Donegal Group Inc. (DGICA) Q4 2018 Earnings Report, Transcript and Summary

Good morning. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donegal Group Q4 2018 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] Jeff Miller, Chief Financial Officer, you may begin your conference.

Thank you. Good morning, and welcome to the Donegal Group conference call for the fourth quarter and year ended December 31, 2018. Yesterday afternoon, we issued a news release outlining our quarterly results. For a copy of that release, please visit the Investor Relations section of our website at donegalgroup.com. In today's call, Kevin Burke, President and Chief Executive Officer, will discuss a number of our recent developments and update you on our business strategy and initiatives. And I'll follow his comments with a brief overview of our quarterly financial details. Following our prepared comments, we will open the line for any questions you might have. Before we get started, you should be aware that our commentary today includes forward-looking statements that involve a number of risks and uncertainties. We described forward-looking statements in our news release and we provided further information about risk factors that could cause actual results to differ materially from those we project in the forward-looking statements in the report on Form 10-K that we submitted to the SEC. You can access our Form 10-K through the Investors section of our website under the SEC filings link. We also use certain non-GAAP financial measures to analyze our business results and refer you to the reconciliation of non-GAAP information included in the news release we issued yesterday. With that, I'll turn it over to Kevin.

Thanks, Jeff. And welcome, everyone. We continue to focus on key strategic initiatives during the fourth quarter of 2018 including the gradual shift in our mix of business towards a higher percentage of commercial lines, increasing the use of technology throughout our operations and improving our infrastructure to support profitable underwriting performance. The challenges that we confronted during 2018 continued into the fourth quarter with elevated loss activity in our personal lines, in part due to weather activity that was higher than our historical norms, higher loss severity in our automobile lines of business, and changes in claims settlement trends that have caused us to establish higher levels of loss reserves to cover expected future development. We recognized these challenges early in the year and address them with significant reserves, strengthening actions throughout the year. In commercial auto, we have seen a greater preponderance of loss severity in several states. While this trend has impacted the industry at large, the impact on our commercial results for 2018 was more substantial than we expected. In response, we've increased our utilization of a predictive model to assist in the underwriting of new and renewal commercial automobile policies throughout our organization. In addition, we've been achieving consistent premium increases in the high single-digits through a combination of base rate increases and discretionary pricing adjustments which have continued to filter through our commercial auto book of business. We've been closely reviewing every commercial auto renewal policy in several underperforming performing states and we will continue to follow rate increases throughout 2019 and take other underwriting actions to reduce exposures in certain problematic classes and geographies as we work to improve the underwriting results of our commercial automobile business. We are pleased to report higher net premiums earned in continuation of net premiums written growth in our commercial business segment. This growth was driven partially by rate increases, but also by new business accounts for many of our agents and regions we have targeted for profitable growth. We work diligently through the year to increase communication with our agency leaders, engaging in open dialogue about the challenges we collectively faced and also listening to their feedback as to ways that we can assist them in meeting their customers' needs and providing value to their customers and ultimately growing their business with us. Our accessibility and commitment to our leaders' agents leads to a deeper business relationship which we believe are primary factors as to why agents choose to place their best business with our companies. Moving to personal lines; we are committed to maintaining it balanced presence in many of our markets, offering a mix of commercial and personal lines products at pricing levels that will allow us to remain profitable through fluctuating market cycles. In the middle part of 2018, we identified 7 states where we incurred consistent underwriting losses and did not have sufficient scale to restore our profitability within an acceptable timeframe. As we outlined in previous calls, we entered into a book transfer agreement to facilitate an orderly exit from the personal lines market in those seven states. We began that process with policies effective in February, will continue to non-renew our personal lines policies in those 7 states throughout 2019. Our agents have expressed appreciation for our approach to exiting these states in a well-planned manner that considered the interest of our customers and agents. This initiative is just one of many steps we're taking to accelerate the recovery of our personal lines business to an acceptable level of profitability. Moving to the integration of technology in our business; while we in Donegal Mutual operate through multiple subsidiaries and distinct markets, Donegal Mutual has developed common technology platforms to ensure consistency within our processes and to employ analytical capabilities to enable us to keep pace with larger competitors. Donegal Mutual formally kicked off a multi-year systems modernization project that will ultimately eliminate legacy systems and enhance our ability to serve the needs of our underwriters, agents and policy holders. We view this project as far more encompassing than simply introducing new software. We view this project as an opportunity to transform the way we conduct business, to question legacy processes and workflows, and streamline our operations. We will have the ability to greatly enhance our data analytic capabilities and build a solid foundation that will support emerging technologies in the future. We continue to develop and implement new predictive models to further enhance our pricing underwriting capabilities, we've recently launched a new workers compensation model and expect to deploy new small commercial business model in the second quarter. We have identified other strategic areas where predictive models can assist our business decision-making and while working to implement them overtime. We continue to increase our utilization of models and external data to make it easier for our agents to place business with us by reducing the amount of our systems required to quote and issue policies. Within the next few weeks, we will be making some structural changes within our company to consolidate functions that govern, analyze and compile data for key areas such as rate-making, predictive analytics, data analysis and business intelligence. We are looking forward to the benefits we will gain by enhancing our data analytic capabilities as the importance of data analytics and our business continues to grow exponentially. Our reinsurance relationship with Willis Re [ph] has also provided us access to consulting services through Willis Towers Watson and with their assistance we will be placing a great deal of emphasis in this area for 2019 and going forward. With that I'll turn the call over to Jeff for review of our quarterly results, and then I'll return with some closing comments.

