Donegal Group Inc. (NASDAQ:DGICA) Q3 2023 Earnings Call Transcript

Donegal Group Inc. (NASDAQ:DGICA) Q3 2023 Earnings Call Transcript October 26, 2023

Donegal Group Inc. misses on earnings expectations. Reported EPS is $-0.02422 EPS, expectations were $0.08.

Karin Daly: Good morning, and thank you for joining us today. This morning, Donegal Group issued its third quarter 2023 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 was pre-recorded (Operator Instructions). Note that we have incorporated responses for many of the questions we received directly into management’s remarks. Speaking today will be President and Chief Executive Officer, Kevin Burke; Chief Financial Officer, Jeff Miller; Chief Underwriting Officer, Jeff Hay; 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.

An individual signing financial documents with a representative from the life insurance company nearby.

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 is my pleasure to turn it over to Mr. Kevin Burke. Kevin?

Kevin Burke: Thank you, Karin, and welcome everyone. We are pleased to provide an update today on many of the strategic initiatives we have in flight, as we execute an intentional strategy to improve our financial performance, modernize our operations and put us in a position to grow profitably as economic conditions begin to stabilize. Donegal’s third quarter of 2023 showed significant disparity between business segments. While we saw significant improvement in our commercial lines segment results, our personal lines segment results continued to reflect the ongoing impact of inflationary pressures in several lines of business, with the largest impact in personal automobile, as claim severity remained at historically high levels due primarily to higher repair and replacement costs.

We experienced an increase in the frequency of severe weather events throughout our regions during the quarter. None of these events generated an accumulation of losses that exceeded our catastrophe retention level. But the active weather patterns, coupled with ongoing inflationary impacts on repair and labor costs, generated the highest weather-related loss ratio we reported in any quarterly report going back to 2018. On a positive note, we saw a significant decline in large commercial fire losses in the third quarter of 2023, as well as an improvement in our core loss ratios in each of the major commercial lines of business lines. Jeff Hay will provide further details on our individual segment and line of business results later in the call.

Moving to business drivers impacting premium revenues, we began non-renewing all commercial policies in the states of Georgia and Alabama during the third quarter, which was the start of a process that will continue over the next several quarters that we expect will have significant favorable impact on our operating results moving forward. The primary strategy we are deploying to offset the loss of topline revenues in those states is to emphasize and promote our brand new BOP product and modernized commercial auto and commercial umbrella products, which are available on our new technology platform in all of the 22 states in which we offer commercial lines. We are actively monitoring quote activity, engaging with our agents, and refining our pricing and straight-through processing guidelines to increase our writings of smaller commercial accounts in targeted geographies, industries, and classes that we believe will be the primary driver of profitable growth over the next few years.

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Q&A Session

In last quarter, I mentioned that our commercial underwriting team would begin to shift their attention to the development of our last major commercial systems modernization initiative that will include a new commercial package policy and modernize the other commercial products remaining on our legacy systems. Preliminary planning meetings have already begun in preparation for that major software release, with the start of development activities planned for early 2024 for the deployment in the second half of 2025. Conversion of legacy personal lines renewals to the new operating platform will begin in early 2024 and continue incrementally over the next few years. We conducted our third annual state strategy sessions in August. And we had excellent participation and engagement by our home office and regional leadership as we evaluated our performance and developed specific action plans at a state level and in some cases, at a county level.

This information will be used as a basis to form our 2024 business plan that will guide highly coordinated marketing and underwriting activities in each region. We also hosted an event for our top-performing agents in September to inform them of our business plan and growth strategies, and to solicit their feedback and perspectives as we collectively navigate challenging market and economic conditions. We walked away with solidified commitments to deepen our relationships and continue to grow our premium with these key agency partners. As we plan ahead for 2024 and beyond, we have all the building blocks in place to achieve and maintain rate adequacy and to begin to capture additional market share within our current geographical footprint. We have a clear view of our target classes and customers in both commercial and personal lines, and we have significant analytical reporting tools to help us monitor and manage our growth versus our plans and expectations in order to optimize our risk profile and improve consistency on our underwriting profitability over time.

