Good morning. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Miller, 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, 2011. I'm Jeff Miller, Chief Financial Officer and I'll begin the conference call by discussing a number of financial highlights and providing commentary on the quarterly and full year results. Don Nikolaus, President and Chief Executive Officer, will then provide additional comments on the quarter and give an update on our business and prospects for 2012. 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 on the report -- in the report on Form 10-K that we submit to the SEC. You can find a copy of our Form 10-K on the Investors portion of our website under the SEC Filings link. We plan to file our 2011 Form 10-K within the next few weeks. Our fourth quarter was difficult from an underwriting perspective, and we posted a net loss of $879,000 or $0.03 per share for reasons that I will cover today. Investment income, realized gains and an income tax benefit provided a substantial offset to the underwriting loss we incurred for the quarter. On the positive side, we achieved significant growth in premiums, primarily as a result of our Michigan acquisition and continuing success in growing our commercial lines of business. Don will provide more commentary on our premium growth in a few minutes. On the other hand, we were disappointed that our fourth quarter losses incurred continue to reflect the effects of severe weather that we…

Thank you, Jeff, and good morning to everyone, and welcome to our earnings conference call. Jeff has done an excellent job of describing the history of the fourth quarter and the adverse weather and the resulting loss that he has indicated. What I'm going to focus on is where we currently are and where we're going. The year 2011 was a difficult year, not only for Donegal Group Inc. but for the property casualty insurance industry as a whole, as you're all aware. However, we do believe that our company has achieved many very positive things in the year 2011, which we believe will position us well going forward. Talking a little bit about premium, net written premium grew by 16% for the year, 14.2% for the fourth quarter. And as Jeff has emphasized, we have had considerable success in growing over the last 18 months our commercial book of business, which is our intent to have a greater percentage of our overall premiums, over time come from commercial business. Having said that, for the year, we had approximately 30% commercial growth, 13% of that was organic, remembering that Michigan Insurance Company is included in the overall numbers. For the quarter, we had organic growth in commercial of 17% and about 30% overall. So needless to say, those are very positive from a premium standpoint. And also in the year 2011, we integrated the largest acquisition to date for our company, a $100 million acquisition of Michigan Insurance Company. We made lots of progress doing that integration, which we all know is one of the most important aspects of doing an acquisition. In the next week, we will be rolling them on, going live with Michigan on our information systems, which will fairly well complete the integration process. In 2011,…

Thank you, Don. Jamie, if you could open the line for questions, please.

[Operator Instructions] Your first question is from the line of Matt Rohrmann with KBW.

I guess first question for Don. I noticed in the release you talked about your focusing on newer agents, less then sort of refining your core team more. Just curious as to what's your -- the main drivers for your change of focus there a little bit? And then talking about the -- targeting price increases is great for 2012, but we've seen some companies sort of struggle with new business even though they're getting rate on sort of their renewal book. I just want to get your thoughts there as well.

Sure. With regard to agencies, new appointments, we have made great progress in 2009, '10 and '11, and appointing additional new agencies, we're going to continue to do that to a degree in 2012. But our emphasis in 2012 will be to spend additional time working with the agencies that we appointed in 2009, '10 and '11 and making sure that they're producing the right business and that we're getting credible volume from them. So we're de-emphasizing new appointments to a degree, but we will continue to do it. With regard to rate increases and the ability to write new business, there is certainly is a trade-off, it was also a trade-off with regard to existing business as to what your tolerance for allowing business to run off if the insurer is not willing to accept your rate increases. At this point, we're seeing that commercial new business is doing well. Personal lines, our growth in personal lines will probably organically not be as strong. However, we don't believe that that's going to anywhere affect our premium growth. It's simply that our unit count will not necessarily be as strong in terms of growth.

Okay, great. And then just 2 numbers questions, for Jeff. What was the duration on the portfolio at the end of the year?

The duration is 4.5. So it's down...

I know you guys repurchased just a few shares in the quarter, what was the price for those?

Our price was $14.30.

[Operator Instructions]

And while we wait to see if any other callers have any questions, let me comment briefly on some reinsurance changes that became effective for the Donegal Insurance Group in 2012. We eliminated our multi-line excess of loss reinsurance contract, which in 2011, that contract provided coverage for any individual losses that exceeded $750,000 up to $1 million, at which point we have coverage under other reinsurance contracts. Therefore, for 2012, our per-risk retention is generally $1 million. Although a few of our smaller subsidiaries had separate reinsurance to lower their per-risk retention. It should come as no surprise that catastrophe reinsurance rates increased for our 2012 renewals, netting the multi-line savings against the cat increases yields an overall increase in the reinsurance premiums of about $1.2 million for the year, and that's assuming the same premium base of 2011. We certainly view that increase in reinsurance cost as modest in relation to the size of our book of business. And as Don mentioned, we did make a change in the external quota share that Michigan Insurance Company has by changing the percentage from 50% to 40%, which means that Michigan will retain an additional 10% of its net business, which translates to approximately $10 million in net written premium growth for us in 2012. We did not make any change to the Donegal Mutual quota share, whereby Donegal Mutual assumes 25% of Michigan's business and places that into the pooling agreement. That's a little complex there, but the bottom line is that 55% of Michigan's underwriting results are in the Donegal Group results for 2012.

