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,…

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…

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.