Q1 2020 Earnings Call
Thursday
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Dead dead ladies and gentlemen. Thank you for standing by and welcome to the Donegal Group Inc. First quarter 2020 earnings conference calls at this time. All participants are in a listen-only mode after the speaker presentation. There will be a question-and-answer session to ask a question during the session. You will need to press star one on your faith in keypad. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Mr. Jeff Miller Chief Financial Officer. Thank you, ma'am.
Go ahead, sir.
Thank you very much. Good morning. Everyone. Welcome to the Donegal group conference call for the first quarter ended March 31st, 2020 yesterday afternoon. We issued a news release outlining a quarterly results for a copy of that release, please please visit the investor relations section of our website at donegalgroup.com in today's call Kevin Burke president and chief executive officer will provide an update on our business strategy and highlight recent development. I'll follow Kevin's comments with an overview of our quarterly Financial details at the conclusion of our prepared comments. We will open the line for any questions you might have
Before we get started.
Should be aware that our commentary today includes forward-looking statements that involve a number of risks and uncertainties. We described forward-looking statements in our news release and we provided further information about factors that could cause actual results to differ materially from those we project in the forward-looking statements in the report on form 10-K that we submitted to the SEC. You can access our form 10-K through a gesture section of our website. We use certain non-gaap Financial measures to analyze our business results. And we refer you to the reconciliation of non-gaap information included in the news release that we issued yesterday with that. I'll turn it over to Kevin. Thanks Jeff and welcome everyone. I want to start by thanking our employees and independent agents for their dedication and commitment as we navigate through these challenging times like many companies Donegal has mobilized a remote Workforce with the majority of our employees working from home to ensure the continuation of vital services to age.
Sim policyholders, I'm extremely proud of our team for pulling together during this crisis and making the adjustments needed to enable us to maintain high standards of professionalism and exceptional customer service since it's on everyone's mind. Let's start with the impact of covid-19 and our response to date as we have received advice from Health officials and shelter-in-place mandate wage government agencies. We implemented a business continuity plan to protect the health and safety of our employees and their families while also continuing to provide services to agents and policyholders wage without disruption. Our core operations are functioning effectively, and we've been able to have regular Communications with employees and agents to address challenges inherent with an operational changes.
Covid-19 had minimal impact on our first quarter of 2020 results and overall. We were pleased with those results which we will discuss in a moment.
We have now shifted our Focus to the second quarter and the remainder of the years we attempt to assess the impact covid-19 will have in our business. There are many more questions than answers at this point. However in the coming weeks and months will be able to gain a clear picture of the true economic impact and we will make adjustments to our business plans as needed. For those of you that may be evaluating on a long term potential impact of the pandemic on our insurance operations. It's important to consider the types of risks honorable ensures. Our business mix is comprised of roughly 60% commercial lines including primarily commercial multi-peril commercial Auto and Workers Compensation Insurance the bulk of our insurance accounts our Main Street type business small to medium-sized businesses such as contractors Mercantile service companies Office Buildings and restaurants, et cetera. Our personal lines consists of primarily personal Auto and homeowners in Georgia.
and other than our home state
Sylvania which accounts for about 35% of our premium volume we do not have a significant geographical concentrations of business.
That was partially offset by rate increases that averaged 2.2% for the quarter. We had planned to continue implementing modest personal lines rate increases in 2012-13 to maintain the level of rate adequacy. We work diligently to restore over the past eighteen months, but we will revisit those plans in light of the covid-19 impact as the year progresses.
Based on what we know today and considering the diversity in the lines of business. We write we do not expect a significant financial impact from claims related directly to covid-19 and wage not record. Any explicit reserves for such claims in the first quarter all of our policies required direct physical loss in order for any coverage to apply in nearly all of our policies also back pain the standard virus, exclusion language nevertheless. We will likely incur additional costs to defend against litigation challenging coverage definitions and exclusions. We believed that our exposure to virus related workers compensation losses is limited, but we are monitoring legislative efforts underway to expand occupational disease presumptions Beyond health care workers off First Responders to apply more broadly to any workers providing services to essential businesses.
Moving to underwriting results. We reported a 62.6% loss ratio for the first quarter of 2020 which compared favorably to the 65.5% loss ratio for the first quarter of 2019 weather-related losses of 6.9 million or 3.7 percentage points of the loss ratio for the first quarter of 2020 were lower than the 9.7 million or 5.1 percentage points in the loss ratio for the first quarter of 2019 weather Los activity for the first quarter of 2020 was also lower than our previous five-year average of 10.7 million dollars or six point three percentage points of the loss ratio for first-quarter related weather-related losses. We did not receive substantial claims from any major storm or whether system down the quarter.
