Donegal Group Inc (DGICB) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third-quarter 2005 Donegal Group earnings conference call. My name is Colby, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Jeff Miller, Chief Financial Officer. Please proceed, sir.

Good morning and welcome to Donegal Group's earnings release conference call for the third quarter and nine months ended September 30, 2005. As introduced, I'm Jeff Miller, Senior Vice President and Chief Financial Officer, and I will begin the conference call by providing some analysis and commentary pertaining to the quarterly financial results. Don Nikolaus, President and Chief Executive Officer, will then share his perspective on the quarterly results and discuss the current trends we are experiencing. Also present on today's call are Dan Wagner, Senior Vice President and Treasurer; and Matt Resch, Vice President of Investments and Senior Portfolio manager for the Company.

Before I get into the financial details, please keep in mind that all statements made in this conference call that are not historic facts are based on current expectations. Such statements are forward-looking in nature and involve a number of risks and uncertainties. Actual results could vary materially.

Among the factors that cause actual results to very materially include the ability of the Company to maintain profitable operations; the adequacy of the Company's reserves for losses and loss adjustment expenses; severe weather; business and economic conditions in the Company's primary operating areas; competition from various insurance and noninsurance businesses; terrorism; legal and judicial developments; changes in regulatory requirements; and other risks that are described from time to time in the periodic reports the Company files with the Securities and Exchange Commission.

In light of the significant uncertainties inherent in forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person. The Company disclaims any obligation to update such statements or to announce publicly the results of any revision to any of the forward-looking statements included herein to reflect future events or developments. Undue reliance should not be placed on any such forward-looking statements.

I'm pleased to report the Donegal Group's strong financial performance has continued in the third quarter of 2005 with the Company began posting excellent underwriting results, solid premium growth, and increased investment income as compared to the third quarter of 2004. We again experienced improvement in the underwriting results of both the commercial lines and personal lines segments of the business, resulting in record levels of net income before extraordinary items for the quarter and nine months year-to-date.

Our net income for the third quarter of 2005 increased 66.1% to 9.8 million or $0.52 per share on a diluted basis, compared to 5.9 million or $0.32 per share on a diluted basis for the third quarter of 2004, as adjusted for the impact of the stock split effective in March of this year.

Total revenues for the third quarter of 2005 were 80.6 million, an increase of 9.4% over the total revenues of 73.6 million in the third quarter of 2004. Our premiums earned in the third quarter increased 9.7% to 74.6 million, compared to 68 million in the third quarter of 2004.

Our investment income showed an increase of 13.2%, growing to 4.5 million in the third quarter of 2005, as compared to 4 million in the third quarter of 2004. Our tax-exempt interest income continued to increase as we continue to shift our invested asset mix to include a higher percentage of tax-exempt municipal volumes (ph) in our portfolio. Tax-exempt interest income as a percentage of total investment income was 59.2% in the third quarter of 2005, compared to 45.1% in the third quarter of 2004.

The point I'd like to make here is that although our shift in investment mix has resulted in slower growth in our investment income, we continue to benefit from higher after-tax yields and have been able to maintain approximately the same effective tax rate in spite of a 43% increase in year-to-date pretax income.

Focusing on our underwriting results for the third quarter, our loss ratio improved significantly to 55.1%, compared to the 62.2% we reported in the third quarter of 2004, again with improvements coming from both our commercial lines and personal lines segments.

We had relatively few severe weather claims in the third quarter of 2005 having received only approximately 250,000 in claims from the combination of Hurricanes Katrina and Rita. This compares to the third quarter of 2004 when we incurred approximately 3.2 million in property claims from a series of severe weather events.

In addition to the reduced catastrophe losses, we continued to benefit from reduced claims frequency and continuing favorable loss reserve development trends in virtually all of our lines of business. The improved claims results have directly impacted our expense ratio in that we continue to project increased costs for incentive compensation to our agents; however, our third-quarter expense ratio at 32.6% compares favorably to the second quarter expense ratio of 35% and increased only slightly when compared to the 32.2% in the third quarter of 2004. This is primarily attributable to a leveling off of the projected incentive payouts largely due to individual agents incurring increases in their respective loss ratios in the third quarter of 2005.

