Jeffrey D. Miller - CFO Kevin G. Burke - COO and Acting CEO Donald H. Nikolaus - President and CEO.

Vincent DeAugustino - KBW.

Good morning. My name is Tania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donegal Group Inc.'s Quarter Four 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

[Operator Instructions]. Thank you. Jeffrey Miller, Chief Financial Officer. You may begin your conference..

Thank you. Good morning everyone and welcome to the Donegal Group conference call for the fourth quarter and year ended December 31, 2014. As introduced, I am Jeff Miller, Chief Financial Officer, and I will begin today's call by discussing highlights of our quarterly and full year financial results.

Kevin Burke, Chief Operating Officer and Acting Chief Executive Officer joins me on the call this morning. Kevin will provide additional commentary on the quarter and an update on our current business trends.

Don Nikolaus, our President and Chairman, while officially on a medical leave of absence as CEO is back in the office regularly now and we are pleased to have him joining us on the call today as well.

Please be aware that certain statements made in our news release within this conference call are forward-looking in nature, and involve a number of risks and uncertainties. We refer you to our news release for more information about forward-looking statements.

Further information on risk factors that could cause actual results to differ materially from those projected in the forward-looking statements is included in our 2013 Form 10-K which is available on our website under the SEC filings link. We plan to file our 2014 Form 10-K within the next few weeks.

Reconciliation of non-GAAP information as required by SEC Regulation G was provided in our news release which we have also made available in the Investor section of our website. Turning to our fourth quarter results, we had 4.5 million in net income and 3.9 million in operating income.

With 101.8% statutory combined ratio for the quarter, our underwriting results did not meet our expectations and I will provide more details about the increased non-weather claims activity as compared to the prior year quarter in just a moment. For the full year of 2014, our net income was 14.5 million and our statutory combined ratio was 100.5%.

Catastrophe losses and reinstatement premiums from weather events in the first half of the year contributed 2.6 percentage points to our 2014 combined ratio and it accounted for most of the increase from our 97.4% statutory combined ratio for 2013.

Turning back to the fourth quarter, from a revenue perspective earned premiums grew by 8.4% and net premiums written grew by 9.4%. We continued to benefit from premium rate increases, new commercial lines business growth, and the additional contribution from a reduction in Michigan Insurance Company’s external quota share reinsurance.

Kevin will talk in a few minutes about our growth initiatives and our ongoing marketing efforts across our operating regions. Let’s walk through some of the loss trend details for the fourth quarter. Beginning with weather losses, we incurred $4 million of weather related losses during the quarter.

That amount was less than the $4.6 million of weather losses we incurred during the prior year fourth quarter and reflected the absence of catastrophe weather events in our operating areas. The fourth quarter is typically quieter for our operating regions from a weather perspective and we were pleased that trend continued again this year.

Large fire losses were 7.1 million for the quarter and that was in line with the prior year quarter as well with $5 million in our homeowners’ line of business and 2.1 million in our commercial property line.

We typically see a modest increase in fire losses as the heating season begins but fire losses fell within our expectations for the current quarter. Our homeowners results were favorable with relatively calm weather and the continuing benefit of premium rate increases and other underwriting actions contributing to a 93.4% combined ratio in that line.

But our personal lines combined ratio rose to 106.5% for the quarter as a result of unfavorable personal auto results which we attribute to an increase in personal auto liability loss severity that exceeded our expectations.

The largest component of this severity was due to increases in case reserves during the quarter on a number of 2013 and 2012 claims spread across several of our insurance subsidiaries and geographic regions.

While the increased reserve activity contributed to a disappointing increase in our personal auto combined ratio, we continue to see improving loss reporting trends within that line of business including a meaningful reduction in the number of reported bodily injury claims during 2014.

Which provides a level of optimism as we move into 2015, since there are fewer claims to develop. But we will be monitoring the reserve activity closely to ensure that we are responding appropriately to any trend indications.

