million as of June 30,
2003. The following table summarizes our cash and invested assets as of June
30, 2003:

|                                    |       |                |       |            |  |            |       |       |  |  |      |       |  
|----------------------------------- | ----- | -------------- | ----- | ---------- |  | ---------- | ----- | ----- |  |  | ---- | ----- | -
|($ in millions)                     |       | Amortized Cost |       | Fair Value |  | % Of Total
|                                    |       |                |       |            |  |           
|Debt securities, available
for sale |       | $              | 169.8 |            |  | $          | 174.2 |       |  |  | 61.0 | %    
|Cash and cash equivalents           |       |                | 111.4 |            |  |            | 111.4 |       |  |  | 39.0 | %    
|                                    |       |                |       |            |  |            |       |       |  |  |      |      
|                                    | Total |                | $     | 281.2      |  |            | $     | 285.6 |  |  |      | 100.0 | %
|                                    |       |                |       |            |  |            |       |       |  |  |      |      

Debt securities. Our investment portfolio primarily consists of debt
securities, all classified as available for sale and carried at market value
with unrealized gains and losses reported in our financial statements as a
separate component of shareholders equity on an after-tax basis. As of June
30, 2003, our investment portfolio of $174.2 million included $4.4 million in
net unrealized gains. We realized pretax net gains of $1.9 million in the
first six months of 2003. The effective duration of our investment portfolio
was 4.5 years at June 30, 2003.

12



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##### Table of Contents



The following table shows the composition by our internal industry
classification of the amortized cost, gross unrealized gains, gross unrealized
losses, and fair value of debt securities available-for-sale as of June 30,
2003:

|                                                                                      |                                  |      |           |       |            |        |            |       |       |   |     |     |  |   |       |      | 
|------------------------------------------------------------------------------------- | -------------------------------- | ---- | --------- | ----- | ---------- | ------ | ---------- | ----- | ----- | - | --- | --- |  | - | ----- | ---- | 
|                                                                                      |                                  |      |           |       |            |        | Gross      |       | Gross |   |     |     | 
|                                                                                      |                                  |      | Amortized |       | Unrealized |        | Unrealized |       | Fair 
|($ in millions)                                                                       |                                  | Cost |           | Gains |            | Losses |            | Value
|                                                                                      |                                  |      |           |       |            |        |            |      
|U.S. Treasury securities and
obligations of U.S. government
corporations and agencies |                                  | $    | 50.3      |       |            | $      | 0.4        |       |       | $ | 0.2 |     |  | $ | 50.5  |     
|Obligations of states and
political subdivisions                                      |                                  |      | 41.6      |       |            |        | 2.4        |       |       |   |    |     |  |   | 44.0  |     
|Corporate debt securities                                                             |                                  |      |           |       |            |        |            |       |       |   |     |     |  |   |       |     
|                                                                                      | Banks and financial
institutions |      |           | 22.0  |            |        |            | 0.7   |       |   |     | 0.1 |  |   |       | 22.6 | 
|                                                                                      | Credit cards and auto loans      |      |           | 28.0  |            |        |            | 0.4   |       |   |     | 0.1 |  |   |       | 28.3 | 
|                                                                                      | Industrial                       |      |           | 20.2  |            |        |            | 0.7   |       |   |     | 0.1 |  |   |       | 20.8 | 
|                                                                                      | Telecommunications               |      |           | 4.6   |            |        |            | 0.2   |       |   |     |    |  |   |       | 4.8  | 
|                                                                                      | Utilities                        |      |           | 3.1   |            |        |            | 0.1   |       |   |     |    |  |   |       | 3.2  | 
|                                                                                      |                                  |      |           |       |            |        |            |       |       |   |     |     |  |   |       |     
|Corporate debt securities                                                             |                                  |      | 77.9      |       |            |        | 2.1        |       |       |   | 0.3 |     |  |   | 79.7  |     
|                                                                                      |                                  |      |           |       |            |        |            |       |       |   |     |     |  |   |       |     
|Total                                                                                 |                                  | $    | 169.8     |       |            | $      | 4.9        |       |       | $ | 0.5 |     |  | $ | 174.2 |     
|                                                                                      |                                  |      |           |       |            |        |            |       |       |   |     |     |  |   |       |     

