Good morning. My name is Mae Ann, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2012 Earnings Conference Call for Donegal Group Inc. Operator Instructions] Mr. Jeff Miller, you may begin your conference.

Thank you, Mae Ann. Good morning, everyone, and welcome to the Donegal Group conference call for the first quarter ended March 31, 2012. I'm Jeff Miller, Chief Financial Officer, and I will begin the conference call by providing commentary on the quarterly results. Don Nikolaus, President and Chief Executive Officer, will then provide additional comments on the quarter and give an update on our business strategies and opportunities. 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. 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. We are pleased to announce significant improvement in our first quarter results relative to the prior year quarter. Our net income of $8 million represents the highest quarterly earnings we've achieved since 2007 and reflects favorable underwriting results, relatively stable investment income and realized gains. Our operating income was $6.5 million for the quarter compared to $2 million for the first quarter of 2011. We experienced favorable winter weather in our operating regions in the first quarter, with weather-related losses of $5.1 million. Those losses were below our 5-year average for first quarter weather claims and far less than the weather impact we experienced in each quarter of 2011. Some of the claims…

Thank you, Jeff, and good morning to everyone. Welcome to our first quarter conference call. Needless to say, we're pleased with the significant improvement in our results. And I believe that our statistics show that it's the best quarter that we have reported since the fourth quarter of 2007. As we have stated in prior earnings calls, our primary focus over the last year has been to return to underwriting profitability, which in our business drives the bottom line. Jeff has, of course, spoken about the increases in net premiums written and net premiums earned. And one of the things I want to talk about are what rate changes and other actions we have taken and are taking, because part of the results are beginning to reflect the premium and rate increases that we would've been putting into effect over the last year. And from the standpoint of retention, our retention in commercial lines is 86%, which we believe, according to industry standards, is quite good. Our personal lines retention is 89%, which also is quite favorable. One of the issues that we know that all those that follow the property casualty insurance industry are interested in hearing is what is the -- what is happening with pricing in the marketplace? And it is our sense, and we believe backed up by what we hear from hundreds of agencies in our own experience, is that it is clearly a market in which rates are firming. And it may not be described as a hard market, because it probably isn't, but it is clear that many property casualty insurance companies are raising rates, primarily in commercial lines and in homeowners. Private passenger automobile continues to be somewhat of a more competitive line. But certainly in homeowners, carriers including ourselves continue to…

Okay. Thank you, Don. Mae Ann, if you would open the line for questions, please.

[Operator Instructions] You have a question from Samir Kaul [ph] of Capital Return.

My questions are about the letter you received from the SEC dated February 16. Essentially advising that they would be okay with your company committing stockholder proposals of a potential sale or merger from the proxy of your upcoming annual stockholders' meeting. Could you discuss the details around this, specifically who the shareholder was? Any subsequent discussion you guys have had since that initial proposal? And then whether or not you know if the shareholder has proposed some more actions with other companies? And any other details you care to elaborate on.

Well, let me try to respond to that. In the February 16 letter, it's a no-action letter, which is the type of letter that the SEC issues. We opposed the shareholder's proposal of one very appropriate grounds in terms of the way it was proposed and the content of it. And in effect, the SEC, for all practical purposes, concurred that our position was appropriate. We have no knowledge of whether that particular shareholder has made proposals to other companies, have no way of knowing that. The gentleman's name -- and it's certainly in the SEC records -- his name is Greg Shepard. And, hopefully, I've answered your question.

Can -- are you able to elaborate on the way it was proposed and the content that was actually in the letter, or -- yes, in the proposal letter?

Well, I think if you would like the details of that, there is a whole stream of letters, et cetera, that would've been supplied to the SEC by his counsel and our counsel. So I think there's a whole history of that, that is available that you can get the various details of it. And, basically, it was a proposal that there be put into the proxy for shareholder consideration, whether the Donegal Insurance Group should [indiscernible] that type of a Harleysville transaction. So you can go to the SEC website and you can look at all the details of that.

And then one other question. You spoke about the commercial accounts in aggregate, but specifically for the 24% increase in workers' comp, how much of the increase would you say is from actual rate increases? How much would you say is from payroll -- increase in payroll with existing clients? And how much would you say is from new business, if you were to break that out?

I will try to do that. I'm sure that many on the call are aware that in workers' comp, the rating bureaus of the respective states sets the loss cost, and then the respective companies set their loss cost multipliers accordingly. Unfortunately, that's one line of business that the rating bureau is not in all states, but in most states have been promulgating increases in the loss cost. And secondly, we have also been increasing, in many states, the loss cost multiplier, which means that we are adding on some additional rate increase. We would project that probably about 60-plus percent of that is new business and probably about 10%, 15%, maybe, is increase in payrolls for existing customers. And the balance would be the effect of these rate increases. Keeping in mind that what is reported is, of course, a picture of the particular quarter. As I've said earlier, I believe those percentages of rate increase versus exposure increase will accelerate over the succeeding quarters.

[Operator Instructions] Your next question is from Brett Shirreffs with KBW.

Just wanted to ask a quick question on some of the retention figures you gave. You said the commercial is at 86%. Just wondering based on the rate increases you've been proposing, how is that retention been impacted by some of the rates you've been pushing?

We don't think it's been impacted at all. Matter of fact, our retention in commercial seems to be about consistent with what it's been over the last 18 months.

Okay, great. And then also, you -- in the release you've mentioned reinvesting some of your short-term investments in the higher-yielding securities, just wondering where you're looking for those new investments?

In the first quarter, we were investing in a kind of a mix of some U.S. government and agency bonds and corporate bonds. And, of course, we focused over the years on municipal bonds, both taxable and tax-exempt, focusing more in the first quarter on taxable munis, just because we had some NOL of loss carryforwards being used up from last year. But that -- there's a mix there of looking for a reasonable yield, if there is such a thing in this current environment.

All right, that's great. And, I guess, just lastly, it looked like there was no buyback in the quarter, is that right?

That is correct. We did not repurchase any shares in the quarter.

Okay. And is there any -- would you care to provide any outlook on that, or...

Well, we have -- from time to time and in most quarters, we have purchased shares not extensively, then we would be open to that going forward.

And while we pause to see if there's any other questions are in the queue, let me just comment briefly on the impact of an accounting change that became effective in 2012, with regard to deferred acquisition costs. Across the insurance sector, I've noticed that many companies are seeing significant impacts. And we mentioned on our fourth quarter call that we've historically maintained a fairly conservative accounting policy regarding the cost that we've deferred. And as a result, the impact of the accounting change in our results was fairly insignificant, approximately $270,000 increase for the first quarter expenses. We expect the full year impact to be between $1 million, $1.2 million, only about 1/4 of a point on our combined ratio, which is quite modest when compared with many of our peers. And seeing no other questions in the queue, I believe we're ready to wrap up here. And we thank everyone for participating in the call, and wish you a good day.

Thank you, everyone.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.