Our commercial lines combined ratio was favorable at 95.1% even with an uptick in the commercial auto combined ratio that reflected increased severity in that line of business as well. The increased severity in commercial auto was weighted to a handful of current quarter claims rather than the development of previously reported losses.

For both auto lines we will continue to increase premium rates and take other appropriate underwriting actions to restore those lines to profitability.

As we continue to utilize and enhance our predicted modeling tools we expect to heighten our ability to identify specific products, tiers, and geographic areas that warrant underwriting adjustments or rate actions.

We saw a continuation of positive trends in our other commercial lines of business through the fourth quarter with workers compensation posting an 86.6 combined ratio for the fourth quarter and a solid 91.1% combined ratio for the full year 2014. Likewise we achieved an excellent 88.7% quarterly combined ratio in our commercial multi-peril line.

While we had hoped for a stronger finish to the year and especially in light of the weather challenges we faced in the first half, we are optimistic as we move into 2015 and believe that we are in a stronger position to generate underwriting profits.

As you may remember we began 2014 with unprecedented freezing weather claim activity in early January which created a significant obstacle to overcome from a financial performance perspective. We are pleased to report that our January 2015 claim experience was quite favorable with limited weather impact.

We write a limited amount of business in New England with no Massachusetts exposure, so the extreme snowfalls in that region will not impact us. However as we speak, much of the eastern part of the country is enduring record low temperatures and the winter is far from over.

But nevertheless we are certainly pleased that the year 2015 has begun on a much more positive note than 2014 from a claims perspective.

And just a few comments on the investment portfolio, our fourth quarter net investment income increased by 2.8% over the fourth quarter of 2013 largely due to an increase in dividend income as we have allocated a higher percentage of the portfolio to equity securities.

For the full year net investment income was down 2.4% which is an improvement over the 7% decline we experienced in 2013.

The slowing decline for the year and modest increase in investment income for the fourth quarter both reflect the benefits of our strategy to stay as fully invested as possible and to act on investment opportunities in our targeted asset classes that the market presents from time to time.

Our book value per share increased to $15.40 at December 31, 2014 from $15.02 at the prior year end primarily as a result of our increased net unrealized gains on our securities portfolio. We declared regular cash dividends in October and December consistent with our past practice and we did not repurchase any shares in the quarter.

I will now turn the call over to Kevin for his comments on our premium growth and ongoing marketing efforts.

Kevin?.

Thank you, Jeff, good morning everyone. I will review commercial and personal lines underwriting segments of our business as well as touch upon our expanding agency distribution system and provide a brief update on the technology enhancements we look forward to implementing in the coming months.

Overall we are pleased with the continuation of 2014, of the premium growth we have achieved in recent years. The full year net premiums written increased 8.6% as compared to 2013. The fourth quarter's net premiums written grew by 9.4% as compared to the fourth quarter in 2013.

This increase represented the combination of 16.7% growth in commercial lines and 4.8% in personal lines. We are optimistic as we move forward into 2015 that our continuing premium growth will enhance our potential to generate a higher level of underwriting profitability.

We routinely review rate indications, market data as we focus on rate adequacy and quality underwriting to achieve our targeted profitability levels in both commercial lines and personal lines. As Jeff has mentioned, our commercial lines business performed well in the fourth quarter achieving a combined ratio of 95.1%.

In personal lines we did not achieve the underwriting profitability level we expect. Jeff already covered the underlying reasons for the increase in our personal lines combined ratio for the fourth quarter. I would like to highlight the fact that we have seen a decline in the frequency of private passenger automobile bodily injury claims during 2014.

We have implemented and will continue to file rate increases where necessary, and we will enhance our utilization of predictive modeling tools to refine our pricing and underwriting tiers. We are optimistic that we will begin to see a return to more favorable results in this line of business as a result of these underwriting initiatives.

To give you a sense of recent rate filing activity in personal lines, we continued to file rate increases in homeowners in the 3% to 5% range depending upon the state and subsidiary. Rate increases in personal, automobile range in the low single-digits depending upon the state and subsidiary.