The amortized cost and fair value of debt securities available-for-sale as
of June 30, 2003, by contractual maturity, is shown below:

|                   |                        |                |       |            |  |   |       |      | 
|------------------ | ---------------------- | -------------- | ----- | ---------- |  | - | ----- | ---- | 
|($ in millions)    |                        | Amortized Cost |       | Fair Value
|                   |                        |                |       |           
|Years to maturity: |                        |                |       |            |  |   |       |     
|                   | One or less            |                | $     | 5.6        |  |   | $     | 5.6  | 
|                   | After one through five |                |       | 77.1       |  |   |       | 78.8 | 
|                   | After five through ten |                |       | 68.9       |  |   |       | 71.5 | 
|                   | After ten              |                |       | 18.2       |  |   |       | 18.3 | 
|                   |                        |                |       |            |  |   |       |     
|Total              |                        | $              | 169.8 |            |  | $ | 174.2 |     
|                   |                        |                |       |            |  |   |       |     

The Securities Valuation Office of the NAIC evaluates the bond investments
of insurers for regulatory reporting purposes and assigns securities to one of
six investment categories called NAIC designations. The NAIC designations
parallel the credit ratings of the Nationally Recognized Statistical Rating
Organizations for marketable bonds. NAIC designations 1 and 2 include bonds
considered to be investment grade, rated BBB- or higher by Standard & Poors
(S&P). NAIC designations 3 through 6 include bonds considered below
investment grade, rated BB+ or lower by S&P. All of the debt securities in
our portfolio were rated investment grade by the NAIC and S&P as of June 30,
2003. Investment grade securities generally bear lower yields and lower degrees
of risk than those that are unrated or are rated non-investment grade.

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The quality distribution of our investment portfolio as of June 30, 2003
was as follows:

|                |  |        |  |           |       |            |  |   |       |  |  |  |       |  
|--------------- |  | ------ |  | --------- | ----- | ---------- |  | - | ----- |  |  |  | ----- | -
|($ in millions)
|               
|NAIC            |  | S&P    |  | Amortized |       |            |  |   |       |  |  | 
|Rating          |  | Rating |  | Cost      |       | Fair Value |  | %
|                |  |        |  |           |       |            |  |  
|1               |  | AAA    |  | $         | 80.8  |            |  | $ | 82.6  |  |  |  | 47.4  | %
|1               |  | AA     |  |           | 24.9  |            |  |   | 26.1  |  |  |  | 15.0  | %
|1               |  | A      |  |           | 30.6  |            |  |   | 31.7  |  |  |  | 18.2  | %
|2               |  | BBB    |  |           | 14.5  |            |  |   | 14.7  |  |  |  | 8.4   | %
|1               |  | Agency |  |           | 19.0  |            |  |   | 19.1  |  |  |  | 11.0  | %
|                |  |        |  |           |       |            |  |   |       |  |  |  |       |  
|                |  |        |  | $         | 169.8 |            |  | $ | 174.2 |  |  |  | 100.0 | %
|                |  |        |  |           |       |            |  |   |       |  |  |  |       |  