Thanks, Kevin. I'll briefly discuss a few of the operational and financial metrics for the fourth quarter and certainly welcome any questions later in the call. Beginning with premium revenue; net premiums earned grew 2.8% to $186.2 million for the fourth quarter of 2018. However, our net premiums written declined 1.8% to $168.3 million. The decrease was largely due to a 10% decline in personal automobile writings in the period leading to an overall 8% decline in personal lines. This decrease is consistent with our continuing plan to balance our new business writings toward lines where sustainable underwriting profitability is achievable and ensuring that the actions we've taken in 2018 to improve our personal automobile results were effective. Despite the overall declining writings during the quarter, personal auto rate increases added over 9% premium growth for that line of business. We were pleased to achieve continued growth in each of our commercial lines with commercial multi-parallel growing at over 6% for the quarter and 6.5% for the year. Overall, commercial auto growth of 5.8% for the quarter was lower than the nearly 9% rate increase impact for the quarter. We expect our commercial auto premium growth will continue to reflect a proportionately higher impact of rate increases versus exposure growth in 2019. In addition to the increase in other commercial lines, net premiums written reflects a modification to third-party reinsurance coverage related to Umbrella Liability policies effective March 1, 2018 pursuant to which we retained a higher proportion of this historically profitable business. For 2019 we included our Umbrella Liability policies in our casualty reinsurance treaty and will further reduce the reinsurance premiums associated with that profitable business line. Let's take a minute or two to discuss our reinsurance program for 2019 as we anticipate an increase in net premiums written as a result of the changes we made. As we discussed in our preliminary announcement on February 8, we implemented a combined reinsurance program with Donegal Mutual effective January 1, 2019. While we encourage all investors to review the announcement for full details, the main takeaway is that we've reviewed the reinsurance strategy across our subsidiaries and determined that a consolidated program would outperform the multiple reinsurance programs previously in place in terms of managing volatility and preserving capital over the long term. We anticipate a decrease of more than $25 million in total reinsurance premiums for 2019 compared to 2018, which will impact net premiums written favorably in the coming year. As we noted in the preliminary announcement, the ultimate net benefit or cost of the restructure program is dependent upon the incidents of large loss activity and the occurrence of catastrophe events that may impact our insurance subsidiaries during 2019. Moving to underwriting performance, our loss ratio in the fourth quarter was 77% compared to 72% in the prior year period. I'll break this number into components including weather-related bosses that are much higher than historical norms, fire losses and development of prior period claims. Weather-related losses contributed 6.7% to our loss ratio for the fourth quarter of 2018 compared to 3% of our loss ratio in the prior year quarter. As we mentioned in our last call, we did receive a number of claims from Hurricane Michael. The majority of those claims occurred in Georgia and Virginia as the storm system passed across those states. We incurred approximately $4.1 million of losses from Hurricane Michael contributing to $12.5 million of total weather-related losses for the fourth quarter 2018 which far exceeded our previous five-year average for fourth quarter weather-related losses of $5.2 million. On a positive note, we did benefit from a decrease in the impact of both homeowners and commercial property fire losses in the fourth quarter of 2018. Fire losses in excess of $50,000 were $4.6 million compared to $7.7 million for the fourth quarter 2017. We had a comparatively lower incidents of commercial property fires during the period. Development of reserves for losses incurred in prior accident years added in 3.6% to our loss ratio for the fourth quarter of 2018 compared to around 1% in the prior year period. The development largely centered around our response to the changing loss trends that Kevin highlighted, particularly in our automobile lines of business. In the fourth quarter we reinforced our loss adjustment expense reserves in recognition of the deceleration our actuaries noticing claims closure rates, which simply means that certain types of claims are taking longer to resolve and will result in higher costs to manage and settle those claims. That was a refinement to the significant reserve strengthening actions we took earlier in 2018. Our release mentioned that our actuaries selected higher ultimate loss ratios in establishing our 2018 actuaries year IB and our reserves. And to be clear, those high selections were made throughout the year continuing into the fourth quarter, but that comment was not intended to suggest any significant change in assumptions during the fourth quarter. Our expense ratio was 32.5% in the fourth quarter of 2018 compared to 31.9% for the fourth quarter of 2017. The increase reflected a December, 2018 guarantee fund assessment of approximately $800,000 related to a handful of insurance company insolvencies in the state of Pennsylvania. In 2019 we will benefit from a full-year of savings we will realize from the closure of our branch office of the Peninsula Insurance Company. We expect to achieve annualized expense savings of approximately $4 million from that consolidation. Overall, our combined ratio was 110.5% compared to 104.8% in the prior year quarter. That certainly was well off the mark in terms of the long-term operational excellence we strive for, but we believe that the actions we took during 2018 will yield overall improvement in our underwriting ratios and net income in the coming quarters. Like all public companies with investments in equity securities, we recorded a mark-to-market adjustment for the decrease in the market value of the equity securities we held at December 31, 2018. This adjustment was the primary cause for our after-tax net investment loss of approximately $6.9 million or $0.25 per Class A share. It's important to note that we've historically held to a conservative investment strategy aimed at complementing our underwriting operations. Our equity component of our investment portfolio has remained relatively stable between 4% to 6% of our total investments throughout 2018. To put the investment loss in context, we've reported net investment gains of $3.5 million in third quarter 2018 largely due to a market-driven increase in the value of our equity portfolio during that quarter. And our equity securities have increased in value as the market has rebounded in the first quarter of 2019 to date. As expected, the new mark-to-market accounting guidance that became effective in 2018 has and will in the future result in quarterly fluctuations in our investment gains with losses as the stock market rises or falls. All in, our net loss was $15 million or $0.54 per Class A share for the fourth quarter of 2018 compared to a net loss of $2.8 million or $0.10 per Class A share for the fourth quarter 2017. We certainly expect better results as we move into 2019. Book value per share was $14.05 at December 31, 2018 compared to $15.95 at year-end 2017. With that, let me turn it back to Kevin.