Net premiums written for the fourth quarter increased by 4.8% with a large percentage of that increase representing increases in rate versus increases in exposures. In commercial lines, renewal premium increases during the fourth quarter generally range from 5% to 7%.

We are continuing to see opportunities to obtain favorable renewal premium increases. We will be closely monitoring our competitiveness within our regional commercial markets. As I had mentioned earlier, we achieved strong growth in commercial lines during the fourth quarter with net premiums written increasing to 16.7%.

We remain committed to sound underwriting principles and loss control initiatives as we move into 2015. Turning to our marketing efforts, I want to highlight the continued expansion of our independent agency distribution system.

We continued to identify and appoint new high quality agents throughout all of our operating areas placing emphasis on appointing agents that have a commercial lines focus. This ongoing initiatives has contributed greatly to the increase in commercial lines premium growth we achieved in 2014. And our expectation is that this will continue into 2015.

In the fourth quarter we appointed 40 new agents and for 2014 in total, 163 new agents were appointed. In addition to the appointment of new agencies we have been working diligently to obtain further growth by enhancing our market position within our existing independent agencies.

As a key component of our 2014 and 2015 business plans, we established specific goals to enhance the level of premium written in each of our appointed agents. As we move agents from their current level or premium strata to the next higher level, we further enhance the overall business relationship between the agent and Donegal.

And we have seen the quality and frequency of submissions improve as agencies commit a greater percentage of their business to Donegal. Moving into 2015, we have started to conduct our annual agency sales meetings and have recently completed meeting in Georgia, Tennessee, and Virginia.

We are pleased to report that we had excellent attendance at each of these meetings. Our agency sales meeting varies in size from 50 to 160 agents attending each of these meetings based on the various regions.

We plan to host 28 agency meetings over the course of the next few months and we continue to view these meetings as great opportunities to update our agents on product and technology enhancements but more importantly opportunities for agents to interact with Donegal management and the marketing and underwriting personnel.

Those opportunities are invaluable, as we promote Donegal to our newer agents and strength in long standing business and working relationships.

I would like to just spend a few minutes to discuss a number of technology enhancements Donegal is working on, as part of our commitment to leverage best in class technology, to ensure ease of doing business with our agents and policy holders. We are excited to announce shortly the introduction of Rightbiz [ph] 2.0 to our agents.

Rightbiz [ph] is Donegal’s agency interface for quoting our commercial lines business. As a result of feedback we have received from our agents and focus groups, we have made extensive enhancements to this newest version of our Rightbiz system.

The new version is very closely aligned from a technology standpoint with our RightPro personal line system that has been extremely well received by our agents. We will be piling the new release of Rightbiz with select agents in the coming weeks and anticipate a full roll out in the second quarter of 2015.

We are making great progress on the development of our new billing system which will ultimately replace our legacy billing applications and provide enhanced opportunities to serve the billing needs of our customers. We expect to gradually roll this new system out to select states beginning in the second quarter of 2015.

We have a mobile application that is currently available on all the states in which we do business. We are working on Phase 2 of our mobile app which is geared towards the independent agents.

When an agent logs in to our mobile app it will have enhanced abilities to view their book of business, follow up on the status of an insurance claim, obtain billing information, etc. all through their mobile devices. We are adding this functionality as a direct result of agent feedback with a rollout planned in the second quarter of 2015.

At this point I’ll turn the call over to Don Nikolaus before we open the line for questions. .

Thank you Kevin, good morning everyone. Jeff and Kevin have given you a very good overview and summary. My comments will be therefore brief. Needless to say as Jeff has indicated, 2014 did not produce the results that were planned or anticipated but we are reasonably optimistic that 2015 will be a good year assuming reasonable weather related losses.

We feel that all the actions that we have taken over the last two to three years whether it be in technology, whether it be in product, the expansion of greater commercial lines exposure, whether it be an enhancement to existing products, the distribution system, and underwriting action that we are well poised.

Needless to say we have a very strong and capable management team down at the very first level of management. And we have a very dedicated staff of people. All the aspects of our operations we believe are functioning effectively and strategically.

