Donegal Group Inc. (NASDAQ:DGICA) Q1 2024 Earnings Call Transcript

Donegal Group Inc. (NASDAQ:DGICA) Q1 2024 Earnings Call Transcript April 26, 2024

Donegal Group Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Karin Daly: Good morning, and thank you for joining us today. This morning, Donegal Group issued its first quarter 2024 earnings release outlining its results. The release and a supplemental investor presentation are available in the Investor Relations section of Donegal’s website at www.donegalgroup.com. Please be advised that today’s conference is prerecorded and all participants are in listen-only mode. Speaking today will be President and Chief Executive Officer, Kevin Burke; Chief Financial Officer, Jeff Miller; Chief Underwriting Officer, Jeff Hay; Chief Operating Officer, Dan DeLamater; and Chief Investment Officer, Tony Viozzi. Please be aware that statements made during this call that are not historical facts are forward-looking statements and necessarily involve risks and uncertainties that could cause actual results to vary materially.

These factors can be found in Donegal Group’s filings with the Securities and Exchange Commission, including its annual report on Form 10-K and quarterly reports on Form 10-Q. The company disclaims any obligation to update or publicly announce the results of any revisions that they may make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. With that, it’s my pleasure to turn it over to Mr. Kevin Burke. Kevin?

Kevin Burke: Thank you, Karin, and welcome, everyone. We will provide some details on our quarterly financial results and an update on the progress of a number of initiatives that we expect will generate incremental improvement in our results as the year progresses. We saw a significant improvement in our results for the first quarter of 2024 relative to the fourth quarter of 2023, but we will discuss a few factors that prevented us from achieving our targeted level of underwriting profit and overall earnings as the call progresses. From a top line growth perspective, our Commercial Lines premiums earned and written continue to reflect the impact of the strategic nonrenewals of all commercial policies in the state of Georgia and Alabama.

That initiative will be largely completed in the second quarter of 2024 and we are pleased that we were successful in achieving higher levels of Commercial Lines new business relative to prior year quarter in states and classes of business we have targeted for growth. Our dedicated small business underwriting team is also making great progress working with our marketing team to communicate our value proposition to specific agency partners and executing a strategy designed to accelerate small business growth in targeted geographic areas and classes of business in the years to come. We expect to see more meaningful increases in small business premiums as we continue to refine and expand our operating capabilities throughout the remainder of this year to enable us to effectively capitalize on profitable growth opportunities in 2025.

In Personal Lines, we’re continuing to implement significant rate increases that account for virtually all of the premium increases in that segment as we actively control new business growth levels to essentially maintain overall exposures within that segment. Earned premiums will reflect even higher levels of rate increases in future quarters, which we expect will continue to drive performance improvements as loss trends continue to stabilize and we get closer to rate adequacy. We are making solid progress on our last two major software releases within our systems modernization project. We’ve begun the development phase of the major commercial systems release that will include a new commercial package policy and modernize other commercial products remaining on our legacy systems.

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Q&A Session

We have submitted all the regulatory filings to convert all remaining homeowners and dwelling fire policies included in the first phase of the last major personal line software release. Both of these efforts will continue to run in parallel over the next two years with the phased rollout of implementations beginning in 2025. Jeff Hay and Dan DeLamater will provide further details on our strategic initiatives that give us optimism that we will see further margin expansion. And Tony Viozzi will provide an update on our investment portfolio that is providing increased levels of investment income. Before we get to those operational updates, I’m going to turn the call over to Jeff Miller for a review of our quarterly financial results.

Jeffrey Miller: Thanks, Kevin. For the first quarter of 2024, net premiums earned increased 5.8% to $227.7 million. Net premiums written increased by 6% with similar drivers to those we experienced in the second half of 2023, as strong premium rate increases and retention were offset partially by planned attrition in states and classes of business we are exiting or have targeted for profit improvement. Rate increases achieved during the first quarter of 2024 were consistent with those we reported for the fourth quarter of 2023, averaging 12% in total and 14% when excluding workers’ comp. The combined ratio was 102.4% for the first quarter of 2024 compared to 101.2% for the prior year quarter with a higher impact of large fire losses primarily accounting for the increase.