We evaluate the risk versus reward tradeoffs of investment opportunities,
measuring their effects on the stability, diversity, overall quality and
liquidity of our investment portfolio. The primary market risk exposure to our
debt securities portfolio is interest rate risk, which is limited by managing
duration to a defined range of three to four years. Interest rate risk
includes the risk from movements in the underlying market rate and in credit
spreads of the respective sectors of debt securities held in our portfolio.
The fair value of our fixed maturity portfolio is directly impacted by changes
in market interest rates. The following table provides information about our
investments that are sensitive to interest rate risk and provides estimates of
expected changes in fair value based upon a 100 basis-point increase and
decrease in market interest rates as of June 30, 2003:

|                                    |       |        |                  |            |  |        |       |       |                  |   |       |       | 
|----------------------------------- | ----- | ------ | ---------------- | ---------- |  | ------ | ----- | ----- | ---------------- | - | ----- | ----- | 
|                                    |       |        | +100 Basis Point |            |  |        |       |       | -100 Basis Point
|($ in millions)                     |       | Change |                  | Fair Value |  | Change
|                                    |       |        |                  |            |  |       
|Debt securities, available for sale |       | $      | 166.3            |            |  | $      | 174.2 |       |                  | $ | 182.1 |      
|Cash and cash equivalents           |       |        | 111.4            |            |  |        | 111.4 |       |                  |   | 111.4 |      
|                                    |       |        |                  |            |  |        |       |       |                  |   |       |      
|                                    | Total |        | $                | 277.7      |  |        | $     | 285.6 |                  |   | $     | 293.5 | 
|                                    |       |        |                  |            |  |        |       |       |                  |   |       |      

Cash and cash equivalents. Our balance in cash and cash equivalents
represented a large component of the total cash and invested assets as of June
30, 2003. During the second quarter, we changed investment portfolio managers
and shifted the investment strategy for one of the insurance subsidiaries that
eliminated the focus on maximizing premium tax credits in the state of Georgia.
As a result, our investment portfolios were in process of being rebalanced and
not all funds were fully invested at the end of the quarter, which resulted in
a higher level of cash held. We anticipate that our balance in cash and cash
equivalents would be even higher at the end of the third quarter of 2003
because not all of the proceeds from the offering will be fully invested at
that time. However, we expect that cash will represent a lower percentage of
total cash and invested assets in subsequent periods.

Forward-Looking Statements

This report includes various forward-looking statements regarding the
Company that are subject to risks and uncertainties including, without
limitation, the factors set forth below and under the caption Risk Factors in
the prospectus filed with the Commission on August 12, 2003, pursuant to Rule
424(b)(4) under the Securities Act of 1933, as amended, in connection with the
Companys Registration Statement on Form S-1 (File No. 333-105505).
Forward-looking statements include, but are not limited to, discussions
regarding our operating strategy, growth strategy, acquisition strategy, cost
savings initiatives, industry, economic conditions, financial condition,
liquidity and capital resources and results of operations. Such statements
include, but are not limited to, statements preceded by, followed by or that
otherwise include the words believes, expects, anticipates, intends,
estimates or similar expressions. For those statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.

Certain important factors, which are discussed elsewhere in this document
and in our Registration Statement described above, could affect our future
financial results and could cause actual results to differ materially from
those expressed in forward-looking statements contained or incorporated by
reference in this document.




Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Please see the caption Financial Condition  Liquidity and Capital
Resources  Investments in Part I  FINANCIAL INFORMATION, Item 2.
Managements Discussion and Analysis of Financial Condition and Results of
Operations of this report for a description of our quantitative and qualitative
disclosures about market risks.

14



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##### Table of Contents






Item 4. Controls and Procedures.



| | (a) |  | Evaluation of Disclosure Controls and Procedures. Our
management, with the participation of our chief executive officer and
chief financial officer, has evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15(e)) as of the end of the period
covered by this quarterly report. Based on that evaluation, the
chief executive officer and chief financial officer have concluded
that our disclosure controls and procedures are effective to ensure
that material information relating to us and our consolidated
subsidiaries is made known to such officers by others within these
entities, particularly during the period this quarterly report was
prepared, in order to allow timely decisions regarding required
disclosure.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Changes in Internal Control over Financial Reporting. There
have not been any changes in our internal control over financial
reporting during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       




PART. II. OTHER INFORMATION




Item 1. Legal Proceedings.