While we expect a short-term decline in claims activity due to load driving lower driving and business activity due to shelter-in-place restrictions. It is far too soon to predict the ultimate impact of many variables on future profitability broad attempts to expand coverage for business Interruption and workers compensation would have a devastating impact on our company and the industry at large and we agree with the comments of Industry Advocates and pure company Executives that forcing insurers to pay for losses for which coverage was not intended and premiums not collected would remain in the destabilization of the insurance industry and ultimately jeopardizing insurance carriers ability to protect customers for the risks. They have agreed to cover.
Large fire losses which we defined as individual fire losses in excess of $50,000 for the first quarter of 2020 were 6.3 million dollars were 3.4 percentage of the loss ratio that amount was in line with the large fire losses of 6.6 billion or three point five percentage points of the loss ratio for the prior-year quarter.
We had favorable Reserve development for losses incurred in Prior accident years of 4.3 million dollars reducing the first quarter of 2020 loss ratio by 2.3 percentage points off with the exception of modest unfavorable development in our homeowners and Commercial autoline. We experience favorable Development Across our lines of business in the first quarter of 2020.
We applaud the efforts of our industry Advocates and larger pure companies and educating legislators on the potential Financial impact and defending against attempts to extend coverage beyond the contractual obligations when we last spoke with you in February. We noted a number of favorable Trends. We saw in our fourth quarter of 2019 results and that we expected those results provide positive momentum as we entered into 2020. For example, we exceeded our business plan and goals for new commercial premium growth and we benefited throughout 2019 from earns increases related to pricing actions. We had implemented over the past eighteen months with the Advent of covid-19. We are now closely evaluating the impact to our 2020 business plan objectives, and we will make adjustments where warranted we will continue to adopt adapt and comply with regulatory requirements and to meet the challenging needs of our customers and light of the ongoing wage.
The expense ratio was 33.4% for the first quarter of 2020 compared with the 32.6% expense ratio for the first quarter of 2019, We primarily attribute that increase to an increase in technology systems related expenses and higher underwriting base incentive costs for the first quarter of 2028. Total are combined ratio was 97% for the first quarter comparing favorably to the 99.3% combined ratio for the prior-year quarter net investment. Income of seven point four million dollars was up 4.6% primarily due to an increase in average invested assets relative to the prior year first quarter. Our average investment yields declined modestly due to a $58,007 increase in short-term Investments during the first quarter 2020.
economic impact covid-19 is having
turning to the first quarter results. We achieved net income of 3.7 million dollars or $0.13 per diluted share. We had improved underwriting performance and our insurance operations with a combined ratio of 97% compared to a 99.3% in the first quarter of last year.
That's
Well, we have not experienced any material decline in cash flows today. We are maintaining a high level of liquidity until we have a better idea of the ultimate cash flow impact incoming a month and light of the uncertainty about the potential impact of covid-19 as The Crisis began to escalate in mid March. We decided to borrow fifty million dollars from the federal Home Loan Bank to bolster our liquid assets as a measure of providing increased Financial flexibility. Should we need it the current yield on our additional short-term Investments is fully offsetting the Modest Mouse touring cost related to the fhlb loan.
Solid performance was offset by net investment losses of ten point seven million dollars primarily related to unrealized losses in the market value of equity Securities we held at Courtney is covid-19 concerns prompted a substantial decline in the US Equity markets the net income and a modest increase in the value of available-for-sale fixed maturity investment banker drove a 1.6% increase in Book value to $15.92 at March 31st, 2020 compared to $15.67 at December 31st. 2019. Jeff will give you more details about the first quarter results, but I want to focus my comments on insurance operations understanding that the first quarter trends that we saw and experienced were primarily before the Advent of covid-19. We continue to capitalize and opportunities for commercial premium growth as our agency partners provided an increased level of new account submissions dead.
Not a mess.
Losses of ten point seven million dollars for the first quarter of 2020 compared to net investment gains of 18.1 million dollars for the prior-year first quarter the net investment losses in 2020 were produced primarily to unrealized losses in the value of equity Securities that we held at March 31st, when the equity markets had declined sharply from year-end 2019 due to covid-19 concerns as a reminder the net investment gains for the first quarter of 2019 included twelve point seven million dollars from the sale of Donegal Services Corporation as well as unrealized gains in the value of equity Securities at that quarter and as a result of the General market recovery from your end 2018 levels off the conclusion. Net income for the first quarter of 2020 was three point seven million dollars or Thirteen Cents per class A share compared to net income of 23 million over 82 cents per class a sheriff Forbes.
We also made progress in our efforts to achieve sustainable profitable personalized business including the February completion of our exit from the personal lines markets in seven states commercial systems accounted for approximately 61% of our net premiums written during the first quarter of 2020 compared to 57% for the first quarter of 2019 as a large number of a commercial accounts Renew on January one while net premiums written expanded in all of our commercial lines Commercial Auto premiums grew by the largest percentage at 11.9% And as I noted in our last call we are pursuing additional rate increases in our commercial autoline rate increases impact by impact was 10.8% for commercial Auto and 2.9% for the entire commercial segment for the first quarter.