When viewed as a whole, our underwriting ratios are very favorable with our combined ratio for the third quarter coming in at a record quarterly low of 88.5%, compared to 95% for the third quarter of 2004. Having reported three consecutive quarters with very strong underwriting results, our net income for the nine months ended September 30, 2005 was $27.1 million, an increase of 43% over the net income before extraordinary item of 18.9 million in the first nine months of 2004.

Net income in the first nine months of 2004 included an extraordinary item of 5.4 million reported in the first quarter of 2004 related to an acquisition.

Earnings per share on a diluted basis for the first nine months of 2005 were $1.46 per share, compared to $1.04 per share for the first nine months of 2004 prior to the effect of the extraordinary item.

Our book value per share increased to $14.72 as of September 30, 2005, and our annualized average return on equity for the first nine months of 2005 was 14.2%.

At this point, our President, Don Nikolaus, will provide his perspective on our results and discuss the trends we are experiencing.

Thank you, Jeff. Good morning, everyone. Welcome to our third-quarter earnings call. As you can readily understand, we as a Company are quite pleased with our results for the third quarter. Certainly relative to many others in our industry that are reporting different results, we feel gratified that we are experiencing such positives both underwriting results as well as overall earnings.

We are likewise pleased that our increase in revenues and increase in premiums earned as Jeff has quoted, both exceed 9%, which we think is quite good. Investment income being up 13.2% is certainly indicative of a number of factors and we are overall quite pleased with that.

One of the topics that I had been commenting on over the last probably three to four conference calls is the growth in our agency distribution system. As I would assume, most of you have a familiarity with us and the fact that we have been attempting to grow our distribution system particularly in regions of the country such as the Southeast and in the Midwest where we are looking to grow. Our agency distribution system increased by 79 new agency appointments during the first nine months of the year, with a qualification I will talk about later and that relates to the Shelby transaction. But organic growth of our distribution system is the 79 new appointments.

Relative to the total agency appointments, it would be an increase of somewhere in the 4 plus percentage points because we have approximately 1800 to 2000 agencies that represent us into a multi-state region.

I would like to chat a little bit about the Shelby transaction. As you probably have read from the announcement that we would have released a number of weeks ago, that we entered into an acquisition rights agreement with Shelby Insurance Companies to acquire the rights to their personal lines books in the states of Pennsylvania, Tennessee and Alabama. Since that announcement we have been quite active as a Company, having various meetings and large agency meetings in those three states. And the purpose of that was of course to try to obtain contracts with those agencies because in the independent agency system, a Company such as Shelby can sell the renewal rights but it is subject to getting the agent that actually owned that business licensed with our Company.

We have been I think quite successful in that initiative. I will give some statistics with regard to that. We have appointed an additional 102 new agencies in those three states. That is in addition to the 79 which is our own organic appointment. We expect that we will begin to issue new policies to offer to the Shelby policyholders, that would be for policies effective January 1, 2006 and thereafter. We would begin to issue those within the next week because it will be in the policyholder's hands a good sixty days prior to the effective date of the policy.

Certainly when we go into the question-and-answer session, I would be pleased to answer additional questions with regard to the Shelby transaction.

We have historically done most of our acquisitions by acquiring other companies. This is the first large book of business that we have attempted to acquire, but I believe that we have approached it with the correct approach in terms of being organized, having the correct information, and trying to execute well on our plan that we have put in place.

On the last number of conference calls, we have also talked about our new electronic personal lines automation system called WritePro. We continue to roll that out in additional states and we will be doing that throughout the next six to nine months.

Everyone is always interested in pricing and where it stands. Certainly it continues to be a competitive market; however, we would say that it is still reasonable and rational, that there are always pockets of where there are some companies that may be attempting to be very aggressive. But we would be saying that we think that it remains a rather reasonable pricing environment. We feel that we are doing reasonably well in this environment and certainly would be open to any questions you might have.

On the topic of acquisitions, we continue to have an aggressive appetite for the right acquisition. I'm sure most of you have been on our conference calls before. We do not want to do acquisitions for the sake of doing them. They have to make sense. They have got to be in the right geographic region. And we believe there are opportunities. I spent about three, four days a week ago traveling in the Midwest, meeting with various companies and pursuing those opportunities, and we remain quite committed to doing those going forward, as evidenced by the Shelby type of transaction.