Thanks, Jeff. We'll open the lines for questions in a moment but I wanted to provide a brief update on our pending sale of Donegal Financial Services Corporation and Union Community Bank's Northwest Bank shares. We expect to close this transaction in early March. We and Donegal Mutual intend to utilize the proceeds from this sale to support our strategic goals as we focus on our core property and casualty insurance business. Based on current expectations, Donegal Group Incorporated will receive over $50 million in net proceeds and record an after-tax gain of over $10 million upon the closing of the transaction. The final proceeds in gain will depend on the market value of The Northwest Bank shares common stock we receive as part of the proceeds at closing. In closing, our performance in 2018 did not achieve our core tenants of improving shareholder value through profitable underwriting, stable investments and ultimately higher return-on-equity in book value appreciation. We understand that certain events as weather impact and sharp changes in investment barriers [ph] can impact an individual quarter as it did in the last three months of 2018. Unfortunately, those events overshadow the very hard work our team performed throughout the year to address the challenges we faced and to position our business for profitable growth in the future. As always, our thanks goes out to everyone on the Donegal team for their efforts, and we look forward to reporting on the positive results of those efforts as the year progresses. With that, we'll have the operator open the lines for any questions that you may have. Thank you.

The first question comes from the line of Christopher Campbell of KBW.

I guess, my first question is on the CMT. Just to kind of looking at the combined ratio there. I guess can we just get a little bit more color on what's driving that because it sounds like you have a lower large fire losses which is driving the improvement but there was a little bit adverse development in there but you all that put together it's still like a sub 90's combined ratio which I look is pretty good; so I guess just trying to understand where the adverse developments coming from?

