Good morning. My name is Devon and I will be your conference operator today. At this time, I would like to welcome everyone to the Donegal Group Incorporated’s Q4 2016 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. I would now like to turn the call over to Chief Financial Officers, Jeff Miller. Mr. Miller, you may begin your conference.

Thank you very much. Good morning and welcome to the Donegal Group conference call for the fourth quarter and year ended December 31, 2016. I will begin today’s call with commentary on our quarterly financial results. Kevin Burke, President and Chief Executive Officer, will then discuss our annual results along with our current business developments and growth initiatives. Following that, our Chairman, Don Nikolaus will share his perspective on our ongoing business strategy 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 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 Investors section of our website. Our fourth quarter was highlighted by strong organic growth across our marketing regions with higher premiums in both our commercial and personal lines business segments. We achieved double digit growth in commercial lines, which is a continuation of a trend we reported consistently over recent quarters and led to an increase in our total net premiums written of 9.5% for the quarter. Kevin will further discuss the factors driving this growth later in the call. Turning to the bottom line for the fourth quarter of 2016, Donegal Group reported net income of $5.6 million or $0.21…

Thank you, Jeff. We were pleased with the continued growth we achieved for the fourth quarter, as well as the profitable results we generated in a number of lines of business. Donegal Group had an exceptional year in 2016. We achieved the highest level of annual net premiums written in a company's history along with solid underwriting results and book value appreciation. Our focus has been on executing our long-term business strategy, including our commitment to sound underwriting discipline, expanding our market share, providing best-in-class technology, and being responsive not only to our customers, but also to our independent agents that have contributed greatly to our positive results this year. Our premium growth has been very consistent, exceeding 8% for each of the past five years. That consistency is a Testament to the solid reputation that we have built, as a regionally focused multi-line insurance group that writes comprehensive suite of products designed for individuals and businesses in local communities throughout our regions. We were very pleased to achieve commercial lines growth of 12.2% in 2016, primarily representing new accounts, our insurance subsidiaries have written, as well as the continuation of modest renewal premium increases. Within commercial lines we write commercial multi-peril, workers comp both of which were very profitable during the year and automobile, which continues to be a challenging line for us in the industry as a whole. We are account riders and we were pleased to achieve strong premium growth in each line of business within our commercial segment. Combining that solid commercial lines growth with the ongoing benefit of personal lines premium rate increases, as well as growth in personal lines policy count during the year, our full-year net premiums earned increased 8.3% and drove the 8.2% growth for our total revenues of $688.4 million for…

Thank you, Kevin. Both Jeff and Kevin have given you a good summary of the quarter and the 2016 results. We have and exceptionally pleased with the success of Donegal Group over the last several years, which we measure using a number of metrics as fellow shareholders. We gauge our success on our ability to generate net income, book value appreciation, and a higher return on equity for the benefit of all of our shareholders. We also look to maintain consistent strategy of returning capital to shareholders to the form of dividend payments. All of this was achieved in 2016. Return on average equity was 7.3% for the full year, compared to 5.1% for the prior year 2015. At the core of our company's success, is a long-standing commitment through relationship with our independent agents as Kevin has referred to. We don't take this for granted and we are constantly communicating with our agents to gather information and ensure that we understand changes within our regional market. This communication is finally important for Donegal in terms of achieving proper rate risk we write in each of our states while also writing and retaining profitable business. It should be understood that understanding the marketplace in which you were doing business is extremely important on the standpoint of being able to make sure that you have the right strategies, the right products, and you are delivering the proper service. So to conclude, 2016 was a great year for Donegal Group and we feel well positioned for future growth in 2017. At this point, we would be happy to respond to questions and I’ll turn it back to Jeff Miller.

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

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

Yes, hi good morning.

Good morning Chris.

Good morning Chris.

Just a few questions on the auto trends, so obviously the combined ratios are higher, part of that’s weather and it sounds like you are also growing as well. So, can you get an idea of what that new business penalty would be for your auto book and few more detailed plans on what is Donegal doing to address the underwriting drag in the two auto segments?

This is Jeff. I will start just by talking about commercial auto and then allow Kevin and Don to contribute to as to some of the trends we are seeing. In commercial auto, the fourth quarter loss ratio was impacted by three large losses each of which were million dollars. So the $3 million from three claims and there was some adverse reserve development that I referred to in my prepared remarks as well about 2.2 million. So between the three losses and some adverse development that accounted for 24 points on the combined ratio. So, taking that into consideration the underlying book of business is actually not performing badly. Having said that, the overall combined ratio for commercial auto for the year is not favorable and we continue to have a profit improvement team that meets every month to look at that and they try to address it, but just wanted to give you a sense of some of the activities in the fourth quarter that contributed to the elevated combined ratio. On the personal lines side, we did have our actuaries dig into the details and we did see some seasonal increase in frequency and of course in physical damage we’re seeing the same trends that others are seeing with increased cost of repairing autos when you have an increase in auto accidents, obviously the physical damage severity becomes an issue as well. Don and Kevin, I don't know if you want to add to that comment.

