Jeffrey D. Miller - EVP and CFO Kevin G. Burke - President and CEO Donald H. Nikolaus - Chairman.

Christopher Campbell - Keefe, Bruyette & Woods, Inc..

Good morning. My name is Alex, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donegal Group Inc.’s Q4 2015 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].

Jeff Miller, Chief Financial Officer. You may begin your conference..

Thank you, Alex. Good morning everyone welcome to the Donegal Group conference call for the fourth quarter and year ended December 31, 2015. 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, President and Chief Executive Officer will provide additional comments on the quarter and discuss our current business trends. Don Nikolaus, Chairman, will follow-up with his comments on the quarter before we open the line for questions.

Please 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. We refer you to our news release for more information about forward-looking statements.

We refer you to our 2014 Form 10-K which is available on our website under the SEC filings link for further information on risk factors that could cause actual results to differ materially from those projected in the forward-looking statements. We plan to file our 2015 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. For the full year of 2015, our net income was $26.8 million compared to $14.5 million for the full year of 2014.

Our 2015 statutory combined ratio was 97.4% compared to 100.5% for 2014. The improvement between years was largely attributable to a lower level of weather related losses in 2015 and lower prior accident year loss reserve development compared to 2014. Overall we were pleased with the significant increase in our profitability.

Turning to our fourth quarter results we had $7.8 million in net income and $7 million in operating income, both of which exceeded the comparable fourth quarter 2014 amounts by a significant margin.

With a 98.9% statutory combined ratio for the quarter, our underwriting results reflected favorable weather conditions as well as lower non-weather claims activity as compared to the prior year period. From a revenue perspective, earned premiums grew by 7.9% and net premiums written grew by 9.1%.

As we’ve reported over the past several years we continue to benefit from premium rate increases, new commercial lines of business growth and the planned elimination of Michigan Insurance Company’s external quota share reinsurance, which accounted for $4.3 million or 3.2% growth in the fourth quarter.

Kevin will provide more detail about what we’re seeing in terms of competitive dynamics in our markets as well as our premium growth initiatives for 2016 in a few minutes. Regarding loss trends for the fourth quarter and full year 2015, let’s start with the below average level of large fire losses, which we define as over $50,000 in damages.

We incurred $6 million of large fire losses for the fourth quarter with $5.1 million in our homeowners’ line of business and a low $900,000 in our commercial property line.

$1.2 million drop in commercial fires drove a decline in overall fire losses from last year’s fourth quarter when we incurred $7.1 million in large fire losses, which is about level with the $7 million quarterly average over the past two years. Turning to weather impact, we incurred $4.5 million of weather related losses during the fourth quarter.

That amount was in line with the $4 million of weather losses we incurred during the prior year fourth quarter and reflected the absence of catastrophe weather events in our operating areas in either period. The fourth quarter is typically milder from a weather perspective in our operating regions compared to the first three quarters.

Mild weather was a largest contributor to our excellent homeowners' results demonstrated by the 85.6% quarterly combined ratio in that line. But when adding personal auto to the mix our personal lines combined ratio came in at 104.2% for the quarter.

That ratio represented an improvement from a 106.5% personal lines combined ratio for the fourth quarter of 2014 the personal auto results did not meet our expectations. Our actuaries submitted fairly consistent seasonality in our personal auto losses over the past several years.

The reasons that we have found difficult to pinpoint our fourth quarter personal auto loss experience has been typically less favorable than our experience for the first nine months of the year.

Our fourth quarter claims frequency was higher than we experienced in the first three quarters of the year, but as we stated in the past we’ve seen no indication of increasing auto claim frequency trends. And that remain the case as we reviewed our full year loss activity and therefore we view the fourth quarter increase as a seasonal anomaly.

Our commercial lines combined ratio was an excellent 92% compared to 95.1% in the prior year quarter. With Q4 2015 commercial multi-peril and workers’ compensation combined ratios in the 83% to 84% range.

Our commercial auto combined ratio reflected increased severity represented by a handful of 2015 claims and to a lesser extent some prior year losses. We also increased our 2015 accident year IBNR reserves during the quarter in response to loss reserve development patterns for our commercial auto line in recent accident years.

For both auto lines we will continue to increase premium rates and take other appropriate underwriting actions to restore those lines to profitability. We expect to enhance our utilization of predicted modeling tools to identify additional underwriting adjustments or rate actions that we should take.