Sure, this is Jeff. I'll take a stab at that and Kevin can certainly weigh in. The weather impact in the fourth quarter was primarily impacting the homeowner's line of business; so although there was some weather impacted it was not significant as to the impact on the combined ratio for CMP. And that in addition to the low fire losses but you alluded to drove that very solid combined ratio for CMP in the quarter. The development again was part of that LAE strengthening that I talked about, we had -- throughout the year have been adding to the loss reserves for the CMP line as we have seen a shift over the last several years to a larger proportion of that line represented by liability, exposures versus property exposures. So we -- as I said, I've consistently been adding to the IBNR reserves, expecting a longer tail on the development of the liability exposures and claims that we've received. And in fourth quarter, the development is related to the increase in the loss adjustment expense reserve that would support this loss reserves.

Just kind of another question, kind of -- on more higher level. One of your mutual -- like a hybrid competitor has recently made a bid for the outstanding public float it didn't already own. So I guess how would Donegal do this type of transaction? I guess especially with the price trading below book value for a bid here?

I mean it's something obviously Chris we were aware of and saw but it would be -- that would not be something that we would be interested in pursuing. We've -- the interrelationship between the mutual and the stock company. It would actually be cost prohibited to do that. And so that would be something that we would have no interest in doing.

Okay got it. And why would be cost prohibitive? What would be driving that?

Yes, this is Jeff. If you looked at the differences in the structure is similar with the other company that you're talking about but the relationship and the proportionate size of the mutual versus the public company in that situation is quite different from ours. So the number of shares that are outstanding and the size of our mutual company would not be conducive to doing that type of the transaction.

And then kind of a question -- this is more or like in the weeds type of question but why did the policyholder dividend ratio increase 10 bips? And then while the underwriting results were like 610 bips higher? I guess I'm just trying to think about like modeling that and then trying to understand that piece of expenses a little bit better.

The policyholder dividends are -- they're related to workers compensation policies. So there's two components of that. In one of the states that we do business, there's a flat dividend and we've been increasing our writings in that state. What I mean by a flat dividend is that the givens are guaranteed at the time you write the policy. So it's kind of a unique circumstance to that particular state but it has increased -- has resulted in an increase in that line item because those dividends are not dependent upon loss ratio. In addition, our workers Comp business has been quite profitable over the last 2 years plus and those dividends lag someone in terms of the payment. We do a crew for the dividends but you know over time you know we expect that number could moderate as there's additional competition and we see that some of the duration the premium writings and potentially increasing the loss ratios. But as to our current; States Workers Comp has been very profitable and that's why we're paying higher dividends in addition to that other dynamic that I explained on the flat dividends.

Okay, got it. And what's the logic behind the flat dividend? And not having that vary by experience? Is there some other offset in terms of just pricing or discounting that makes that makes sense.

Yes, it's just part of the way that worker's comp is written in that state, it's kind of historical dynamic within that state. So, I can't really explain the logic behind it but that's what all of our competitors are doing if you want to write a workers comp in that state, you have to offer.

And it's been that way for many years well so.

It's just that we're ramping up our writings in the state which is why you're seeing the impact.

Got it, that makes sense. Just one last one if I may; reinsurance program, it looks like you guys made pretty substantial changes, lots of cost savings. I guess, how would it impact like per event cap retention? And then just -- your cap coverage on individual lines; I guess how should we think about that in terms of like a big event hits Donegal what would that look like for some of your bigger lines?

Sure, we'll be glad to address that. Although the overall program so when we have a program in place that covers Donegal Mutual and all of the subsidiaries of Donegal Group and there is a $10 million retention as it relates to kind of that. However, Donegal Mutual has provided an underlying catastrophe agreement with each of the Donegal Group subsidiaries that lowers the overall per event retention to $2 million per subsidiary, and if there is an event that impacts multiple subsidiaries that retention is capped at $5 million. So that's pretty comparable to what we had in place for 2018, there was -- it was a little more complicated because we had some individual agreements in place between some of the subs of DGI and Donegal Mutual, and now there's just one common agreement that has a similar retention. The other primary difference between what was in place for 2018 and what we have implemented for 2019 is that the catastrophe agreement in place between Donegal Mutual and the Donegal Group subsidiaries does not include reinstatement premiums, and that's a significant factor because what we found is, in the past, many times when there was a cat event that impacted Donegal Group Insurance subsidiary, although it recovered losses from Donegal Mutual, it then paid reinstatement premiums that offset a fairly large proportion of that loss recovery. So, as -- that's kind of long winded question to answer the question but I don't believe it's going to be a significant change in the exposure the Donegal Groups subsidiaries have to a cat event, and we believe that the absence of reinstatement premiums with that underlying Donegal Mutual policy or a treaty will actually be of benefit in total.