At this point, I will turn it back to Jeff and the moderator and we will go to the question-and-answer part of this presentation.

Okay, Colby. I think we're ready to open up for questions.

(OPERATOR INSTRUCTIONS) Mike Grasher, Donegal (ph).

Congratulations on your quarter. Jeff, with the loss ratio, 55%, I think you made the comment that there was some positive development in the quarter. What specific lines would those be coming from or accident years?

I am glad to answer that. Primarily it is across the board. There is no one line that really stands out. As we look at our loss developments across accident years, certainly the more recent accident years just because there's more activity in those years, we would see primarily the loss developments being in the more recent 2004/2003 accident years. But certainly even going across some of the older accident years, we see some modest favorable development.

Lines of business pretty much across the lines of business. Certainly we have favorable development in the casualty lines, but also even in some of our property lines we would see some modest favorable development.

Okay, thank you. Don, a question with regard to the Shelby book. Part of that is Alabama. Will that create any change in terms of your underwriting philosophy around the coastal areas or will you continue to stay away? How will you manage that?

Well, it is a very good question, very appropriate given the recent storms. We currently have a book of business in Alabama and our appetite as an underwriting company has certainly been to manage our catastrophe exposure. And the agencies that we have appointed in Alabama are within the same geographic areas in Alabama that we have traditionally done business in. We would not and do not intend to compromise the management of our catastrophe exposure by any acquisition or any book acquisition.

Okay, that's helpful. And then in terms of your commentary around acquisitions, do you continue to look at the personal lines or because of the Shelby acquisition, are you kind of lean more towards commercial? What are you thinking in that regard?

The Shelby book happens to be all personal lines and that is because what the business that they were in and the books of business that they were offering. In doing acquisitions, the ideal company would be a company target that have both a commercial book as well as a personal lines book, but we would not back away from a personal lines only company because we have done those in the past. Nor would we back away from a commercial lines only company, provided it is in the lines of commercial lines in the same type of underwriting mix that we currently address.

Okay, thank you.

Meyer Shields, Legg Mason.

A couple of quick questions if I can. First of all, would you quantify the impact of reserve releases for the quarter and year-to-date?

The impact of reserve releases? It would be somewhere in like a 5% range of our reserves. So I don't know as if I have an exact number for you, but it would be somewhere in about a 5% range that we would historically feel as a reasonable loss reserve development release.

So that we are clear, our reserve development generally comes from the settlement of cases. We do not take down reserves that we have up in cases just because we think the wind is blowing more favorably. Our reserve development that Jeff is describing as being positive is the result of cases being closed and settled because there is no better kind of a claim than a closed one.

So, that's helpful. Great. Second question, of the 102 Shelby agencies that you have appointed, do you have an idea as to the percentage of the business of the renewal business that you have acquired, what they write?

Well, we do have some statistics on that. Very candidly I will want to be a little guarded because I am sure you would recognize that we have had competitors trying to poach on our opportunity. So we don't want to give too much information away. But in general all of those agencies would represent about 27 to $28 million of premium. That is not to say that we will take all that premium, because one of the advantages of the Shelby opportunity is that we get to underwrite each and every risk, which we will do. We will underwrite it as new business.

So it is early to tell what percentage of the 27 to 28 million that we will make offerings on. We might offer on 90% of it. We might offer on 70 or 75%. When we do our next conference call, we will have better statistics because we will have gone through two or three months and we can give you a better indication.

Okay. Are you done with the Shelby agency appointment?

We had to have a deadline because we of course could not send out a renewal of one of our new policies to a Shelby policyholder unless the agent of record had signed up. And because we needed to start that process; the deadline was October 14. So we are basically finished because we needed to be finished.

Okay. Last question if I can. Are you -- I don't know if it is too early in the process yet, but are you feeling any reinsurance rate pressure from your nonaffiliated reinsurers?

Well, it's a good question. We recently completed the renewal of one of our subsidiaries, reinsurance for they had a renewal date of October 1 and we did not see any adverse impact from Katrina and Rita. However, it is too early to tell what will transpire with the renewal period at January 1.