As we reviewed our commercial lines results in the aggregate, which we believe is the correct way to view those results because we are primarily an account writer. We were quite pleased with the level of profitability that we achieved in that segment for 2015.

The full year combined ratio of 92.8% reflected the efforts we’ve been expanding over the past several years to grow profitably in commercial lines. Net development of reserves for losses incurred in prior accident years was $2.4 million a substantial improvement over the $6.9 million development for the prior year quarter.

For the full year 2015, development of prior year loss reserves was $7.2 million only 1.2 percentage points of our loss ratio comparing quite favorably to the $14.5 million or 2.6 loss ratio points for the full year 2014.

We’re pleased to see improving development trends and we’ll continue to monitor those trends and take appropriate actuarial actions. Now before I turn the mic over to Kevin I’ll make just a few comments on the investments portfolio.

Our fourth quarter net investment income increased by 13.1% over the fourth quarter of 2014 largely due to an increase in average invested assets during the year and a lower allocation of expenses to our investment operations.

We’ve been concentrating our new money investments in mortgage backed securities and corporate bonds with a lesser emphasis on tax exempt bond purchases as part of our tax planning strategy to utilize an alternative minimum tax credit carry forward that we accumulated in the recent years.

For the full year net investment income increased 14.2%, which is an improvement over the 2.4% decline we experienced in 2014 again the result of an increase in average invested assets during the year and a lower allocation of expenses to investment operations.

Our book value per share increased to $15.66 at December 31, 2015, up from $15.40 at prior year-end, primarily as a result of our positive earnings during the year and partially offset by lower unrealized gains in our securities portfolio. We declared regular cash dividends in October and December consistent with our past practice.

And also as we reported in the Form 8-K that we filed with the SEC on December 22nd we repurchased 2 million shares of our Class A common stock in a private transaction during the fourth quarter. I’ll now turn the call over to Kevin for his comments on our business premium growth initiatives.

Kevin?.

Thank you, Jeff. Good morning, everyone.

As Jeff indicated, we’re pleased with the continued growth and profitable results we achieved for the fourth quarter, as well as for the full year of 2015, our focus on our long-term business goals including our commitment to sound underwriting discipline, our focus on providing best in class technology and our strong relationship with our independent agents have contributed to these positive results.

Maintaining our competitive position within the markets we serve is a priority for us, we routinely review rate indications and market data to maintain our focus on rate adequacy and quality underwriting, which are critical in achieving our targeted profitability levels in both commercial lines and personal lines.

I will review the commercial and personal lines underwriting segments of our business as well as touch upon our agency distribution system and provide a brief update on our technology initiative. The commercial lines segment of our business continued to perform very well in the fourth quarter.

We’re pleased with the continued premium growth and profitability of our commercial lines business and our retention levels remain consistently in the mid-80% range. As Jeff noted, in the personal lines segment of our business we achieved excellent homeowner results with this positive result was offset by our personal auto results.

We are committed to improving the profitability level of our personal lines segment. We have implemented and will continue to file rate increases where appropriate and we will continue to expand our utilization of predictive modeling tools to refine our pricing and underwriting criteria.

To give you a sense of recent rate filing activity in personal lines, we have filed rate increases in the homeowners in 2% to 4% range, depending upon the state and subsidiary. Rate increases in personal automobile ranged in the low-single-digits, depending upon the state and subsidiary.

In commercial lines, renewal premium increases during the fourth quarter generally range from 3% to 5%. While we continue to see opportunities to obtain renewal premium increases, we have experienced increased competition for quality accounts.

Turning to our marketing efforts, I want to highlight the continued expansion of our independent agency distribution system. We continue to identify and appoint 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. It is our expectation that new agencies will continue to represent additional growth opportunities. For the full year of 2015 we appointed 38 new agencies throughout the regions in which we operate.

We are excited about the potential quality 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.

In the past five years we have doubled the number of agents that write more than $2 million of annual premium with us and we have more agencies in the pipeline moving towards that objective. As these agencies utilize Donegal more frequently, we have created an excellent foundation for future premium growth for our organization.

We’ve started our 2016 annual agency sales meetings and recently held meetings with our agents in Georgia, Tennessee and Virginia.

The attendance at these meetings has been excellent and it’s a great opportunity for our agent to hear about our 2016 initiatives meet with Donegal’s regional and home office staff and allow us for open dialogue with our agents. In the coming months we will continue meetings throughout all of the regions in which we operate.