So the mutual and then the group, we're just swapping dollars, right. So they would get -- so group would get the benefit of the reinsurance recoveries for Mutual and then they'd have to go pay that right back to the Mutual to reinstate coverage? Okay, got it. So where does all the savings come from because I mean you guys have a pretty substantial like $25 million and seeded premiums, you guys are saving annually, so is that coming from like pro-risk type of – like, I mean, maybe like workers Comp cat or property cat or are you doing anything on the facultative side, it's -- that's where you're getting some of those savings?

Yes, there is two primary areas that we're getting the savings from. One is the reduction of facultative premiums both, in property fact and Umbrella Liability facultative. We've had eliminated all of the Umbrella facultative and that's now included in the casualty treaty, and on the property side we've significantly increased the level at which we would need to buy facultative coverage, and we have a treaty that covers us up to a higher threshold; so there is a reduction in facultative premiums. The other savings is the result of eliminating a number of treaties that would have covered the low end of our exposures, so basically we were trading dollars of reinsurers to cover expected losses, especially in some of the smaller subsidiaries that has their own individual programs. And by consolidating those programs and increasing the overall retention, we've basically stripped out the premiums that we were paying for the expected losses at those lower band.

Got it, that makes sense. Well, thanks for all the answers. Best of Luck in 2019.

[Operator Instructions] The next question comes from the line of Bob Farnam of Boenning & Scattergood.

I have a few questions, probably just more color on your actions and trying to deal with the auto business. You raised the current year loss ratio for -- sounds like maybe both, commercial and personal auto -- correct me if I'm wrong but just want to know what the current action of yours have looked like -- or the most recent action years have looked like in terms of loss ratio in that business? And how far you moved this year's ratio up?

Sure, this is Jeff. Again, the -- what I'm referring to is our core loss ratio which would be normalized basically stripping out the prior year development and stripping out weather; so our current accident year loss ratio -- non-weather loss ratio for the auto lines was right under 80% -- 79% to 80% for 2018, and that would apply to both, personal auto and commercial auto, very similar loss ratios that we have selected in terms of setting the reserves. Those -- both are higher -- quite a bit higher than what we would have established or set at the end of 2017 for the 2017 accident year. On the personal line side, we would have had a normalized loss ratio 70.6% in 2017, that has increased right to about 79% for 2018. On the commercial line side we were expecting around 64% core loss ratio and we've increased that to almost 80% for 2018 commercial line -- commercial auto. So what that tells you is that we were less optimistic in 2018 as to the improvement we were expecting in our loss ratios. The last several years when you trend and develop the loss ratios, they are currently sitting right around that 79% to 80% range. So we've booked 2018 at the same level that our experience shows, it's -- our last several accident years are going to trend ultimately at that same rate. So we are expecting, obviously that the actions we took in 2018 are going to improve our results as we move into 2019, particularly in the second half of the year but we did not anticipate that the 2018 accident year would show any measurable improvement.

Yes, so basically you're setting the 2018 year numbers. And in the ballpark words, the other -- the prior years have developed up too; so you're basically trying to avoid further adverse development in the 2018 year going forward based on what you've seen in the other years?

Yes.

So if you're booking in 80% for the auto lines, what -- did you have a happy target that you're going to try to get to eventually and how long will it take to get down to kind of your targeted loss ratio range?