As we have said in the past, Donegal Insurance Group has a focused and dynamic business strategy for profitable growth and an expanding distribution system with state of the art technology and committed to shareholder value and success as an independent regional property and casualty insurance group.

One of the other aspects of what we have said is that with the various rate increases that we have continued to take, the underwriting action we believe that we are well poised for a successful future. We’ll turn it back to Jeff to begin the question-and-answer session. .

Thank you Don, Tania if you would open the line to questions please..

[Operator Instructions]. Your first question comes from the line of Vincent DeAugustino with KBW. Your line is open. .

Hi, good morning everyone.

First welcome back Don, hope you are doing well, and I guess to start with Kevin, just on one of your points from the prepared remarks on growing share of wallet with agents, with that resulting in some higher quality business submissions, should we think about there being any loss improvement, how loss ratio improvement lift from that or is this kind of I guess more of an ancillary side effect?.

Well I think Vince it’s an excellent question. I think that’s what is expected, that’s what anticipated.

The hope is -- again we have not, what’s important is we have not left what we are most comfortable with from an underwriting standpoint, so that is when we look at the growth of the book we are comfortable with what we are underwriting, and I think that maybe some of the size of the accounts our appetite is growing in terms of being able to write some larger accounts.

But it is not doing different type of underwriting or getting it to different classes of business. So the expectation is as we go into 2015, those accounts that we are very familiar with and we’re comfortable with and that lift should be able to provide some increased profitability for 2015. .

Okay, and then you kind of opened a little bit of a segue into my next question which was really on the commercial auto side, you kind of just mentioned it here but just curious if kind of in some of the reviews looking back at the commercial auto book if you found that any of that business retrospectively has been a little bit heavier or a little bit more of like a specialty flare to it then you originally thought or if there was any deviation, it didn’t sound like it but any deviation from kind of that underwriting target?.

As you can imagine, when we have a particular line of business that maybe isn’t performing to our expectations we’ll spend a lot of time digging into the claims. And one of the things that we have not found is that there is any consistency in terms of trends that causes major concern.

So in terms of when you talk about commercial auto, obviously we are looking at rate adequacy but when we look at any losses within that line or other lines we are not seeing any trend that causes us concern that maybe we are writing business that we’re not typically used to.

So again we are kind of optimistic there when we look at that, that the book of business is a book of business that we are very familiar with and our hope is that some profitability in a couple of those lines will start to come through for 2015. .

Vincent, this is Jeff.

If I could just add to that, one of the things we have done in just last couple of months is to form what we call a commercial auto profit improvement team following a similar model that we had followed a number of years ago when we had some elevated losses in our workers compensation line where we had an explicit team that discussed together.

It’s a multidisciplinary team, it has claims people as well as underwriting people just to make sure we have open communications. They review some of the larger losses, review the classes and products of business where our loss ratios are exceeding our targets.

And just making sure that we tightened up any underwriting areas that may need to be tightened up. But there is a lot of analysis and ongoing communication going on in that particular area. .

Okay, thank you very much for that Jeff, that’s helpful. And I mean you are right on the workers’ comp side, the results have been quite good recently so appreciate that.

This is really small potatoes but on the DFSC side with the lease terminations, so relative 2015 versus 2014 what should we be thinking about in the cost savings?.

The cost savings going forward to the bank are approximately $300,000 a year. Donegal Group Inc's percentage of that is 48.2% so there will be some ongoing cost savings.

It won’t be material to the results that Donegal Group is posting but there is some legacy issues there, they have predated our acquisition of Union, and so we were pleased to have the opportunity to extricate ourselves from some of those lease obligations that were in effect going forward.

It cleans up not only the expense side of their books but also removes from their obligations some ongoing lease type things. So it was a good move from them, it was a onetime hit to the financial results but going forward it will save us some money..

And Vincent we think that it’s a -- was a very good decision to do what was done and it will clearly add positive aspects going forward. .