Finally I’d like to spend a few minutes on our technology enhancements we implemented recently. These are all part of our ongoing commitment to leverage our best-in-class technology to enhance our ease of doing business with our agents and policy holders.

We continued with the phase roll out of our new billing system, which is now live in several states. The new billing system replaces our legacy system and will provide flexible billing and payment-plan options along with the new look to our billing forms that are easier to read.

We continue with the implementation of Donegal’s new policy-rating engine. The new rating engine will allow greater speed to market. The implementation is currently underway and with full rollout to be completed throughout 2016.

To continue to build upon our reputation as a strong regional carrier, it’s important that we have the ability to bring products to market quickly and be nimble and react to market trends.

Our ongoing focus on our agency and CSR form initiatives where our information services department receives direct feedback on Donegal’s systems from our agents and in one-on-one interaction at the agency sales meetings.

The information gain from these meetings is extremely helpful as we continue to develop our systems to better meet the needs of our agents. We believe this direct involvement of our agents as we develop systems is one of the reasons our agency facing systems for an example right pro and right biz are often viewed as best-in-class fire agents.

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

Thank you, Kevin and good morning, everyone. Welcome to our earnings conference call. As you’ve heard from both Jeff and Kevin our underwriting results and increased investment income for the quarter and for 2015 slowly benefited from the various strategies we have employed over the last number of years.

We believe that Donegal Group will continue to benefit from these strategies going forward. Some of these fundamental strategies include a focused on underwriting profitability. And what that means is proper underwriting, inspecting risk, knowing the business that you are writing, rate adequacy.

Kevin talked about the various rate increases and we have an ongoing review of all products in all departments in all region in all states.

Growth of our distribution system needless to say if you have a desire to grow you need to be adding to the distribution system while at the same time as a company you need to make sure that the agencies that you have licensed are growing in premiums so that you have a higher percentage of their premium than you did in the prior year.

Best-in-class technology, we are investing quite a few millions of dollars annually to make sure that we can use those words because it’s very important in this day and age that within independent agencies that you have technologies that’s comparable or superior to even the national carriers.

Needless to say we have been investing a lot of time and money in predictive modeling and the increased use of data. Also we have a very strong focus on geographic location where we are going to do business and profitable product focus. One of the products that we are most profitable with so that we emphasize those.

Now some of the statistics you’ve already heard, but I’m going to run down through them and I think what it does is underscores that it’s been a successful year and our trends are quite good. Fourth quarter net income increased by more than 70%, statutory combined ratio of 98.9%. 2015 net income increased by 84%, statutory combined ratio of 97.4%.

Net premiums written increased by 9.1% for the quarter and 8.6% for 2016. Our book value is increased to $15.66, net income fourth quarter $7.764 million for the entire year $26.770 million. Commercial lines loss ratio very excellent 92% for the fourth quarter and 92.8% for 2015.

Investment income which we’re very pleased about increased by 13.1% for the fourth quarter and 14.2% for the entire year 2015. We believe that all of these are the direct results of the various strategies that I spoke about earlier.

And as you know the Donegal Insurance Group is and plans to be a successful independent regional property casualty insurance company and we look to continue to that process. Thank you I’ll turn it back to Jeff. .

Thank you, Don. Alex at this time, we’re ready to open the line for questions. .

[Operator Instructions] Your first question comes from the line of Christopher Campbell of Keefe, Bruyette & Woods. Your line is open..

Hi, good morning. .

Good morning, Chris. .

Hi congratulations on today’s results. .

Thank you. .

My first question is on rates. Kevin had mentioned on personal auto taking rates in the low to mid-single digits.

How does this compare on personal auto with your loss trends? And just a secondary question with your 3% to 5% renewal increases in commercial, how does this compare specifically commercial auto, how does that compared to loss trends in that line of business?.

We are definitely keeping up with the loss cost in both personal auto and commercial auto the rate increases that Kevin mentioned is low-to-single digit on personal auto. Commercial auto the rate increases are anywhere in the 5% to 8% range.

And our accident year loss ratios for those lines are improving or at least stable even taking into account the fourth quarter results that we talked about. So that would indicate to us that the rate increases that we’re taking or at least keeping pace with it’s not outpacing the loss cost. .