Candidly, our position with reinsurers are that we did not provide them any of the losses from the hurricanes and therefore we should not help to pay for it. We recognize that there will probably be in spite of our comments -- there will probably be some efforts to in the catastrophe area to either maintain the stability of rates or some modest increase; keeping in mind that prior to those hurricanes, we all anticipated that the cat market would be soft and that rates would be down nicely. So that has to be factored in. That is probably gone. But we would expect that our book will be favorably looked upon because if you think about it, reinsurers will need to take a fresh look at making sure that they have their books maybe more well-balanced and therefore will want -- hopefully will want premium away from some of their exposure.

So time will tell, but we are well prepared for the renewal. We have tried to make sure that we have as good of information because information is extremely important in reinsurance renewals because we would want reinsurers to have an accurate assessment of our book of business and the exposures or lack thereof that we provide to them.

Okay, thanks. That's very helpful.

Victor Kauffman (ph), private investor.

I have two areas of question. One is on the Shelby and I don't think it has been covered. You are going to be paying Shelby something for the renewals that you do underwrite, correct?

That is correct.

My question is -- is it one time payment or do you pay them on an ongoing basis first? That is the first question.

I will answer that. It is a one time, Victor, and the agreement provides that we only pay for those policies that we make an offering to and those policies that we make an offering to that stick for the first 60 days.

Okay, that's what I thought it would be. My question is when you pay that, in other words, that is sort of your capital expenditure for this?

Well, I'm going to defer to my accounting friends, but that would be considered part of the acquisition cost.

That's what I mean, yes, the capital expenditure to get it.

Well, I don't know that it is a capital expenditure.

I don't care if it is or not. That is not my question. My question is when you write this policy on an auto or a home and the homeowner pays you let's just take $1000, can you tell us -- and it sticks -- you offer and it is accepted -- for the year, the one year, how much do you pay Shelby?

Well, two parts to that, Victor. It varies by state because we had a stronger appetite for at least one of the states and that is not negative to the others. It is just we felt there was maybe a greater profitability. It is as low as 5% for some of the lines of business and very honestly, I am reluctant to give too many of those details because there will be other book transfers like this around. I would not want our competitors to know what we pay.

Okay, then may I ask?

But I will tell you this. It is a range depending upon the product and the state. It is a low of 5% to in one state, one particular product as high as 12. So it is sort of like a sliding scale depending upon the product.

So will this acquisition with these payments, will there be any need for additional capital with the Shelby acquisition?

Not at all, Victor.

Good. That's the real question I had.

No not at all. We have a substantial amount of capital and this will not do anything at all to put a dent in our need for capital. We are fine.

So this is getting a new company but not needing to raise capital for it?

That is correct.

Next question and this is completely off the wall I think but I think I need it. When you compare -- and I don't know if you can give me this information or if it is correct to give it to me -- Donegal Mutual -- to the corporate Donegal, in size, premium size, is that something that you can tell us?

It is all public record, Victor.

What is the comparison size of the premium -- I think the easiest way for me to do it is premium to premium?

I think what we ought to do is take a minute and explain the pooling arrangement and I will ask Jeff to do that because it is a little more of a complex answer. I think you'll like the answer. But Jeff, do you want to go over that?

Certainly. The pooling agreement -- our largest subsidiary in Donegal Group is Atlantic States and Atlantic States and Donegal both participate in a pooling agreement whereby each of those companies put all of their direct business into the pool and then it is shared 70% to Atlantic States and 30% to Donegal Mutual. So on a direct basis, Donegal Mutual has higher levels of direct premiums because of its long-standing -- it has been around since the 1800s. So it has a higher level of direct premiums. But after that all goes through the pool, Donegal Mutual ends up having actually less premiums that they are retaining than Atlantic States.

I understand now what you said about the pooling. So they put all of theirs in and Donegal is putting in an inordinate amount and getting out a much smaller amount, the Mutual? But if you would compare what Donegal Mutual has then to the rest of the organization, is it like 10%? 5%?

I would think somewhere in the 25% range, because it is at least 30% of the direct business of Donegal and Atlantic States, and those companies are much larger than our other affiliates.

I see. So you think that Mutual may have 20 to 25%?

Yes, I think that is a reasonable --.

When the smoke clears and the bottom line, it is approximately that of the overall writing.

Okay, thank you. And I guess the other question that would just help me here is I don't know what they would call it, surplus in the Mutual? How much surplus does Donegal Mutual have?