No, I think that Jeff covered it well. When you look at the overall results, clearly prior passenger auto, commercial auto Chris are the two lines that are running some issues in terms of loss ratio. We have - and continue to pay a lot of attention to those two lines. When you look at from by region by state down to agent we are able to analyze it at that level. And one of the things that we’ve got to be cautious about is, is it relates to rate adequacy on private passenger auto, is a very strong regional company, we have to make sure that if we continue to take some additional rate where it’s needed that it’s done in more of a laser-type approach, so that we’re addressing specific loss ratio areas in a given state, in a given area as opposed to taking some very broad-based increases. And you are seeing that amongst regional’s and national’s companies that are taking some fairly aggressive I think private passenger auto rates or at least they have been filed, Donegal is going to take a very specific approach to it to try to address it, and there is also a fair amount of industry issues that are going on associated with the two from distracted drivers. We've all been out on the road and it’s hard to underwrite and address those issues when you have as many distracted drivers from the texting issues, and also the severity of damage to vehicles these days. When you look at a vehicle damage today, versus eight years ago, many of the cars today have bumpers with sensors, rear cameras, lane change on side mirrors, and the cost of repairing those has also increased dramatically so as much as the safety issues and things that have been implemented, the hope being that frequency would drop over a period of time. I think we’re also in crossroads where you’re not necessarily seeing frequency drop, but at the same time repairs and other issues are more expensive, and so from our view those are two specific lines that we understand that we are going to pay a lot of attention to start to correct some of those loss ratio issues.

This is Don Nikolaus. Some of the other things that we are doing is looking at some of the predictive modeling approaches and looking at some of our historic statistics and try to see whether we can identify where we need to make certain changes and we have done that in certain states and we will continue to do that because at the end of the day, we are going to make sure that we are pricing new business accurately, based upon the specific of the applications. So, we are sort of enhancing that for various states in the private passenger all in the automobile line of business.

Thank you. That’s very helpful, just circling back to what Jeff said on the commercial auto, there was about 2.2 million of adverse development in the quarter was there anything similar in auto, on the personal auto side, is there any read-through from what’s happening in commercial auto to the reserves and personal auto, and also, I think Kevin noted the higher PD severities, are you seeing anything similar on your liability coverage’s, our severity is higher than you’d expect it there, any idea of what we could get on what’s happening on the liability side would be helpful?

Sure. Let me take, this is Jeff; let me take the first part of the question. The development on the personal lines auto was very insignificant for the quarter. So, there was no significant unfavorable development, I think the number is around $500,000 and for this alignment, the size of personal auto, for us that’s a very small number. So, we were pleased see that the reserves from prior years were quite adequate, but no similar issues for personal auto that we saw in commercial auto. As far as the severity on the liability side, I would say, no we are not seeing any significant increase in severity and liability. The only severity increases we noted during the quarter or during the year for that matter would have been on the physical damage side as Kevin mentioned.

Great and then one question on the favorable workers comp development, could we get a little bit more color on what you're seeing in terms of lost cost trends in that line, since it’s been very strong performance.

It has been very strong. For the year, we had about $10 million of favorable development in that line. So we believe that our reserves are quite strong and workers comp is at one hand where there is great pressure in various states, and it’s obviously a very competitive line. We would remind you that we would write workers comp for generally smaller contractors. We don't write the very large accounts that many of our larger competitors would be writing, although we do have our share of some larger accounts. Most of our workers comp would be related to smaller commercial businesses. So, I don't think we're seeing any significant change in loss cost in that line, it continues to perform very quite well as you noted.

And we are also called account writers, which means that a vast percentage of our workers comp, we are also writing commercial auto forum, package forum et cetera, and underwriting plays a very strong role in the loss ratio, in the line of business like workers comp. And I think our underwriting people are doing a very solid job in making sure that we understand the risk and that we are pricing it appropriate. We have multiple pricing tracks though that we can price a risk according to the specifics of that particular risk, so the same price doesn't apply for every application that we write.

Great. And just one final question on taxes, which were a little bit lower than we had expected, anything special happening here?

No. We, of course throughout the year, the first three quarters of the year we are projecting the effective tax rate that we expect for the year and through nine months we had projected a effective tax rate based upon our projection of the profitability for the fourth quarter. Our profit for the fourth quarter did not reach the amount that we had targeted, and so the effective tax rate was lower and we had a slight benefit there because we had projected a higher tax rate, during the first three quarters. There is a bit of a true up in the fourth quarter, which is typical and for this year it was a benefit to us.

Very well. Thanks for all the answers and good luck in 2017.

Thank you, Chris.

Thank you, Chris.

[Operator Instructions] There are no further questions at this time. I will turn the call back over to the presenter.

Thank you Devon, and we appreciate everyone's participation on the call this morning and wish you a good day. Thank you.

Thank you everybody.

Thank you.

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