Okay. Second question I had was just in terms of like the commercial auto net written premium growth.

How should we view that given its combined ratio?.

As I mentioned we are account writers so we would be writing commercial accounts and commercial auto we would expect to grow proportionately with the other commercial lines.

But as I mentioned, we do look at the rates on a product-by-product basis and to the extent that commercial auto is performing at a higher combined ratio than the other commercial lines we will address that.

But overall, we do review those results in the aggregate and we’re quite pleased with the commercial lines combined ratios that we’re generating on an account level in the aggregate..

Okay.

So just follow-up question on that, should we think of on this account writing focus should we think of commercial auto as a loss leader for Donegal?.

Don’t think we would necessarily characterize it as that we certainly strive to write each of the lines profitably. But we do recognize that from time-to-time one of the lines may not be performing as well as others.

In some quarters we’ve had workers comp results that were not as good as some of the other lines, but when we look at things over the long-term we expect each of those lines to contribute favorably to our underwriting result..

Christopher as Jeff was alluding to kind of the account writer base is in a way that we view it in its entirety you shouldn’t misinterpret that that we’re not looking at each of these classes and accounts with fine detail to ensure that we have adequate pricing and rate to ensure that it’s profitable.

So for when we look at it and we stand back of it from an account standpoint, what Jeff said is accurate, but we are very much looking at commercial auto we would not view it as a loss leader it would be something that we are making sure that it is as profitable as can be and where we take actions to make sure that that occurs..

This is Don Nikolaus. Account writing in our judgment is a fundamental philosophy of underwriting commercial risk because as you can see from the very favorable loss ratio for commercial lines that it benefits you by writing the entire account provided the underwriting justifies it.

So that is the philosophy we follow and under no circumstances do we consider commercial auto being some kind of loss leader or something..

Okay, perfect that’s very helpful.

Another question I had was on the reserve strengthening it improved significantly year-over-year just how much of the $2.4 million was commercial and personal auto?.

For personal auto in the fourth quarter was about $1.2 million of favorable loss development, commercial auto is about $1.4 million.

So we had some offsetting favorable development in some of the other line and the $1.2 million is quite modest compared to the overall premium for personal auto so might have been 2 points on the loss ratio for the fourth quarter. Commercial auto would be more significant because we don’t have as much in terms of premiums in that line.

So the development would have represented about 7 points on the loss ratio for that particular line although it was only $1.4 million..

Okay.

And where were you seeing that favorable development that offset?.

Favorable development offset was primarily in work discount..

And do you have an estimate on that?.

Around $1.4 million so we would have few of the other lines that were up or down to make up the difference..

Okay, that’s very helpful. Thank you. And just kind of one final question regarding the recent tender kind of it’s like a two part question one technical and then like another higher level and more strategic.

What percentage of income is likely to be allocated to the Class A shareholders? We are currently modeling in 82 and we just wanted to get an updated number for our model..

I don’t know that I have that number on my fingertips we have about -- I want to say it would be somewhere around 80% of the earnings would be allocated to the Class A shares.

It’s somewhat of a complicated formula it takes into effect the dividend differential, but I can certainly follow-up with you offline to get you the exact number what that will be going forward..

Okay, that would be great.

And just the higher level one given the shares you bought back how are you thinking about M&A and what would be an attractive opportunity right now for Donegal? And does the increased credit line, does that inhibit you in anyway?.

As far as M&A is concerned Christopher I mean that is still very much part of our business plan. And so in no way does it alter that at all. So we are obviously looking for the right opportunity and so it really doesn’t change anything..

From a M&A standpoint as you look at our history we are looking for companies that ride business that we ride, we don’t want to ride taxi cab free cash in New York or workers’ comp in Texas. So we’re looking for companies that have the similar product mix to us, geographically that’s important.

We would want to acquire companies in the regions that we are currently in which is the Northeast.

The south as we define it we have no interest in those two exposures and also we’re interested in the Midwest, but not states like Oklahoma or Missouri where there is a lot of bad weather activity and is I would like to underscore what Kevin said that we continue to be active in that market and we certainly are not inhibited by the fact that we purchased the stock.

We have always said that our target is anywhere company writing anywhere from $15 million to $100 million in premium and that remains our target and we are on an ongoing basis having conversations with investment bankers and others because acquisitions are not something that you do overnight.

It’s been our experience that you build relationships you get to know the entity. So I’d say it’s an ongoing process..