It is around 105 to $108 million of surplus.

And that shows up only on the Mutual book?

That is correct.

That is correct -- 108 million is the surplus, Victor.

Okay. 108 million.

And a large percentage of that is Donegal Mutual's investment in Donegal?

I can imagine so. Okay. Those are my questions and I appreciate the answers and I hope you guys keep doing the same job you are doing.

David Lewis, SunTrust Robinson Humphrey.

Not to beat you up on the prior year reserve development, but I know you kind of threw out a traditional 5% redundancy that gets released. I guess the question really is, has there been any change that more favorably impacted the third quarter?

I appreciate you asking that question because it occurred to me after the other question was answered that we should have made that distinction. We are experiencing very similar development trends as we would have seen in 2004. Maybe just a hair more favorable in 2005 comparing the two years. But the 5% number that I threw out was really a year-to-date number, not what would've affected the third quarter. So there is no significant change in our -- in what we would experience in our development trends from historical years, especially in the most recent years of 2003/2004.

Okay, and so we could also assume that the third quarter is somewhat comparable to that of the nine months?

That would be correct.

Okay, and Don, as far as the pricing trends go, I guess there's two ways to look at it. One, the impact of any reinsurance rate increases on the entire industry and people feel that they need to put price increases throughout the industry to impact that. The other side might say that it -- I'll just throw the State Farms and the Allstates of the world that are nonrenewing in coastal areas -- feel that they have to put the capital to work and therefore come into some of your more attractive markets. What is your thought process? You've got a lot of moving parts there.

Well, I think a couple of things. One, there is the possibility that the market, the pricing was starting to soften, which is clear. But it may firm up because of these storms because of both primary companies and reinsurers looking to raise rates because of their loss experience. So that would certainly for us be a positive development if that were to occur.

There is certainly also the possibility that the Allstates and the State Farms sort of reduce their exposures in those areas and look to other parts of the country and that is certainly a distinct possibility. Certainly it is too early to see that because not much time has transpired.

But candidly, we are not at all intimidated by State Farm or Allstate from a competitive standpoint. I think that we currently look very good against both carriers, particularly State Farm. If they lowered their rates somewhat, we would continue to look quite good. Keep in mind that State Farm is out there writing everybody and we have a more refined targeted appetite. And we think that that will continue to serve us well.

But as you know, David, this industry is constantly in a state of change. Six months to a year from now, the whole pricing environment might be different. It might be different than what any of us think it might be. And our job is to make sure that we are prepared to deal with it.

I guess it is also an opportunity for me to mention that I have done in prior conference calls that underwriting results are not just the result of pricing. The whole underwriting component is in our judgment a major factor and we will continue to stay disciplined in terms of the quality of the risk and how we price those as we have in the past.

That is helpful. And Don, would you care to maybe give us a flavor of what you are seeing on rates in the homeowners, small commercial, and Workers Comp and some of your primary markets?

I would be pleased to do that. In Workers Comp, we continue to see modest rate increases at the various states. Now it varies from state to state but as an example, the state of Maryland, which is contiguous state to us, their loss cost increase was just approved of about at least as it relates to our book of business, of about 4.3 to 4.5%. We have elected to of course take advantage of that because you can set your loss cost multipliers so that you either are taking a less or a greater increase, but there is an example. Workers Comp I think that you continue to get increases.

Homeowners it depends upon the particular jurisdiction. We will be filing a rate increases as an example for some of our products in the state of Ohio, where we will be taking an increase. There will be other states where we will not because very candidly, our loss ratios are quite favorable and of course you need to provide actuarial justification for rate increases.

So homeowners is certainly an area, particularly with the storms that have occurred. I would anticipate that that will be a line of business where rate increases going forward will be more readily approved by departments and companies will be more aggressive in doing it.

In private passenger automobile, we see in some states, some companies raising rates a little bit, but generally you are seeing them being reduced by some modest percentage. There are pockets where we don't do business in those states. But as an example, the state of West Virginia recently had some change in its legislation having to do with punitive damages and those type of issues and companies apparently have lowered rates in those states.