59% in personalized just sort of the target goal for us, Bob. 59% to 62% -- we do have a little bit of an expense load that we're working with as well. We'd love to be able to get there in the next year to 18 months on the outside and it really highlights a lot of the aggressive action that were taken behind the scenes in addition to obviously, they're all the reserve strengthening that Jeff has highlighted. There is a number of things that we're doing corrective action wise in terms of some of our predictive models and really digging into on a state-by-state basis. If you think about 2018, we really sort of step back and we took base rate increases to sort of make up for some pricing inadequacy that we had. As we move forward what we're doing is we're taking much more refined look at it and on a state-by-state basis, those rate increases are being refined to ensure that 80% of our overall personalized book-of-business has performed relatively well, and so we're trying to get us in that 20% but at the same time we've got to be careful in terms of the rates that we do apply. So aside from the reserve strengthening when we look at a private passenger auto, our goal would be anywhere in that 59% pure loss ratio would be a target for us and we think that we can achieve that overtime but it will take some aggressive actions. It's one of the reasons quite honestly that we get us in that $22 million of business in those 7 states, it was really about how quickly can we accelerate the recovery of that book of business. On the commercial line side, commercial auto industry wide issue and we're taking a number of corrective measures, we're looking at every single renewal policy on the commercial auto side and particularly in problematic states, Georgia, being one of them. We're also looking at certain telematics that we can provide for a policy holder for a certain size fleet; we've got 3 different vendors that we're looking at right now as -- hopefully, we can deploy that in 2019. And again, all those are designed to sort of chip away at those two particular lines that have been very problematic for us. But all the reserve strengthening, and as we sort of walk in to 2019 with our eyes wide open; I think Jeff categorized it extremely well that you know we were I think a little optimistic in the last 18 months and thought that we had done what we needed to do, we're not changing the model going forward but we are making sure that we have appropriate reserves in place. So we're looking forward to seeing what the next few quarters brings for 2019.

So it was so basically it's not just the rate increases I mean looks sounds like you're getting upper single digit rate increases any auto book but it's also the re-underwriting that you're doing and changing the policy profiles that you're expecting to generate the better profitability?

It is, it's -- you know, the rate component of it is obviously it's an easy fix to you to file those rates but that's a very tactical move. What we're sort of shifting of gears going forward is more strategic, again 2018 Bob was about taking base rate and building a foundation that we can move from. We're looking at commercial auto, private passenger auto, on a state-by-state basis, on an agency-by-agency basis to ensure that we retain the good book-of-business that we do have but at the same time making sure that 20% -- that 25% of those books are not dragging down our results. And so there is a lot of things that we're doing behind the scenes from a predictive model standpoint. We've just hired a new Chief Analytics Officer that will be starting in early March, and we're going to restructure to pull all that -- the data analytics, business intelligence within the organization and that's going to really position us to not just take tactical moves in terms of rate but really strategically look at those 2 lines of business, look at the 26 states in which we operate in and making sure that we're refining our pricing with a business model that we understand the direction that we're going in.

Right okay, and as you do raise the rates you know you're going to have high single digit rates on top of high single digit rates and you know I think you started this a little while ago. How have your agents been able to -- what's the feedback from the ages and on their ability to be able to push these rate increases off to their policy holders or their clients and how has that impacted retention in this business?

We've had a little bit of a retention slip which is sort of forecast, we knew -- particularly like on the private passenger auto side of it, some of the changes that we made; we anticipated that we would have some retention decline there but that's planned and that was expected. On the commercial auto side, we're one of many many carriers out there that are being very aggressive on the rate. And so having traveled around to several states now during our typical spring agency meetings, I've been in Georgia, Virginia, Tennessee, Pennsylvania, you know the agents are very candid and we've got a close relationship with them and they will tell you whether or not you're sort of off the rails or you're doing all the right things and the feedback that we have gotten has been expected. They expected what we were doing in personal lines in terms of aggressive with respect to -- rate increases on the commercial auto side they're seeing it with every other carrier. The question really comes down to what are we doing as an organization to provide value to help them chip away at loss ratios particularly on the commercial auto side? And that's why fleet monitoring processes in telematics and having very defined predictive models. That's really the part of the solution that the agents are looking for and can we help them to provide that? And feedback, Bob, on the transition of that personal lines book of business in those 7 states that we've -- that we're working through right now, you know one of my first concerns was how would the agency plant respond to that change and we anticipated that first 30 days, we may have some agents push back or question our commitment to personal lines when you make an announcement like that. I can tell you that very quickly dwindled in after the first 30 days, after that announcement, the agents again have appreciated our approach to pulling out of those 7 states in providing a market for them and also right on the heels of our announcement there were several other major carriers that announced similar transactions move, in some cases moving a 100% of their book of business. So we sort of faded quietly into the sunset if you will with the agency as it looked at that personal lines book of business. And we've had no push back and we've been able to retain the commercial lines business in those 7 states that we pulled out of personal line so that's good news.