First quarter of 2019 which included the gain on the sale of our former banking subsidiary with that. Let me turn it back to Kevin for some closing comments.
Thanks, Jeff. I want to again thank everyone at Donegal for rising to the occasion as we continue to work through this incredibly challenging time. We've been working hard in recent years to enhance underwriting profitability home improve operational efficiency compete more effectively and ultimately to further improve financial performance and enhance our book value growth. We were pleased to see positive momentum in the third quarter, and we look forward to continuing that progress as we persevere through and ultimately move past the current challenges. Our goal remains to successfully execute on strategies designed to generate consistent favorable returns for our stockholders over the long term with that will ask the operator to open the lines for any questions that you may have. Thank you.
Our commercial retention levels have remained consistent during the first quarter of 2020 which indicated a general level of Market stability at that time and is also a testament to the bathroom relationship our agents have with our customers and our mutual commitment to provide Superior Service to them as the covid-19 pandemic subsides over time. We expect to have attractive opportunities to increase scale and grow profitably and commercialize throughout our Region's on the workers compensation front. We were pleased to have positive growth in that line of business despite some challenging rate environment in many of our operating regions new business writings more than offset rate reductions in that line that continues to generate profitable results with that said we continue to care package and write new accounts and renewals and light of the declining rate environment and the uncertainty of covid-19.
Ladies and gentlemen at this time. If you would like to ask a question, please press star one on your telephone keypad again to ask a question, please press star then the number for just a moment to compile the queue and a roster.
Your first question is from the line of a bob with boning and scattering.
Morning, Bob. Yeah, I had a good morning. So I have a question on workers comp exposure. So obviously you've had a few states that have put out some presumption of compensability for first-line wage for front-line workers and the First Responders. How much of your book is potentially exposed to something like that?
We are pleased that our commercial lines business segments delivered a statutory combined ratio of a 96% for the first quarter of 2020 which was comparable to the 96.4% combined ratio for the prior first-quarter moving to personal lines net written premiums declined 11.2% for the first quarter of 2020 in February. We completed the exit from the personal lines markets and seven states where we had not achieved profitability in recent years the changes we have implemented in our personalized business lead to improved underwriting performance package a statutory combined ratio in our personalized business for the first quarter of 2020 decreased to 94.7% compared to the 97.8% in the prior first quarter.
But this is Jeff. Thanks for that question. We have looked at our workers comp exposures particularly in in light of medical type of exposure and we do in fact sure a modest amount of medical facilities such as urgent care centers family practices in rural areas. Most of those are smaller in comparison with some of what you might think of in larger cities. We have not to this point received any workers compensation claims related to anyone who has is positively tested for the covid-19 virus. So we do not currently expect to have a significant amount of exposure to workers compensation claims. But as you have mentioned there are some legislative attempts to expand the resumption of the workers compensation the controls
Personalized results was driven primarily by a reduction in weather-related losses, which had a positive impact in our homeowners line of business where we achieved a 90.7% combined ratio for dead order. Our personal lines automobile results did not meet our targeted profitability level. However, we achieve some modest Improvement during the quarter as a result of Prior rate increases and under wage adjustment our personal automobile results for the first quarter. We're basically at a break-even mark with a combined ratio of one hundred percent. We expect continued improvement in our personalized book business as we work to stabilize that segment in anticipation of introducing a new Auto and homeowners products in 2021 with that alternate over to Jeff for more details about the birth order and then I'll return with some closing remarks. Thanks Kevin as usual. I'll highlight a few of the operational and financial metrics for the first quarter and we'll be glad to address any wage.
think of the disease relative
Up to the occupational involvement of workers that are not necessarily just healthcare workers, but also workers that are working in Essentials businesses. So we're monitoring all that that could have an impact if those presumptions worst, and we've noted that a number of those efforts have have now been withdrawn so we currently do not think we have a significant exposure to them.
Questions later in the call overall net premiums written increased 0.8% to one hundred ninety-eight point two million dollars and net premiums earned declined 0.4% wage 187.3 million dollars for the first quarter of 2020 net premiums written for commercial lines increased 7.1% on personal lines net premiums written declined by 11.2% during the quarter. We attribute the strong growth in commercial lines to market share gains by many of our insurance subsidiaries and a continuation of renewal premium increases as Kevin mentioned, a renewal pricing increases average 2.9% for the quarter in total as a 10.8% average rate increase in commercial Auto was partially offset by a 3.8% average decrease in workers compensation rates.
