Jeffrey Miller - Executive Vice President and Chief Financial Officer Kevin Burke - President and Chief Executive Officer Donald Nikolaus - Chairman of the Board and President.

Seth Canetto - KBW.

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donegal Group Inc. second quarter 2015 earnings conference call. [Operator Instructions] Jeff Miller, Chief Financial Officer, you may begin your conference..

Thank you, Stephanie. Good morning, and welcome to the Donegal Group conference call for the second quarter ended June 30, 2015. I am Jeff Miller, Chief Financial Officer, and I will begin today's call with commentary on the quarterly financial results.

Kevin Burke, President and Chief Executive Officer, will then provide his perspective on the quarter and provide a business update. Don Nikolaus, Chairman, officially returned from his temporary medical leave of absence, will also provide a few comments on the quarter, before we open the line for questions.

You should be aware that certain statements made in our news release and in this conference call are forward-looking in nature and involve a number of risks and uncertainties. Please refer 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 available in the report on Form 10-K that we've submitted to the SEC. You can find a copy of our Form 10-K in the Investors section of our website under the SEC filings link.

Further, reconciliation of non-GAAP information as required by SEC Regulation G was provided in our news release, which is also available in the Investor section of our website. Turning to the quarterly results. We were pleased with the solid improvement in our results relative to the prior year's second quarter.

Net income was $6.5 million or $0.24 per share of our Class A common stock on a diluted basis compared to $1.9 million or $0.07 per Class A share for the second quarter of 2014. The strong performance started with our topline growth. Our net premiums written grew 9.3% for the quarter.

Similar to the same you've heard from us over the past several years, the growth was due to premium rate increases in most of our business lines, commercial lines and new business growth as well as the elimination of Michigan Insurance Company's external quota share reinsurance, which accounted for $5.3 million as a second quarter premium growth, were 3.5% of the prior quarter net premiums written.

That amount is on pace with the $20 million of growth that we anticipated for the full year 2015, when we terminated the quota share reinsurance at the end of 2014. Kevin will touch on the other growth drivers during his prepared remarks. In addition to topline growth, our strong quarterly performance reflected a relative decrease in claim activity.

Our statutory loss ratio improved to 65.1% from 72% for the prior-year quarter. There are a number of factors that contributed to that improvement. Weather losses of $8.9 million compared favorably to $11.6 million in the prior-year quarter, and were lower than our $12.7 million average for second quarter weather losses over the past five years.

Large fire losses totaled $5.9 million, much improved from the $9.3 million in the prior-year quarter and lower than our $7 million quarterly average over the past two years.

While homeowners fire losses were in line with our expectations, we experienced a lower volume of large commercial fire losses in the current quarter, which drove the overall improvement.

Our personal lines combined ratio was 99.4%, which was in line with the prior-year quarter and reflects our continuing efforts to achieve consistent profitability in that segment. Our commercial lines combined ratio improved to 92.4%, premium rate increases and the lower incidence of weather and large fire losses drove the improvement.

Fire accident year loss reserve development added $4 million to our incurred losses for the quarter compared to $6 million for the second quarter of 2014. The 2015 development was primarily related to accident year 2014 losses in our commercial multi-peril workers compensation and personal automobile lines of the business.

For the first six months of 2015, development of $3.4 million was within a range we consider acceptable, adding only 1.1 percentage point to our loss ratio. Turning to the investment portfolio.

Investment income increased 11.8% for the quarter, primarily related to a lower allocation of expenses to the investment function and also an increase in average invested assets during 2015.

Our book value per share increased to $15.62 at June 30, 2015, compared to $15.40 at yearend 2014, in spite of a decrease in unrealized gains on our available-for-sale bond portfolio. The number of our outstanding Class A shares increased by nearly 1 million shares since yearend 2014, and that was primarily due to stock option exercises.

A number of stock options that we had granted in 2010 expired in July 2015. Exercises of those stock options accounted for the increased share activity during the first half of 2015. We also repurchased 60,880 shares of Class A common stock during the second quarter.

And finally, our Board of Directors recently approved quarterly cash dividends of $0.1350 per share of Class A common stock and $0.1175 per share of Class B common stock payable August 17 to stockholders of record as of August 3. At this point, I'll turn the call over to Kevin for his comments on the quarter..

Thank you, Jeff. Good morning, everyone. Thank you for joining our earnings call this morning. As Jeff has noted, we are pleased with the solid results we achieved for the second quarter as well as the first half of 2015.

Our continuing focus on our long-term business goals and commitment to sound underwriting discipline has contributed to these positive results. I will review the 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 our technology initiatives.

We are pleased with our continued revenue growth for the second quarter of 2015. Our second quarter net premiums written increased 9.3% compared to the second quarter of 2014. This increase represented a combination of 12.5% growth in commercial lines and 7% in personal lines.