So just going into that, the business that you're not going to be -- it's going to be renewing in other papers you're -- the premium -- you're going to lose premium there so that -- what size is that business that you're sending to Safeco and you said it started to kind of get off the books?

Yes, we start -- yes we started the non-renewals in February and it's approximately $22 million over 7 states. The majority of that being Nebraska but again when we look at where we're strong at states like Pennsylvania and some mid-western states, Virginia and some other areas. States like South Dakota; we don't have the market share and personal lines there, and so for us strategically it was a relatively easy decision to make but it will accelerate the recovery of our personal lines.

Your next question comes from the line of Jamie Inglis of Philo Smith.

Good morning guys, two questions. One; could you tell me a little bit more about the technology initiative meeting? How much of that is sort of an outward facing versus inward facing unit processing changes and what is sort of the staging and timing of all that?

Jeff and I will both comment on it because we're both playing very active roles in that initiative. Its -- first off let's start with the timing of it. It is scheduled right now for about a 4.5 year implementation process. So in terms of you know from an agent's perspective what they would see initially, it's sort of seamless from agent’s perspective because we have very, very good front facing agency portals that we have repeatedly received very high marks on. So the ability for an agent to access Donegal through one of our agency portals is very, very good. Behind the scenes is really what we're working on and it's the last piece of our legacy systems that needed to be modernized and it's the biggest and so with the 4.5 year timeframe to do that is obviously it's a workflow change process, it's all-encompassing. It's an initiative that absolutely needed to be done because it places the organization in a position to really be able to harness the new technology that's available to us. And so we look forward to implementing that but it is going to be a long term process and we will continue to give quarterly updates on it. Jeff, I don't know if you had any additional comments on it.

Sure, I mean they've done but this type of -- would amount or execution [indiscernible] many times with other carriers and much expanded data repository and reporting capabilities, analytical capabilities would be greatly enhanced. So this is kind of the two areas that it's focus. We -- you've been following us for any number of years you know that we converted our claims legacy systems to a modern system a number of years ago. It goes probably back almost 10 years and then our billing systems; we had migrated from legacy systems to modern platforms within the past several years. So as Kevin said, we're down to kind of the remaining policy administration system and reporting systems that are somewhat of the nucleus of the systems and the most difficult to migrate. So it is like a very large project we have Ernst & Young serving as our systems integrator. They've done this type of a transition, a modernization project many times with other carriers and so we're very much utilizing and relying on their expertise to help us with the process and you know they're guiding us through the various phases of the project but it's a very defined and comprehensive project that is going to require a lot of work over the next 4.5 years.

On a separate notice to review the reinsurance program with the Mutual, I guess I assumed that the pricing of that re insurances you know arm's length if you will and if that's so, why does it -- maybe you can't speak to but why does the Mutual want to do it?

Sure, absolutely that it is an arms-length transaction that's required by regulation and we also have a very stringent governance process internally. And you can read our filings we talk about our coordinating committee that exists and there's an independent directors on both sides of review all of the intercompany transactions. But specific to your question why would the Mutual do that, the 10 is that over a longer term period of time that this would be kind of a net neutral results of that over, let's say a 10 year period. The premiums in losses that are shared between the companies would pretty much be even. We priced the premiums for the intercompany contract at the expected losses on a model basis and are allocating those premiums to the individual subsidiaries based upon their contribution to those expected losses. The only -- questionable, I guess you know the -- we made comments about the lack of reinstatement premiums and why would Donegal Mutual do that? Donegal Mutual is the majority owner of the stock of Donegal Group Bank. And Donegal Mutual relies on the dividend payments from Donegal Group Bank is one of its major revenue streams. It is certainly in Donegal Mutual's best interest for Donegal Group to report positive favorable underwriting results. And to be protected against the quarterly volatility that a large catastrophe Van [ph] could have on those results. So it's very much consistent with the long term view the Donegal Mutual takes that you know Donegal Mutual will build it surplus based upon the successful under writing resolves that Donegal Group would generate over time.

There are no further questions at this time, attendance on the call over to Kevin Burke for closing remarks.

Well, we appreciate everyone's call this morning, attendance on the call and we look forward to future quarters. We've taken a lot of corrective actions in 2018 and we look forward to reporting on those in future quarters. So thank you very much for everyone's participation.

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