We recently held an all-employee meeting at which I emphasized to our entire team over the past several years, we have developed detailed strategies and successfully built an infrastructure, including talent, systems and tools, to enable our future growth and margin expansion. Now, it’s all about execution and the level of success we achieve over the next few years will be determined by our team’s collective ability to execute on our strategies, using all of the tools and capabilities at our disposal. I look forward to updating you on our progress in future calls. At this point, I’ll turn the call over to Jeff Miller for a review of our financial results.

Jeffrey Miller: Thanks, Kevin. Net premiums earned increased 8.9% to $224.4 million for the third quarter of 2023. Net premiums written increased by 6.3%, with accelerating premium rate increases and strong retention offset partially by lower new business volume and planned attrition in states we are exiting or have targeted for profit improvement. Rate increases achieved during the third quarter were in double-digit percentages for all major lines of business except workers’ compensation, averaging 11.8% overall and 13.4% excluding workers’ comp. The combined ratio of 104.5% for the third quarter of 2023 was a significant improvement from the 109.6% combined ratio for the prior-year quarter, with both periods reflecting elevated weather-related losses.

Our core loss ratio decreased by over 4 percentage points from the prior-year quarter, and the remaining improvement related to a significant decline in large commercial fire losses that was partially offset by higher weather-related losses. Weather-related losses were $25.7 million, or 11.5 percentage points over the loss ratio for the third quarter of 2023, compared to $19.4 million, or 9.4 percentage points for the third quarter of 2022. The weather impact was heavily weighted toward the homeowners line of business, with $16.1 million of losses contributing 49.2 percentage points to the third quarter homeowners loss ratio. The impact to commercial property was $8.8 million, or 17.5 points of that line’s loss ratio. Our insurance subsidiaries did not incur losses from any single event that exceeded their $3 million catastrophe reinsurance retention with Donegal Mutual during the third quarter.

Higher frequency of localized storm events drove the total quarterly weather claim impact higher than the previous 5-year average of 9.3 percentage points for the third quarter. Large fire losses which we define as over $50,000 in damages contributed 4.9 percentage points to the loss ratio for the third quarter of 2023, which was substantially lower than 8.4 percentage points for the prior-year quarter. A large decline in commercial fire losses resulted from lower claim frequency and severity compared to the prior-year quarter. Our insurance subsidiaries experienced net favorable development of reserves for losses incurred in prior accident years of $7.3 million, or a 3.3-point reduction in the loss ratio for the third quarter of 2023, compared to $6.2 million, or a 3.0-point reduction in the loss ratio for the prior-year quarter.

Specific line of business detail included favorable development of $3.4 million for commercial auto, $2.7 million for personal auto and $1.3 million in other commercial which is primarily commercial umbrella, spread across accident years 2019 through 2022. The expense ratio of 34.1% for the third quarter of 2023 increased modestly compared to 33.4% for the prior-year quarter. The increase primarily reflected higher technology costs related to our ongoing systems modernization initiatives. As I have mentioned in prior calls, we expect the expense ratio impact of our multi-year systems modernization project to peak in 2024, representing around 1.5 percentage points to our expense ratio next year and then beginning to subside gradually in subsequent years.

Starting in 2019, our insurance subsidiaries have received allocations of their proportionate share of the costs Donegal Mutual has incurred based on their respective premium revenues. The costs related to a major software release are spread evenly over a 5-year period beginning at the point when the software release is first deployed into production. In summary, we essentially had a breakeven quarter as the underwriting loss we incurred offset investment income earned for the third quarter of 2023. While far from our targeted level of profitability, the quarterly result was a significant improvement compared to the $10.4 million net loss for the third quarter of 2022. Last week, our Board of Directors declared a regular quarterly cash dividend of $0.17 per share of our Class A common stock and $15.25 per share of our Class B common stock.

The dividends are payable on November 15 to stockholders of record as of the close of business on November 1. With that, I will turn the call over to Jeff Hay to provide more details about our commercial and personal lines segment results. Jeff?