We and our subsidiaries are named from time to time as defendants in
various legal actions that are incidental to our business and arise out of or
are related to claims made in connection with our insurance policies, claims
handling, premium finance agreements and other contracts, and employment
related disputes. The plaintiffs in some of these lawsuits have alleged bad
faith or extracontractual damages and some have claimed punitive damages. We
believe that the resolution of these legal actions will not have a material
adverse effect on our financial position or results of operations.

In addition to legal actions that are incidental to our business, one or
more of our subsidiaries has been named as a defendant in a number of currently
pending putative class action lawsuits. Please see the caption Business 
Legal Proceeding included in our final prospectus filed with the Commission on
August 12, 2003, pursuant to Rule 424(b)(4) under the Securities Act of 1933,
as amended, in connection with the Companys Registration Statement on Form S-1
(File No. 333-105505), for a description of these legal actions.




Item 2. Changes in Securities and Use of Proceeds.



| | (a) |  | Effective August 11, 2003, we amended and restated our charter
and bylaws. Please see Description of Capital Stock included in
our final prospectus filed with the Commission on August 12, 2003,
pursuant to Rule 424(b)(4) under the Securities Act of 1933, as
amended, in connection with the Companys Registration Statement on
Form S-1 (File No. 333-105505), for a description of the rights of
holders of shares on our common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (c) |  | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (d) |  | On August 15, 2003, we consummated the initial public offering
of our common stock. The offering was made through an underwriting
syndicate led by book-running manager Keefe, Bruyette & Woods, Inc.
and co-managers Morgan Keegan & Company, Inc., U.S. Bancorp Piper
Jaffray Inc. and SunTrust Capital Markets, Inc. The shares of common
stock sold in the offering were registered under the Securities Act
of 1933, as amended, on a Registration Statement (Registration No.
333-105505) that was declared effective by the Securities and
Exchange Commission on August 11, 2003. All 7,972,276 shares of
common stock registered under the Registration Statement were sold at
a price to the public of $21.00 per share. The Company sold
3,750,000 shares and selling shareholders sold 4,222,276 shares. The
offering did not terminate until after the sale of all of the
securities registered on the Registration Statement. The net
offering proceeds to the Company were approximately $71.6 million
after deducting $5.5 million in underwriting discounts and
commissions paid to the underwriters and an estimated $1.65 million
in other expenses incurred in connection with the offering.
|
| |     |  | The proceeds of the offering were used to repay outstanding term
loans with First Tennessee Bank National Association and Hibernia
National Bank. The Company intends to use the remaining proceeds to
capitalize its insurance subsidiaries to complete the acquisition of
an inactive life insurance company and for general corporate
purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

15



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



| | (a) |  | The Annual Meeting of Shareholders of the Company was held on
April 29, 2003.                                                                             
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | The following directors were elected at the meeting:
Jacqueline C. Adair, William C. Adair, Jr., Udayan D. Ghose, R.
Wilson Orr, III and Stephen L. Rohde.
|
| | (c) |  | The meeting was called for the following purpose and with the
following results (prior to effect of stock split):                                         
|

| | 1. |  | To approve and adopt the Companys Second Amended and Restated
Charter;
| | -- |  | -----------------------------------------------------------------------

|          |  |          |  |             |        |           |  |       
|--------- |  | -------- |  | ----------- | ------ | --------- |  | ------
|Votes     |  | Votes    |  |             |        |           |  | Broker
|Cast For  |  | Withheld |  | Abstentions |        | Non-Votes
|          |  |          |  |             |        |          
|1,391,139 |  | None     |  |             | 36,789 |           |  | None  



| | 2. |  | To approve and adopt the Companys 2003 Equity Incentive Plan;
| | -- |  | --------------------------------------------------------------

|          |  |          |  |             |        |           |  |       
|--------- |  | -------- |  | ----------- | ------ | --------- |  | ------
|Votes     |  | Votes    |  |             |        |           |  | Broker
|Cast For  |  | Withheld |  | Abstentions |        | Non-Votes
|          |  |          |  |             |        |          
|1,391,139 |  | None     |  |             | 36,789 |           |  | None  