The same way in New York State. We would not be following suit in those directions. So hopefully that gives you some flavor on a product by product basis. As far as small commercial, I think it is a good distinction between small commercial and large. The midmarket accounts we understand that it is a fairly competitive market. We do some business in that arena. But on the small- to medium-sized accounts, yes, you can't get the rate increases you did some years ago, but the rates seem to be reasonably stable.

That is very helpful. And back to the Shelby book of business, you brought on 100 plus agency appointments. Is there the opportunity to start to put in some of the other product offerings that Shelby has not provided? Because it my understanding some of these agencies that were writing through other carriers, just the homeowners through Shelby.

Well actually the book of business that we are going to be providing offerings on, the automobile, the private passenger automobile, is significantly larger than the homeowners. Having said that, depending upon the state -- and we have said to the new agency appointments of Shelby that we want to stay focused over the next three to six months on being very efficient at having a seamless, smooth rollover of this book in terms of all what we need to do. And that we would basically be deferring -- pointing those agencies for new business and for commercial lines.

However during that period of time, we will be getting acquainted with these agencies and we will be looking for the opportunity to open them up for new business in personal lines other than the Shelby book and also to make appointments on the commercial side. We consider an agency relationship to be a very important relationship and we were happy to do the Shelby transaction. But we need to make sure for their benefit as well as ours that it is a right fit and also that it is going to be a growing and profitable relationship.

But we think there are great opportunities there. We're looking forward to working with them, but it is not going to be gangbusters on other new business from the get go. We are focused on doing the best job we possibly can on transferring the Shelby book.

Very good and two final questions for Jeff. One, do you have the pre FAS 115 book value or the adjustment?

I do. The pre FAS book value was $14.58 per share; a $0.14 adjustment for the unrelated gains.

Okay, and the final question, I guess I'm trying to figure out the sustainability of the favorable loss trends, assuming fairly normalized weather that you've see in the last two quarters at least. Any thought process? Obviously if the market starts to soften a little bit there is a little bit of pressure on the relative loss ratio. But assume that the markets are flat, and you continue to do the underwriting like you are doing, how do we look at that? And one last factor, if the Shelby book is primarily auto, wouldn't that have a little higher overall loss ratio so therefore if you bring that up a little bit over the next couple years?

Well, a couple comments and I will Don weigh in on the Shelby. But we at this point, we do not see any reason for a deviation from the results we have been posting the last several quarters. Of course a lot of it is based upon weather events that we don't have any control over. We expect our premiums to continue at the same track and growth and therefore all things being equal, we would not expect significant changes in our loss ratio.

As far as the trends that we are seeing, we're seeing reduced frequency in a lot of the lines. So certainly we do not expect any fluctuations to any wild degree.

As far as Shelby, of course we don't expect any particular jump in our loss ratios as a result of that business. We are doing the same underwriting of that book of business that we would for any other business that we would write. And it is going through the same scrutiny and same underwriting criteria that all of our other business would be going through.

Well wouldn't the auto tend to have a little bit higher loss ratio than the small commercial and homeowners?

It could. As a line of business, that is generally a line that has a slightly higher loss ratio. However relative to our overall book, we don't expect it to have a material impact.

A little follow-up to that question. It is a very good one, David. Needless to say, we look at loss ratios and combine and sort of arrange -- we certainly can't sit here it predict that we are going to have in each of the next several quarters a 55% loss ratio. We're going to work very hard to try to achieve that. But we would say to you that the loss ratios of the last three to four quarters, sort of a range, that our hope would be that in the absence of severe weather and the absence of some real change in the pricing structure, that those ranges are not necessarily unrealistic.

That is very helpful, thank you.

Ron Bobman (ph), Capital Returns (ph).

I just had a couple of questions in two different areas. The first on reinsurance, I was curious do you expect to buy more cover, more property type cover this coming renewal season?

Well, first of all let me put it this way that nothing that has transpired with regard to any of these storms would motivate us to do that. Because first of all, we did not have losses related to it other than a very tiny amount. We each year run at least two cat models and that is one of the things we are working in conjunction with our reinsurers to do currently. And we buy reinsurance based upon what those cat models are telling us. Currently we have cat layers up to $80 million, 77 million, excess of three.