One of the things that I would emphasize is that we have not increased our retention on catastrophe coverage. So that we think that, that is currently conservatively structured and we want it to keep it with that structure going forward.

We have a follow-up question from Matt Rohrmann with KBW.

So I just wanted to follow-up on one point from Jeff's comments. You obviously -- while you talked that the rate increase is expected for reinsurance particularly the cat side. Just curious to hear your thoughts on obviously, for large severity-driven events, the coverage is what it is. I was curious, if you had looked as you did this year in prior years. I'm curious to get your sense in terms of what the cost would be more of a frequency-driven type of plan? As I know others have said that it would be quite expensive. I'm curious if you get sort of feel -- better feel for the magnitude of what that kind of cost would be?

We have looked over the years at aggregates is basically what they are, and they're quite pricey and certainly in the catastrophe reinsurance market going into 2012, we believe that would have been a prohibitive cost. So it's -- the concept sounds nice, but in the markets over the last year, it would not have been in our judgment, not advisable or not cost effective.

Don, just in terms -- I know it's not apples-to-apples by a long shot, but I mean, are plans such as those -- and I know it's obviously with the frequency of weather this past year and then pretty much from '08 on. I mean, are those type of plans 2 to 3x more expensive the bottom line cost?

We -- our understanding we haven't priced it in about 3 years. Our understanding is that it might be as much as 1.5 to 2x. But certainly -- here is our view of it that you want a reinsurance program to be in place for a longer period of time and if you have an aggregate in place, you're going to pay significantly higher costs every year. And 1 of the attributes or 1 of the philosophies of reinsurance is that you're going to have claims over time, and you want to insure against the severe event, but you want to make sure that over time, that you have a reasonable reinsurance cost and that's been our approach at least over the years.

We have a question from the line of Ron Bodman with Capital Return.

I believe you touched on part of this. Could you talk about the rate movement in sort of the major lines that you write for the fourth quarter? And maybe if you can compare them to what the rate movements were as compared to the third quarter of '11 and then correspondingly how retentions changed?

Let me address the rate part, and Jeff will talk about the retention. In personal lines, we of course have a schedule of the frequency with which we do rate reviews. So as an example, on a homeowners lines of business, you generally do an annual rate review. And our rate reviews, we take it by state. So that would've ranged anywhere from the first quarter of last year into the fourth quarter. And as the year progressed, we would have, because of results, we would have increased -- the indications would have increased significantly and as a result, we would have filed for higher percentage increases in the third and fourth quarter than compared to prior quarters. On the commercial -- and they could be anywhere in homeowners anywhere as high as 12%, which is fairly significant. So we would have -- in automobile, private passenger automobile, they could range anywhere from 4% to 8%. In commercial, commercial is more complex because many times your premium increases that you achieve have to do with how you deal with what are known as credits that you have by regulation the ability to price up or down, a risk off of a base rate. In our case, we would not, other than at worker's comp, would not have thought a lot of base rate changes, but on the thousands of renewals, you have the ability legally to adjust the amount of credits or debits that you apply, and that's the method by which you get your premium increases generally on commercial lines. You also can have base rate increases. We in the fourth quarter would have begun that process of increasing commercial rates much more than we would have in the first 3 quarters of 2011. And we have by product line and by state, a schedule that we are attempting to achieve and it would be anywhere from mid-single digits to as high as 10% or 12%, depending upon the specific risk of a --generally the increases in the case of risk without losses, will be in the range of 5% to 7%, any with losses could be as much as double digits or more, or potentially non-renewal. So that process is accelerating as we move into 2012.

Could you comment about January of 2012, because it sounds like, if I understood your description rate on the commercial lines, you were not effectively pushing for rate in the first 3 quarters, but you in an earnest began in the fourth quarter. You gave us the ranges for the fourth quarter. I'm not sure what the average increase was, but anyway, you gave us the ranges in the fourth quarter. Should we assume that in the early parts of '12, the numbers for commercial lines are either at or greater than these ranges that you gave us? You just...

It is fair to assume that those ranges for commercial lines in the first quarter would be very similar to the fourth quarter because they are part of the business plan.

Similar, okay. How about retention, sir?

Sure, on the retention side, our personal lines retention -- well both personal and commercial lines, retention rates have stayed fairly constant. In personal lines a year ago, we would have been around 89% policy retention. And through 2011, we're like at 88.5%. So it really didn't change a whole lot. Commercial lines is mid-80s. And commercial lines retention might be down 1 percentage point. But overall, very consistent. We have not seen a significant decrease in retention as a result of the rate increases that we've taken throughout the year.

So I guess that emboldens you to stay the course with the rate increases.

It does indeed.

Exactly.

[Operator Instructions] I'm showing there are no further questions at this time.

Okay. We thank everyone for their participation on the call, and hope for a good 2012.

Thank you, everyone.

Ladies and gentlemen, this concludes today's Fourth Quarter 2011 Earnings Conference Call. You may now disconnect.