Good morning. My name is Tanisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2012 Earnings Conference Call. [Operator Instructions] Mr. Jeff Miller, you may begin your conference.

Thank you. Good morning, and welcome to the Donegal Group conference call for the second quarter ended June 30, 2012. I am Jeff Miller, Chief Financial Officer, and I will begin today's call with commentary on the quarterly financial results. Don Nikolaus, President and Chief Executive Officer, will then provide additional comments on the quarter and give a business update. Before I begin with my prepared remarks, please note 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 submit to the SEC. You can find a copy of our 2011 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. Turning to the quarterly results, we are pleased with the significant improvement we saw in the second quarter, even though our -- the results did not meet all of our objectives. Net income of $2 million reflected a modest underwriting loss offset by investment income and realized gains. Operating income was $1 million for the quarter, compared to an operating loss of $4.5 million for the second quarter of 2011. Let me begin with the 3 primary drivers of the second quarter underwriting loss. First, we had above average weather losses in our operating regions of $11.3 million, including $3 million from the widely discussed derecho storms that swept across…

Thank you, Jeff. Good morning, everyone, and thank you for joining our second quarter earnings call. Jeff has given you a nice overview of a summary of the second quarter, and what I'll do is, do a number of things including talking about business trends, rate increases, how we view the overall environment and some additional items. What I would like to start off with is to emphasize some of the factors that Jeff has referred to. And one of the things that we have sort of pondered as we have viewed the second quarter and year-to-date earnings is the fact that 2012, although nowhere near where we would like it to be and would plan for it to be, there is significantly a better tone to things and certainly, the trend in terms of overall losses, weather patterns, although not good, is much better than it would have been in 2011. Jeff has, of course, told you about the growth in net premiums written of 11.2% in the second quarter, and certainly about 12% in net earned premium. I'll talk a little bit about how that has been accomplished and why we believe that going forward, that has positive aspect associated with it. We also reported that the commercial combined ratio for the quarter was 95% approximately in the 6 months, it's 92% and later on, I'll be talking about what we are doing in commercial lines and we would want you to tie together that combined ratio which is quite favorable in commercial lines, and our strategic direction to increase commercial underwriting written premium as an overall percentage of our book of business. From an earnings standpoint, if you look at the 6-month period, we basically have earnings, although not where we want them to be, a little…

Okay. Thank you, Don. Tanisha, if you would open the line for questions, please?

[Operator Instructions] And we do have a question from the line of Brett Shirreffs.

I was wondering if we could dig into this development a little bit more. I think you said it was around 2.3 points overall, or $2.3 million. Was that the total magnitude of the average development or were there offsets in other business lines?

There would be some modest offsets in other business lines, although I believe the $2.3 million that I quoted is very close to the number that reflects the 2 lines that I mentioned, which would be workers' comp and personal auto. There was some additional modest development in commercial auto liability, which would've been offset by other lines. But primarily it's those 2 lines that I mentioned.

Okay. And actually, just on the commercial auto as well, that combined ratio ticked up quite a bit in the quarter. Anything happening there? Any trend you're seeing that's alarming?

I wouldn't say there's any alarming trends there, some pickup in severity is probably the main primary component of that commercial auto. And while we're talking about the development, maybe I can give just a little more information as to -- I kind of touched on the accelerated payment patterns that our actuaries noticed. What I meant by that, to give you more detail, is that, the paid losses in the workers' comp and personal auto liability and to some extent, the commercial auto liability lines, exceeded the expectations that the actuaries would've had, based upon the historical payment patterns. You go back a few years as they track those patterns, the current experience in the current quarter for the 2011 accident year would've exceeded the expected payments for that period of time. But they did not compensate us as they might have by reducing IBNR reserves at a faster rate than they would have historically done. So what they basically concluded is that it's too early to determine if what they saw was a relatively small but again, measurable shift in the payment patterns, whether that represented an acceleration of the timing of the payments or it actually was an increase in the amount we will ultimately pay to settle those losses. So they took a conservative stance, and that conservative position, they took basically accounts for much of the shift in that loss reserve during the current quarter.

And Brett, this is Don Nikolaus. To add to your commentary about commercial auto, I would point out that the combined ratio for commercial autos for the 6-month period is 93.7% on a statutory basis, and that -- no, excuse me, a 100.9%. And we don't believe that there is anything significant in that development in commercial auto that you're -- that combined ratio that you're saying. Also, when Jeff was giving you the additional explanation of how our actuaries approached the increase of paid losses, which, in most cases would be a positive, but our actuaries basically have said, "Hey it's only the second quarter, it may be very well be a positive, but we're going to approach it from a conservative standpoint." To think what it underscores is that yes, there is some modest adverse development in the quarter, but we would -- management would suggest that it reflects the conservative and strong approach that we would take to reserving.

Okay, that's great. It makes sense. And you mentioned $7 million of fire losses in the quarter. Would you have that number for Q2 '11 as well?

It was, I believe $2.3 million and that's if you look back through our transcripts, that's not what we said last year. Last year we would not have included the Michigan fires because we were reporting Michigan losses as a separate component. But it was $2.4 million. The number last year, they would be comparable to the $7 million this year, so a significant increase.

Okay. And in the release you mentioned adding some corporates to the investor portfolio. Is that a change in strategy going forward? Or what's Tony's outlook there if he's around?

Tony's in the room here. The, basically, the strategy is there, we're continuing to manage our exposure to the municipal bonds, and if we have a, as you know, a large concentration of our portfolio in municipal bonds and so, as we're looking for opportunities to put some money to work instead of earning basically nothing on our cash, corporate bonds was an area where we saw we could pick up some yields. That's just a modest increase there in the current quarter, but it's probably not going to increase that segment any further, it just was where we put the money in the current quarter.

Okay, great. And then just lastly for Don. Any outlook in the M&A environment? Or are you guys seeing any opportunities there?

Well I'm glad you mentioned that, because I usually say something in my comments about it. Brett, we continue, as always, to talk to investment banking people, talk to companies. We don't certainly currently have anything that's eminent, but we consider it to be sort of ongoing missionary work. You always want to be out and about, because these types of transactions don't happen in our business overnight and sometimes it's a matter of building acquaintance and some form of business relationship with the entities. So we continue to have interest and it's certainly part of our business strategy.

[Operator Instructions] And there are no further questions at this time.

Okay. Well, I guess to summarize, were it not for the severe weather event at the end of the quarter, and the unusual level of fire losses, we would've seen a much better picture for the quarter. We certainly appreciate everyone's participation today and hope to talk to you again in another 3 months.

Thank you, everybody.

This does conclude today's conference call. You may now disconnect.