Good morning. My name is Britney, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2008 Donegal Group's Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions). Thank you. Mr. Miller, you may begin your conference.

Thank you. Good morning, everyone and welcome to the Donegal Group earnings release conference call for the fourth quarter and year ended December 31, 2008. I am Jeff Miller, Chief Financial Officer, and I will begin the conference call by covering financial highlights and providing commentary on the quarterly and annual financial results. I will then turn the call over to Don Nikolaus, President and Chief Executive Officer, for his comments on the quarter, as well as the business trends that we are currently experiencing. Certain statements made in our earnings release and in this conference call are forward-looking in nature, and involve a number of risks and uncertainties. Please refer to our earnings release for more information about forward-looking statements. There were a number of factors that impacted our results for the fourth quarter of 2008. Increased claim activity affected our underwriting profitability, and conservative investment decisions resulted in lower net investment income for the quarter, as compared to the fourth quarter of 2007. However, viewed within the context with difficult economic and market conditions, we are pleased to report a number of positive developments during the quarter. First of all, unlike many of our peers, we incurred minimal realized investment losses, and no other than temporary impairments during the fourth quarter of 2008. The market values of our available-for-sale fixed income investments improved significantly during the fourth quarter, mainly as a result of the lower market rates. Equity holdings represent less than 1% of our overall investments. Our short-term money is invested primarily in U.S. Treasury securities, where we are receiving a low investment yield, but ensuring the preservation of our capital. We believe the absence of significant investment losses during the quarter, speaks to the soundness of the decisions we made throughout the year. Our top-line growth…

Thank you, Jeff, and good morning, everyone. Welcome to our fourth quarter earnings conference call. As a follow-up to the same that I would have discussed that the third quarter earnings conference call of the Donegal Group has continued to basically focus on some very key issues. First of all, I'd like to talk about balance sheet strength. It became very clear in the August, September timeframe that unusual events were occurring in the investment markets. And we recognized that the integrity of the balance sheet of Donegal Group would be extremely important. As Jeff has indicated, we are pleased to be announcing today that we have a increase in book value, which I think places us among a limited number of insurance companies that would have achieved that for the full year 2008, and also for the fourth quarter. The fact that we have focused on balance sheet strength, and continuing to implement a conservative investment philosophy, we were also able to report today that there were no other than temporary impairments, and that our realized investment losses were limited to the modest sum of $181, 000. Equities, as Jeff has indicated, are only representing approximately 1% of the portfolio and we do not own any preferred stocks because we had liquidated them earlier in the year. We continue to operate on a very conservative operating and underwriting strategy, because we believe in a recessionary environment. For an insurance company it becomes very important that you are focused on the quality of your book. We certainly are very anxious to grow our premium, but probably more important what the quality of the premium is that we have on our books and that we would be writing as new business. So that we are certainly redoubling our efforts to make…

Thank you, Don. And Britney, if you could proceed with the question-and-answer period please.

(Operator Instructions). Your first question comes from the line of Joseph Demarino with Piper Jaffray.

Thank you. Good morning. On the higher severity, you mentioned resulting, I think some fires. What type of buildings did these fires occur in? Was that personal or commercial?

There were actually two farm policies that had large fires in the fourth quarter, as well as a large commercial. So, the three large fires that I referred to, two of them were farm, which would fall into our personal lines segment, and then one large commercial building.

Okay. And I think, did you say for favorable development you did have some, but that it was $2 million less than what it had been in the prior year?

Actually, in the fourth quarter of 2007, we actually had very little development. It was basically flat, and the fourth quarter 2008, we actually had $2 million of unfavorable development.

Okay.

So, the $2 million less is of about a flat base from 2007.

And, what lines I guess, did that occur in, and what accident years?

It was primarily attributable to loss severity in the 2007 accident year. And primarily in personal auto. And I can put that into some perspective, for the full year 2008, we experienced net unfavorable development of around $2.7 million, which was 1.2% of our reserves as of the prior year end. So it's certainly within a range that we consider reasonable. And I can report that our external actuaries had confirmed earlier this week that our net reserve estimates are very close to their point estimates, and we continue to believe that our loss reserves are adequate, and even conservative estimates of our ultimate liability.

Okay. Thank you. And then, on the mention of the lower underwriting based incentive compensation. What exactly, what exact changes did you make to the compensation structure?

Basically, that refers to contingent commission programs that are available for agents as well as the bonus programs are available for all employees. So and both are focused on loss ratio and if you have a higher loss ratio, you would experience lower contingent commission payouts and there are lower incentive compensations to employees.

Okay, thanks. And then just lastly, what was the statutory capital number at year end?

Statutory capital and surplus was $324.9 million. That would include Sheboygan Falls, as fairly close to what I believe I told you at the end of third quarter and the reason that we didn't see an increase for Sheboygan Falls acquisition was that we also had dividends paid from the subsidiaries to our holding company.

Okay, thank you.

You're welcome.

Your next question comes from the line of Michael Phillips with Stifel Nicolaus.

Thanks, good morning.

Good morning.