Chris I would just add that from a financial perspective we have a lot of different ways that we can do acquisitions and number of we can do mutual to mutual affiliations with Donegal mutual that can eventually result in an acquisition by DGI or we can do quota share arrangements.

There is a lot of different ways we can do acquisitions or affiliations without necessarily expanding a great deal of cash. Such as the way we did a few of the acquisitions, the most recent being Michigan Insurance Company. So we are continuing to look at opportunities look for opportunities to add additional companies to our family company..

Okay. Those are all the questions I have. Thank you gentlemen for all the insight and best of luck in 2016..

Thank you, Chris..

Thank you..

Your next question comes from the line of Philo Smith [ph]. Your line is open..

Hi, could you talk a little bit about growth strategy in commercial lines going forward and I know you guys have come a long way.

But in terms of going forward already targeted geographies that maybe preference for certain lines within the lines you already write and maybe your appetite for new lines and new classes of business sort of beyond the main street small to mid-size commercial business that you currently focused on?.

Well let’s approach it from a slightly different approach. One of the things that we have doing over the last two to three years is appointing more commercial focused agents are keeping in mind that the number of the acquisitions that we did were all personal lines companies.

So that what we have been doing over the last three, four years is bringing commercial lines to those states and to those agents and in addition to that we have an emphasis on appointing agencies that have a commercial focus and the rational for that is that it exposes us to a greater percentage of commercial new business applications.

We are not opposed to writing personnel line. However we do want to balance somewhat more our book of business, which is currently weighted about 58% through personal lines and about 42% to commercial. So we would like to balance it out more, that’s why we are looking to a point more commercial focused agencies.

It does not mean that we are going out and writing new classes that have significant risk associated with or very large accounts. We do expand the number of classes that we write, but we are very careful about that and yes we do write larger accounts.

We utilize reinsurance when we are doing some of that, but we are very careful not to be writing larger accounts just to feel good about things that we’ve written some giant account. It has to be a class that we feel comfortable with..

Great, thank you.

And could you talk about maybe any changes to the reinsurance program that renewal?.

We had a very successful reinsurance renewal and one-on-one most of our programs do renew at January 1st. We did not make any significant changes to the reinsurance program.

The structure of it remains very consistent with 2015 and the rates will be comparable, some coverages costing a little more some costing a little less, but we don’t expect a major change in the reinsurance cost or the coverage that we’re buying. So it’s very consistent with what we would have had in place last year. .

Got you, okay. So in 2015 it looks like the expense ratio ticked up just a bit because of consuming the various growth and technology initiatives that you guys had.

Do you think this sort of level is going to continue on a go forward basis sort of in the near-term?.

I don’t expect any significant change to the expense ratio; we continue to invest in technology. And that’s done primary at the Donegal mutual level and those costs are then shared with the Donegal Group insurance subsidiaries.

We have not made any change the way we’re allocating those expenses that are shared proportionately on the basis of net written premiums. So as the net premiums written increase those charges would naturally migrate upward, but it all has to do with the level of expenditure and investment.

We don’t expect to necessarily see significant increase, but I wouldn’t say that it going to decline as well. And the other impact to the expense ratio is our ongoing profitability and the incentive payments that we share with our agents and employees.

So as our loss ratio is lower our expense ratio will be slightly higher and that’s by design those programs are designed to incentivize both our agents and our employees to do everything they can to write business profitably and increase our underwriting profit. .

Great, that’s it from me. Thank you for the answers. .

Thank you. .

[Operator Instructions].

While we’re waiting to see if there are any other questions just wanted to mention that it might be helpful to comment on the significant snow storm that we had in January if you’re watching the weather channel or the news that you saw the areas of the country where we do a lot of business was impacted by very significant snow storm.

And we’re pleased to report that our January underwriting results were favorable, limited impact from claims related to that snowstorm.

And so I think part of the contributing factor to that was there were steady winds with the storm that kind of kept the snow from accumulating on roofs and then it’s -- we had a nice gentle fall in the next few days following the storm that most of the snow disappeared in it fairly rapidly.

So the claims activity has been relatively light and considering the magnitude of the storm and we don’t expect a significant financial impact to the first quarter results. Seeing no other questions in the queue we’ll wrap things up and we thank everyone for your participation today.

And look forward to speaking to you with the first quarter results in April..

Thank you..

Thank you everybody..

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