The core loss ratio increased modestly from the prior year quarter, primarily due to a higher personal lines core loss ratio compared to that quarter despite a 16.6% increase in net premiums earned for that segment. Weather-related losses of $10.8 million or 4.7 percentage points of the loss ratio for the first quarter of 2024 were down from $14.1 million or 6.5 percentage points for the first quarter of 2023. The lower impact was primarily due to lower commercial property losses with $2.1 million of losses contributing 4.3 percentage points to the quarterly commercial multi-peril loss ratio comparing favorably to 10.5 percentage points of the loss ratio for that line of business in the first quarter of 2023. The weather impact to the homeowners line was $7.3 million or 21.3 percentage points of the homeowners loss ratio, which improved modestly compared to 23.9 points in the prior year quarter.

In total, the quarterly weather claim impact was in line with the previous 5-year average for the first quarter of 4.7 percentage points. Our insurance subsidiaries did not incur losses from any single event during the first quarter of 2024 that exceeded their individual $3 million catastrophe reinsurance retention with Donegal Mutual. Large fire losses, which we define as over $50,000 in damages contributed 6.6 percentage points to the loss ratio for the first quarter of 2024, which was higher than 5.1 percentage points for the prior year quarter. An increase in the frequency and severity of both commercial and homeowners fire losses contributed to the increase. Our insurance subsidiaries experienced $8.4 million of net favorable development of reserves for losses incurred in prior accident years, representing a 3.7 point reduction in the loss ratio for the first quarter of 2024, which was comparable to $8.3 million or a 3.9 point reduction in the loss ratio for the prior year quarter.

Specific line of business detail for the first quarter of 2024 included favorable development of $5 million for commercial multi-peril, $2.7 million for commercial auto, $1.1 million for homeowners and $2.5 million spread across other lines. That favorable development was partially offset by unfavorable development of $2.9 million for workers’ compensation. We attribute the unfavorable development in workers’ compensation to higher-than-expected severity for a relatively small number of previously reported losses in accident years 2022 and 2023. The expense ratio of 35.7% for the first quarter of 2024 decreased modestly compared to 36.4% for the prior year quarter. The decrease primarily reflected early impacts of expense reduction initiatives, offset partially by higher technology costs related to our ongoing systems modernization initiatives.

In summary, the underwriting loss we incurred for the first quarter of 2024 was more than offset by $11 million of investment income and $2.1 million in net investment gains, resulting in after-tax net income of $6 million, which was modestly higher compared to $5.2 million for the first quarter of 2023. To provide more details about our Commercial and Personal Lines segment results and related initiatives, I will turn the call over to our Chief Underwriting Officer, Jeff Hay.

Jeffery Hay: Thank you, Jeff. I’ll first dive deeper into Commercial Lines before providing additional insight into our Personal Lines performance. Overall, growth across the commercial lines of business was slightly negative at minus 1% due to our ongoing strategic initiatives that include nonrenewing and exiting commercial lines in Georgia and Alabama and other targeted nonrenewals in select classes in other states that are improving our risk profile of our book of business at a steady pace. Other specific actions driving positive impacts include ITV improvements, enhanced roof underwriting through the use of aerial imagery with embedded artificial intelligence and point-of-sale integrations with catastrophe models that lead to improved terms and conditions on properties with higher potential exposure to severe weather.

For the first quarter, intentional attrition accounted for a nearly 5% decrease in our Commercial Lines premium and led to a 78% overall retention rate. Excluding this impact, we achieved our plan for Commercial Lines premium growth in our active footprint with retention at a strong 82%. We continue to emphasize renewal rate increases in the areas where the intersections of class, line of business and geography are most challenged. We achieved 11.9% renewal rate increases across our commercial book, excluding workers’ compensation, with commercial multi-peril at 13.3% and commercial auto at 11.4%. Turning to profitability metrics. The first quarter was marked by some elevated loss trends in several lines of business and we’re continuing to tighten our underwriting guidelines and procedures to improve the underlying portfolio performance.