Okay, good deal, and then just a last one for me but on the M&A front, some of the transactions we’ve seen in the space almost all of them had some type of expense synergy aspect to them and we kind of look at the earnings levers for insurers, 10-year struggling always to stay above 2, getting a lot of pressure there, and then clearly insurance rates increases are decelerating, so for a subscale insurer you’d start to feel the pain on the expense structures more and more and so I am just curious if you are seeing any of that play out in the M&A pipeline maybe getting a little bit more robust?.

At this point we had not seen a lot of activity in the pipeline. You are seeing a lot of M&A transactions on the reinsurance side. Not as many on the primary side. So it’s a area of our strategy that we continue to focus on.

We are interested in doing further acquisitions as opportunities might arise and we continue to look and talk to various companies. But I would say that that's not a real active discussion at this point. We really view our opportunities as we go into 2015 on the organic side.

We have a lot of momentum with our agencies as Kevin talked about in building books of business with commercially focused agents and really moving them into that next strata whether it is the writing 0.5 million with us, moving to 750. Writing at 750,000 moving to 1 million and just really getting that increased royalty from our existing agents.

So we see a lot of opportunity there but we will continue to look for opportunities and explore any opportunities that are presented to us on the acquisition front. .

Okay, thank you very much everyone. Take care. .

[Operator Instructions]. .

While we are waiting to see if there is any other questions let me just give a quick follow up commentary here on our reinsurance renewal for 2015, something that would be of interest to our stockholders. We were pleased to report we renewed our external reinsurance program for 2015 with relatively favorable terms compared to those in place for 2014.

We’ve locked in the rates for a number of our programs for two years in 2014 so those rates have continued into 2015 and there is no major changes in coverage or reinsurance cost anticipated for those external agreements.

There is one notable exception to that statement and that is that we’ve over the past several years incrementally reduced the level of Michigan Insurance Company’s quota share reinsurance with external parties and with the percentage reduced to 20% for policies affected in 2014.

2015 we’ve eliminated Michigan’s external quota share reinsurance and the financial impact of that change is an increase of about $20 million to our 2015 net premiums written.

So that means that our consolidated underwriting results will include 95% of Michigan’s underwriting results for policies effective in 2015 and that marks the completion of the growth strategy we’d outlined when we acquired Michigan in late 2010 underscoring our confidence in the management and underwriting activities of that major subsidiary.

Just want to give you that update as we go into 2015..

Your next question comes from the line of Vincent DeAugustino from KBW. Your line is open. .

Hi, good morning again. Thank you for taking the follow up.

Jeff on the reinsurance renewals, I guess just two quick questions, you mentioned favorable terms was there any Cat extension on that as well or no?.

The Cat program, we had actually negotiated two year Cat program on 70% of our program in 2014. So we only renewed 30% of the Cat program which was very helpful because we obviously had a number of Cat losses during 2014. So that particular element helped us as far as keeping the rate increases to a minimum.

But all of the casualty side and the workers comp we were able to renew at favorable terms relatively similar to 2014 with some modest rate reductions in some of the contracts where we had favorable loss activity. .

I think part of your question is were we able to extend the 72 hours to 96 hours?.

You got it. Yes. .

Current states, and we were in a number of the contracts. .

Okay, would those contracts -- I mean here I am obviously just thinking about the winter weather impact and the longer the hour -- hour of the window for winter losses with ice jamming and things like that, that is when you see the biggest delays.

Is that by geography in Northeast on the contracts or is not -- does it not work that way?.

It does not work geographically. .

The 96 hours of wind storm window. So that would be for hurricane, for windstorm, hail that type of loss. We have actually a seven day window for freezing type plans. .

But there is no geographic limitation. .

That's correct. .

Okay, alright good to know on the freeze. And I think that wraps me up. Thank you very much guys, take care. .

Thank you, Vincent. .

There are no further questions at this time. I turn the call back over to the presenters. .

Thank you. At this point we are ready to wrap up the call. So we appreciate everyone's participation this morning. And we will talk to you at the end of the first quarter. Thank you..

Thank you. .

Thank you everybody. .

This concludes today's conference call. You may now disconnect..