| | 3. |  | To elect directors to serve on the Companys Board of
Directors, the exact number of which has been fixed by
resolution of the Board of Directors at five (5); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |  |          |           |          |  |             |  |           |        |        |  |     
|--------------------- |  | -------- | --------- | -------- |  | ----------- |  | --------- | ------ | ------ |  | ----
|                      |  | Votes    |           | Votes    |  |             |  |           |        | Broker
|Nominee               |  | Cast For |           | Withheld |  | Abstentions |  | Non-Votes
|                      |  |          |           |          |  |             |  |          
|Jacqueline C. Adair   |  |          | 1,391,139 |          |  | None        |  |           | 36,789 |        |  | None
|William C. Adair, Jr. |  |          | 1,391,139 |          |  | None        |  |           | 36,789 |        |  | None
|Udayan D. Ghose       |  |          | 1,390,639 |          |  | 500         |  |           | 36,789 |        |  | None
|R. Wilson Orr, III    |  |          | 1,390,639 |          |  | 500         |  |           | 36,789 |        |  | None
|Stephen L. Rohde      |  |          | 1,391,139 |          |  | None        |  |           | 36,789 |        |  | None



| | 4. |  | To ratify the selection of Ernst & Young LLP as the Companys
independent auditors for fiscal year 2003.
| | -- |  | --------------------------------------------------------------------------------------------------------

|          |  |          |  |             |        |           |  |       
|--------- |  | -------- |  | ----------- | ------ | --------- |  | ------
|Votes     |  | Votes    |  |             |        |           |  | Broker
|Cast For  |  | Withheld |  | Abstentions |        | Non-Votes
|          |  |          |  |             |        |          
|1,391,139 |  | None     |  |             | 36,789 |           |  | None  




Item 6. Exhibits and Reports on Form 8-K.



| | (a) |  | List of exhibits:
| | --- |  | -----------------

|      |  |                                                                                                                                                                           
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.31 |  | Stock Purchase Agreement among Direct General Corporation, New York Life and Health Insurance
Company, NYLCare Health Plans, Inc. and Aetna Inc. dated as of June 26, 2003
|      |  |                                                                                                                                                                           
|31.1  |  | Rule 13a-14(a) Certifications of CEO (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)                                                                          
|      |  |                                                                                                                                                                           
|31.2  |  | Rule 13a-14(a) Certifications of CFO (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)                                                                          
|      |  |                                                                                                                                                                           
|32.1  |  | Rule 1350 Certifications of CEO (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)                                                                               
|      |  |                                                                                                                                                                           
|32.2  |  | Rule 1350 Certifications of CFO (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)                                                                               



| | (b) |  | Reports of Form 8-K:
| | --- |  | --------------------
|
| |     |  | None.               

16



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##### Table of Contents






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.

|                   |  |                                                          |  |                           
|------------------ |  | -------------------------------------------------------- |  | --------------------------
|                   |  |                                                          |  | DIRECT GENERAL CORPORATION
|                   |  |                                                          |  | (Registrant)              
|                   |  |                                                          |  |                           
|September 23, 2003 |  | By:                                                      |  | /s/ William C. Adair, Jr. 
|                   |  |                                                          |  |                           
|Date               |  |                                                          |  | (Signature)               
|                   |  | Name: William C. Adair, Jr.                             
|                   |  | Title: Chairman, Chief Executive Officer and President  
|                   |  |                                                          |  |                           
|September 23, 2003 |  | By:                                                      |  | /s/ Barry D. Elkins       
|                   |  |                                                          |  |                           
|Date               |  |                                                          |  | (Signature)               
|                   |  | Name: Barry D. Elkins                                   
|                   |  | Title: Senior Vice President and Chief Financial Officer

17