If those models show that we need to an additional 10 million, we will do that, keeping in mind that we are very conservative in the amount of cat cover that we buy relative to our exposures. It is not uncommon for us to buy up to the 500 to 1000 year event. We don't feel satisfied at trying to write cover ourselves only to a 250-year event. SO there are a number of factors that go into all that and later in the year when we have all that information, we will make a decision as to what we deem as appropriate. But we will generally aim to be on the conservative side.

Obviously prudent. But obviously the showing of the models of late has been anything but admirable. Everyone should be looking for discounts on their model purchases.

Let me follow up on that. We are not a -- we don't believe the models are Bibles. The models are a guide and that is one of the reasons why we have always bought between 500 and 1,000 years, because we're not betting the farm on the model. If you bet on the models on the 100 year or the 250 event, you might find that to not work out so well. It also depends upon where your book of business is. If you are in real exposed areas, then you probably need to more significantly question the model.

Right. Thanks for your thoughts on that. The other question I had was could you provide some details on what net writings were by line of business, inside of personal lines, auto versus homeowners and other and commercial lines, commercial auto, Workers Comp and CMP, please?

Sure. Net writings I assume for the quarter or nine months?

Well, you know what I'm really trying to get at any sort of mix changes, so whether you can give me the quarter and year-to-date and I can look at the trend or quarter-over-quarter would be -- either one would directionally give me some indications.

I think what you would find and I can give you some figures here but basically we're looking at very similar growth rates across most of our lines of business. In the commercial sector, we would have been going from approximately 7 million in commercial auto to 8.2 quarter-to-quarter.

So 7 was last year's comparable quarter?

-- (multiple speakers) the third quarter of last year; 8.2 for the third quarter of this year. Workers Comp, 6.7 last year to 7.7 this year. Commercial multi-peril, 10 million last year, 11.3 this year. Then in the personal lines we would be looking at growth in personal auto from 30.8 million to 31.7; and homeowners from 12.9 to 14.7.

In general, or commercial lines is growing at a somewhat higher percentage rate than our personal lines.

Somewhat -- there's been just a tremendous amount of advertising for the major auto writers and I guess homeowners as it relates to Allstate and State Farm. Is that a component, whether or not it is the top component, but is that sort of a driver of that mix shift a little that? Albeit not that great?

No, I don't know that we would necessarily say that the national advertising by State Farm, Allstate, Progressive, and Geico is affecting our numbers that we can measure. What I would highlight there is that on a regional basis and certainly commensurate with our size and resources, we do a fair amount of co-op advertising on a regional basis in conjunction with agencies. And we do it on a more targeted approach and we do not use television. We use newspaper inserts. We use direct mail. We use radio.

But there is no question that the whole personal lines arena, particularly auto, is being highly sought after by national carriers. And certainly if they were not doing that our growth rates in personal auto would probably be somewhat higher. But we think that our growth rates are better than they were a year ago and as we roll out our WritePro in our various states, we think they will continue to go up. Because everything is always more complicated than it appears.

One of the major issues today in the selling and distribution of personal lines coverages is whether you have the best automation available, because agencies are interested in ease of doing business sometimes as they are in the price competitiveness. And we think that we will improve our shelf space within agencies and increase our market share as we roll out more and more of our technology, which we believe at the end of the day will compare favorably to the Travelers of the world and the Progressives of the world.

Thanks a lot for all your answers and your help.

Mike Grasher, Donegal.

Just a follow-up question, Don, and just to clarify. You went over the -- you were throwing out numbers around the acquisition and I think you said you were going after 27 million of the business and you expected to offer on 70, 75%?

First of all, Mike, would you identify that don't work for Donegal? The announcer says that you are with Donegal. Would you announce who you are with?

Piper Jaffrey, I'm sorry.

You're not an insider.

No.

Yes, the book of business that is represented by the Shelby agents that we have licensed is about 27 to $28 million. Because each and every risk will be underwritten, I can't sit here with a crystal ball and tell you whether we will end up offering 90% of those people policies or 80 or 70. But I believe it will be somewhere in that range and my hope would be it will end up being on the higher end. But until we have some actual experience under our belt in terms of a number of months, we will not necessarily know that.

And any gut feel for what sort of a capture rate you might have?