As Jeff has alluded to, these growth percentages include the positive impact of our termination of the Michigan Insurance Company external quota share reinsurance agreement for 2015.

Over the past several years, planned incremental reduction in Michigan's external quota share reinsurance have provided acquisition growth that has complemented our organic growth initiatives.

While we want to ensure we maintain our competitive position within the marketplace, we routinely review rate indications and market data to also maintain our focus on rate adequacy and quality underwriting, which are vital on achieving our target and profitability levels in both commercial lines and personal lines.

Our commercial lines business continue to perform well in the second quarter, achieving a statutory combined ratio of 92.4%. This is a substantial improvement as compared to the prior year's quarter's combined ratio of 105.8%.

In personal lines, we are pleased with the trending improvement for our underwriting results, as we achieved a 99.4% statutory combined ratio for the second quarter. Our 98.9% personalized combined ratio for the first half of 2015 compares favorably to the first half of 2014's combined ratio of 101.1%.

We have implemented and continue to look at rate filing increases where appropriate, we will continue to expand our utilization of predictive modeling tools to refine our pricing and underwriting tier criteria.

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

In commercial lines, renewal premium increases during the second quarter generally range from 5% to 6.5%. While we are continuing to see opportunities to obtain renewal premium increases, we have experienced increased competition for quality accounts and we will be closely monitoring our rate competitiveness within our regional commercial markets.

Turning to our marketing efforts, I want to highlight the continued expansion of our independent agency distribution system. We continue 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 initiative has contributed to the increase in commercial lines premium growth over the past several years. And it is our expectation the new agencies will continue to represent additional growth opportunities. In the second quarter, we appointed 29 new agencies throughout the regions in which we operate.

Year-to-date, we have appointed 59 new agencies and we are excited about the potential quality growth opportunities these additional agencies represent. We also continue to emphasize growth and development within our existing agencies, working diligently to earn their increased loyalty and commitment to us.

I'd like to spend a few minutes to discuss a number of technology enhancements Donegal implemented recently, as part of our ongoing commitment to leverage best-in-class technology to enhance ease of doing business with our agents and policyholders.

We are pleased to announce that in the second quarter we launched a significant upgrade to our WriteBiz system, which we refer to as WriteBiz 2.0.

WriteBiz is Donegal's web-based portal for quoting underwriting our commercial lines business, as a result of feedback we received from agency focus groups and system users, who made extensive enhancements in this newest version of our WriteBiz system.

WriteBiz 2.0 has been extremely well received by our agents, and we have seen an increase in commercial lines quote activity since its introduction. Donegal also expanded its call center and service center capabilities in the second quarter by implementing an additional call center service center in our Midwest region.

By adding a fully functional call center in our facility in Le Mars, Iowa, we now have increased resources available, as we strive to provide best-in-class service to our agents and policyholders.

The new center allows us to expand our operating hours and provide opportunity for future expansion of our service capabilities, as our organization continues to grow. At this point, I'll turn the call over to Don Nikolaus, before we open the lines for questions..

Kevin, thank you. And good morning, everybody, and welcome to our call. I just got a few brief comments.

We believe that our underwriting results for the quarter and the first half of 2015 clearly benefit from the various strategies we have employed over recent years, as did our investment results, and we believe Donegal Group will continue to benefit from these strategies going forward.

In our business strategy, we have some high priorities, rate adequacy, conservative underwriting, state-of-the-art technology, which Kevin has done an excellent job of giving you an update on, predictive modeling and using data.

We all read articles today of how important it is to be using as much data is as available in the whole, in our case, in the underwriting process. And also, we have a geographic and profitable product focus.

So that we are doing business where we believe is a very profitable area, and also focusing on products in terms of promoting their growth that we believe will help us longer-term have a good mix of business and a profitable mix of business. Now, at this point, I will turn it back to Jeff and we can do questions..

Thank you, Don. And Stephanie, we're ready to open the lines for questions please..

[Operator Instructions] Your first question comes from Seth Canetto with KBW..

Don, congrats on -- we're happy to see you make a full return from your medical leave..

Thank you..

My first question is about the strong rate that Donegal has been able to achieve.

And I know, you guys mentioned, as competition intensifies and you monitor the book carefully and that's well insulated given your dialog with agents and the small-to-midsize account focus, but should we expect sort of a continuing deceleration of rate increases? And any update on the conversations with your agents as you talk about sort of pushing through more rate on the book?.

Seth, this is Kevin. I'll take that question.

One of the advantages I think that we have and you actually alluded to it in your question is the fact that the market that we target kind of the small-to-midsize commercial accounts in particular, it's somewhat insulated from some of the things that you see in the headlines in terms of the softening of rates in commercial accounts.