Large fire losses increased from the prior year quarter driven by both the frequency and severity of those losses. To reduce the frequency of large fire losses going forward, we recently introduced several new underwriting resources to our frontline teams to alert them to specific factors that collectively increase the risk of fire. Weather-related losses were close to our historical average for the first quarter despite an unusually active storm quarter. Of note, we did not incur material impact from the Smokehouse Creek wildfires in Texas. Our first quarter workers’ compensation loss ratio included 11 points of prior year reserve development that we attribute primarily to reserve increases arising out of routine periodic case reviews for a small number of prior year claims.

The reserve increases primarily reflected updated projections of future medical costs we expect to pay on claims for accident years 2022 and 2023 in our flagship state of Pennsylvania. Claim frequency within the workers’ compensation line of business continued to trend downward and indemnity severity appears to be showing early signs of abating. We maintain our conservative stance in our reserves and risk appetite strategy as evidenced by our historical trends. While we believe the workers’ comp development in the quarter represented the timing anomaly, we will appropriately monitor reserving activity in the state to ensure there are no broader trends behind that activity. And as Jeff mentioned earlier, commercial auto and commercial multi-peril experienced net favorable prior year reserve development, more than offsetting the adverse impact from workers’ compensation.

On a core loss basis, excluding large fire and weather-related losses and prior year reserve development, the underlying commercial multi-peril loss ratio improved modestly compared to the prior year period, while commercial auto and workers’ compensation increased slightly. On an overall basis, the Commercial Lines core loss ratio increased by one percentage point over the first quarter of 2023. We maintain our offensive strategy in Commercial Lines and we’ll continue to spread our geographic footprint of the property book of business to optimize the diversification benefit and improve the loss ratio performance for the year and well beyond. Echoing Kevin’s comments about our Personal Lines book, we are controlling new business volume to accelerate our return to profitability by limiting our exposure growth.

We successfully reduced our new business ratings by 19% compared to the first quarter of 2023 and still achieved 18.5% premium growth in the quarter, primarily driven by aggressive renewal rate increases, coupled with strong retention. Policies in force decreased 2.5% from March 31 of last year and were down 0.6% from the year end of 2023, indicative that our growth in the quarter was fully attributable to renewal rate achievement with rate increases averaging 15.2% for personal auto and 19% for homeowners. As a reminder, we’ve been aggressively taking rate since late 2022 and are now seeing earned rate levels in excess of loss costs, which is driving margin expansion. We expect to see an acceleration of earned rate, particularly from our personal auto line of business as an increasing percentage of our auto policies are written on a 6-month term.

Premium retention continues to be very strong at 107.2%, indicating that policyholders are accepting the higher renewal premiums across the Personal Lines book. The homeowners line of business experienced elevated large fire losses in the quarter compared to the prior year period and our historical average. Weather-related losses included the impact of severe Midwest convective storm activity in the first three months of the year, but remained close to our historical average quarterly weather impact. Similar to our Commercial Lines business, we’re managing our geographic footprint of the homeowners book to diversify our portfolio or risks in relation to regional weather patterns. During the first quarter, we made great progress on reducing our policies in force in counties where we have higher concentrations of risk and modestly grew in other counties that reflect a positive combination of underwriting and agency management.

The personal automobile line of business loss ratio improved three percentage points compared to the first quarter of 2023, primarily driven by an improvement in the core loss ratio that we can attribute to rate-driven increases in earned premiums. Similar to commercial auto trends, liability severity trends continue to move higher, but post-pandemic frequency increases have leveled off and are now showing signs of a downward trend. Furthermore, we are seeing a continuation of moderation in auto physical damage severity that is primarily due to gradual declines in used car prices. Our teams are working tirelessly to improve our underwriting results and we remain confident that our strategic actions will create positive momentum in the results over time.

With that, I’ll turn the call over to Dan DeLamater. Dan?