We believe that our rates will be nicely competitive and that we think because of the way we're doing it that it will be hopefully rather seamless. And that we think our rates will look very favorable relative to the Shelby rates. And we think that the hit ratio ought to be pretty good. But that is to a degree of supposition on our part and we are optimistic about it. But beyond that, we don't have any hard numbers because it is too early.

Okay. And then I just want to go back to follow up on David's question with regard to results and expectations on the loss side and maybe ask it a different way. Is there anything different or a different approach that you're utilizing from an underwriting standpoint that you're doing today that you were not doing three, four years ago that has actually added to the bottom line?

I can't say that there is anything different, although I would say to you that back in the years 2000 and 2001 and going into 2002 when the market started to harden, we did more than just raise prices. We also took the opportunity to firm up underwriting standards and to look at anything that we thought was marginal business. So as I think we all realized, the property and casualty business, everybody talks about long tail on losses but on the underwriting side, many times you don't get to harvest the benefits of what you do from an underwriting standpoint for maybe two, three, four years.

And therefore what I would be saying to you is we're not doing anything different today than we did in '02, '03, '04. But we certainly in addition to raising prices from the year 2000 into the end of the year 2004, we also refined our book of business. And I think that hopefully we have gotten better in what we do and also I think that the experience of our people has certainly grown.

You get to talk to a few people on a conference call, but we have some very experienced, capable middle and upper management people that we have brought into the Company over the last five years; regional VPs that we have brought in from companies like Safeco and National Grange and other regional companies. So we have certainly strengthened our organization. We have recently within the last six months hired the chief actuary from the state of Pennsylvania, who is now our Chief Actuary.

So there are a lot of components to trying to grow a company and achieve results, and a lot of it has to do with bringing on board the right people. There is an old saying about you've got to get the right people on the bus and you've got to get them in the right seats. I think that we have made a lot of progress over the last three to four years in doing just that. And I would like to suggest that it is showing up on the bottom line.

That is very helpful, thank you.

Victor Kaufman.

Sorry to come back, but something else came up for me when I listened to everyone else. The Shelby -- back to Shelby -- you know you said at the start that you had 79 by your regular growth of new agents?

Yes.

And now you picked up 102 with the Shelby?

Yes.

I have a question. The 102 with the Shelby has a specific book of business that you're trying to pick up -- that you're paying this acquisition cost on, but aren't you in the same boat with this 102 as you are with the 79 with other business? Or is this all they write?

No, that is not all they write, Victor. The 79, we would have of course over a period of time identified them in various regions that we do business in, various states, and we would have solicited them. They may have solicited us. We would have gathered a lot of information about them. We know hopefully when we appoint them where we will fit in that agency; what kind of a composition of their book that hopefully they have a balanced book between commercial and personal lines.

The Shelby is somewhat different in that these folks, good folks were agencies for Shelby and because of this agreement we struck with Shelby we show up on the scene. They don't necessarily know a lot about us. Hopefully they know a fair amount, but they don't know a lot about us maybe and we of course have only recently been introduced to them. So we are concentrating in working with them in transferring that book of business. And once we get that started, we are going to be actively talking to them about joint opportunities to write other business.

These by the way I guess I ought to point it out -- Shelby had a significant number of other agents that we felt based upon their loss ratio history with Shelby did not fit the parameters for us. So there has already been a selection process. And I don't want it to come across that we are some elitist group, but needless to say agencies are the first line underwriters for business. And you of course can measure how they might do based upon how they did do and we had all the loss statistics going back five years for all of the Shelby agencies and we made a judgments in terms of what the criteria would be as to which agencies we would offer an appointment to.

I was just thinking to myself that your growth though, besides the Shelby, picks up these 102 that you get to work with with the Shelby transition, and then you are there. They are not extra work like you have to do to pick up the new new ones you're getting next quarter.

That is true, but I would hasten to point out with those 102, it will be cautious new growth for new business other than Shelby because we want to know that we're doing it right.

I hear you. Okay, thank you.

We're just conservative guys from Lancaster County, Victor.

I know you are. You're just like Vermonters and I love it.

At this time, there are no further questions in queue.

Okay, we want to thank everyone for participating and for all your good questions. As a reminder, a replay of this conference call will be available until October 28 by dialing 888-286-8010, pass code 59103119. Thank you everyone for participating in the Donegal Group third-quarter conference call. Goodbye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.