Let me start off with just one kind of high level kind of strategic question. And then couple of other ones. First question, no surprise that we're seeing combined ratios for pretty much industry tick up '08, probably '09 as well and so we're going to see, it's likely a lot of smaller companies, impairment rates kind of tick up and some companies that don't have the well with (ph) that I think that you guys have, find yourselves in, it's dire strait. I mean we have even seen some recent companies say point out of personal lines in certain segments that means recently in last week, obviously. I guess the question is how much do you focus on that kind of stuff in terms of a concrete strategy to say here's what other companies have done, they may be a trouble and there is some business to be had because of that and how aggressive do you become in going out after some business that might be out there on the table to get because of that?

Well, let me respond to that. Companies that are exiting a particular line of business, what we talked about in the -- our distribution system is books of business. There might be book of business that were with a company that either has become less competitive or in the example you gave or exiting the market. You have to be careful because there's generally a reason why somebody is exiting the market. They're not exiting it because they made too much money in it. So you have to be careful that the quality of the book of business is what you want it to be. But we are very proactive in looking to what is called rollover books of business and what we do, however, is we have a whole process where there are specific criteria under which that have to be met in order for us to sign off on agreeing to rolling over a book of business. But it's certainly area where we look to always try to grow. We just need to be careful that we don't get carried away with what that book of business might be. There is an old saying in our business that, you have to be careful that you don't look at the perfume of the premium versus the sort of the downside or the problems with the quality and the profitability of it. So we're very cautious about that but we're aggressive about looking to those opportunities.

Well, thanks, Don, that makes great sense. Nuts and bolts question, the press release talked about and you mentioned that in your opening comment Jeff the savings from staff productions, first you said $2.3 million in '09 and subsequent. Can you breakdown how much that might be in '09?

It would be $2.3 million in '09 as well as in subsequent years. So that's an annual number.

Okay, good. And that is all I have for now. Thank you.

You're welcome.

Your next question comes from the line of Dan Schlemmer with FPK.

Yes, hi, good morning. Sort of a follow-up on that last question with the personal reductions. Can you give a little more background on, I mean are you talking about claims people or are you talking about overhead or marketing, etcetera, where the cuts are coming from?

They, basically, are coming from various departments, including the fact that we have accelerated the centralization of certain functions into our home office facility because we have a number of branches and some of those relate to companies over the years that we have acquired. So, some of it is the elimination of positions in regional offices and simply having the function centralized. Also, some of it comes from the fact that with a very aggressive program of automating function that we have been able to reduce the need for a certain number of personnel that may have done data entry work with positions like that. It also included a few claims people. We also consolidated some marketing positions in that. We had some overlap between marketing people from one of our subsidiaries, calling on agents in the same state as we would have had calling on that same locality from the home office area. So it's a broad area. We've looked at all aspects of the operation and basically was able to downsize without, in any way in our judgment, adversely affecting our service levels or our aggressiveness in the marketplace or our ability to appropriately service claims.

Great, thank you. Separately, the OTTI, I know you didn't take any impairments on the quarter, we're -- obviously are seeing a fair amount of that across the industry. And there is a fair amount of judgment as to when or whether you are taking impairment. Can you give us any background on how you guys make the determination that an impairment -- how you would make the determination that an impairment is appropriate or what kind of thresholds you might use?

Certainly, I can give you some color on that. Obviously, there are very specific accounting rules that dictate what constitutes an impairment and when it is other than temporary. But as you indicated, there is some level of judgment involved in that. And because we liquidated the majority of our equity holdings, we had very few equity holdings left, as we mentioned they're less than 1% of our investments and those equity holdings were held out again at the end of the year. So the criteria that we use is we generally look at anything that is less than 20% of cost, unless if there is a decline of more than 20%. So that the holding value is less than 80% of cost, then that is obviously one that we look very closely at is to see if the near term prospects of recovery are reasonable and if they are not, then we write them down. On the bonds side, we clearly because of the nature of our investment portfolio and the high quality of the holdings of any bonds there that are marginal, we clearly have the ability and intent to hold them to maturity. So therefore, the credit worthiness of the issuer is generally the criteria that we would use to determine if a write-down is appropriate. Does that answer your question?

Yeah, absolutely. Thank you. Last question, just real quick, talking about Sheboygan, in the comments you said Wisconsin's an excellent state to do business in. I am just curious whether you can clearly tell us what you meant by that, if you are talking about from a regulatory standpoint or competitive standpoint or other?

Oh yes, I'd be happy to do that. I would say from our view of it, it has a profile from a demographic standpoint. There are a lot of small towns and small cities. We like that. Also, from the standpoint of the regulatory environment, we think it's a favorable regulatory environment from an insurance company's viewpoint. It's fair, but it's reasonable. And also it's a state in which independent agency companies, because there's a number -- fair number of them balance out there. There is a strong independent agency base. So what that tells us is that there are strong opportunities for independent type companies such as ourselves to expand a distribution system in that state. And generally, companies are profitable in this state which would be a important criteria.

Very helpful. Thank you.

(Operator Instructions). At this time there are no further questions, sir.

Okay. We certainly thank everyone for their participation on our conference call this morning. Certainly, the year 2008 was not with lot of challenges. We look forward to 2009 and the opportunities that it might present. Thank you very much and have a nice day.

Thank you, everybody.

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