What you're seeing across the industry is on a much larger commercial accounts, you're seeing more aggressive pricing. For us, quite honestly, we're seeing maybe a half a point reduction from where we were a year ago.

It's not to say that there is some softening of the market, but in the accounts that we're looking at, the size of the accounts, there maybe some continuing softening going forward, but we're not overly concerned about it. The other aspect is we really look at this on an account-by-account basis, so we get very granular with it.

When you look at the total rollup numbers maybe instead of a 7% renewal rate that we had maybe 12 months ago, it's 6.5%. But when we look at it as an account-by-account basis, we're really looking at from a profitability standpoint, we're not chasing rate and we are somewhat insulated from it.

So I think that we're feeling pretty optimistic about our ability to get and retain quality commercial accounts without having to take any dramatic hit on pricing..

Let me add something to that. As we all know in commercial business, depending upon the size is the account that you look at the specific premium that is being charged relative to the exposure and the loss experience.

And we have not been hesitant to impose premium increases, sometimes significant, based upon that particular risk, loss experienced in the prior year.

So the general conversation about rate increases is an important topic, but I wanted to add also that we have a very disciplined approach at looking at commercial accounts and seeing where the loss experience has been and reflect that in what premium we are charging for the renewal..

And then just branching into the strong premium growth in the commercial lines that remained strong, and as you guys alluded to it's mostly from the earn-in of rate, and I assume also the rollout of the WriteBiz 2.0, is that already having or do you believe it will have a significant impact on premium growth or is it too early to tell with that?.

Well, Seth, I can just give you an approximate amount. It's basically WriteBiz 2.0, which has been pretty much 18 months in development. When we rolled that out in the first 30 days, we had about an 8% increase in quote activity in the commercial lines quote activity. Now, how much of that is directly related to the new system it's hard to say.

But the good news is that we were seeing some immediate impact from our agents. The feedback that I have been getting throughout all of our regions, directly from the agents has been very, very positive. And they particularly like the fact that we listened and we took their input in the redesign of this system.

So they're seeing a system that they had some direct input on. And we believe that over the next six months to a year that should yield some increase numbers for us. So we're excited by it..

And I noticed the other segment, which has consistently achieved double-digit premium growth that turned negative this quarter.

Could you explain what's driving the premium out of this quarter?.

Seth, I don't have that information readily at my finger tips. There is some ancillary commercial lines, where we don't track them as one of our major business lines. So I can certainly look into that and get that for you offline, but I don't think there is any significant trends there that we would have recognized..

And just similar to 1Q, the elevated operating expense ratio, I think that's from the increased underwriting based incentive costs. So given the success with implementing the technology enhancements and the continued earn-in of rate, which I believe is leading to the core margin expansion that you guys have been able to achieve.

Should we expect sort of an elevated operating expense ratio, while these technology improvements start to roll through the book?.

I don't think we expect any significant increase there. And we continue to monitor our cost and expenses and are trying to leverage as we grow, leverage the higher premium base. But certainly we have a very strong focus on technology, and we continue to invest in the state-of-the-art technology.

We're getting ready to rolling a new billing system later this year. And so there is continuing investments in technologies. Those investments are made at the Donegal Mutual level. Donegal Mutual is the company that purchases the technology, but we share in the costs with Donegal Group through various expense sharing arrangements.

So I guess the bottomline to that is I don't think we're going to see significant reductions in our expense ratio, but because we're continuing to invest in technology and assuming that we continue to produce a good level of underwriting profitability on the loss ratio side, we would expect to continue to pay higher level of underwriting-based incentives and that's going to result in the expense ratios thing pretty close to where it is.

Now, that would my expectation at least..

Just moving on to the adverse reserve development, I know you guys mentioned that it was across; I believe C&P workers comp and auto lines.

Now, that we've gotten sort of six months picture, do you see that continuing this year or should that level out?.

That's an excellent question and that's where we try to pull out the crystal ball and look into the future. It's difficult to say exactly what transpire the remaining of the year. We have been addressing for the last several years, because we've had some modest adverse development in the last several years.

And we have been proactively addressing that by increasing our actuarial IBNR estimates as well as the expectation of loss ratios for the current accident year. So we do believe that we're getting ahead of the levels of development we saw in some of the prior years.

And I think this year you can see that the level of development that we're talking about is lower than what we would have experienced a year ago. But we do see some improving trends and it's important I think also to make note that our actuaries have not noticed any patterns of adverse loss development. We're seeing some pockets of activity..

And I'm clearly showing that there are no further questions in the queue at this time. I'll turn the call back over to the presenters. End of Q&A.

Well, thank you very much. We appreciate everyone's participation on the call this morning. And thanks for the good questions. And wish everyone a good day. Thank you..

Thank you..

Thank you everybody..

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