Okay, and in regards to your agents probably two questions about your ages. So what is their ability to run a new business if if they're predominant working from home and to have they given you an idea even just the beginnings of an idea of how their customers are often? Like seeing a lot of the customers shut down completely or they just reduced operations or were they on in fact not impacted. This is Kevin on the first question the agents ability to write new business in in working in this remote setting. I think that the majority of our agents if not all of them at this point are well prepared right new business and are really looking for the opportunity to do that. The the bigger question is the second the second part of that and that is a a really a big to be determine what we're seeing is Thursday.
Improvement in
in terms of Trends, we continue to obtain higher pricing and Commercial Auto with increase as well into double digits for
We've had new business opportunities and Commercial lines is in the pipeline. One of the reasons why we had a really good first quarter, we're seeing second wage order again. There's good business that that's in the pipeline. We are hearing Rumblings as you would expect that the opportunities for new businesses are starting to dwindle and that's what does that mean? Statistically? I don't know but the agents are prepared and have fully embraced the remote working opportunity to re to write new business and life. It really comes down to the macro issue of what does the economy look like in ninety days. What does it look like in six months? And as we all know that there's a big question mark about that.
How how has your your kind of a policy retention been in the commercial lines? You know, I'm assuming you have a lot of these Main Street businesses and stuff. And I know they've been pretty quick to renew is that the is that fair statement policy retention right now is very good on both personal lines and Commercial lines. And again. And what does that look like in in three to six months from now Bob? I I don't know, but currently we've got the majority of our businesses are are renewing their policies majority paying their premiums and it really comes down to if if the current economic shut down if you will continues for another 30 days wage, you're going to have a certain percentage that are going to be able to rebound back in the businesses will be able to move forward if it continues and again, this is just my perspective on it if it continues off.
for 60 or 90 days
That really changes the landscape and and I I don't know and couldn't really speculate the the the amount of of businesses that would not be able to recover wage for a long pass another 30 days.
Right. Okay, that's it for me. Thanks. Thanks, Bob.
Your next question is from the line of Douglas Eden with the ECM.
Morning, Doug.
Good morning. Good morning to you both and congratulations on a solid border. Especially given what is going on in the world. Currently. I have two questions. Also first now that there have been four or non-renewal for personalizing the seven states that we've been talking about. Are you envisioning the rate of Premium declines in that segment to improve going forward and second with regard to work comp and the softness and the pricing that you articulated in that line of business. Are you continuing to add Reserves at a faster clip than the overall premium growth in order to protect ourselves against some unexpected hire, you know claims development in the future.
Let me talk briefly about the personalized piece and I'll ask Jeff also to comment particular on the workers comp side for personal lines. That is the plan as you age have noted with the seven states. Now that that is completed. We have taken over the past year some-odd rate increases as it relates to personalize as compared to the prior 18 months where we were very aggressive. And so the business plan calls for more moderation in terms of the personal Lines phone numbers and so our business plan really calls for a very low single-digit decrease through the remainder of this year. And that was the plan obviously me prior to covid-19. But that is that is the plan and I think that we will start to see that
Okay Douglas, this is Jeff on the workers compensation front. Yes. We we are as you as you stated. We are seeing some moderation and some reduction in the overall premium rates just to give you a sense of that in in the first quarter of the premium rate impact was I think I mentioned in my prepared remarks a 3.8% decline over the past two years. The average decrease has been about 2.7% at the the average quarterly deadline. So the the premium rate reduction has been somewhat modest. We are taking a more conservative view of the the loss ratio for 2020 are are pigs was higher than it would have been in in the past several years. The core workers compensation loss ratio that we recorded was 62.7% off.
that is just
Modestly higher than what it has been over the past two years, but it is a couple points higher than it would have been a year ago in the first quarter. So we are expecting some modest wage increase in the in the overall loss ratio, but you know, as you saw in the combined ratio for workers comp, it's still quite profitable and we expect that to continue with the with a a 90% combined ratio in in workers comp. There is some room there for some modest deterioration in that loss ratio.
Okay, and you think you're reserving for it? You know, I know in the past Jeff you've mentioned adding more higher level of reserves to the line relative to with the premium growth God protect, you know the companies of the future cuz that line in particular can have some you know, unwelcome surprises and it sounds like you continue to do that in in 1 Q we did and I thought you know as as you can imagine with our smaller business as many than not being up in and running and not in operations currently, you know, let's take a look at what we do for the second quarter in terms of reserving, but certainly we are expecting that we will see the reserves increase at a higher rate of than that premiums in this current environment.
Okay, thank you and one final if I may regarding the technology initiative. I was I was covid-19 and you know people working from home has that has that delayed or made any change to the plans with regard to the the rollout and the phases that that you all that, you know, put together such a detailed plan around. So what's been the impact on that that your name?
What we did have to take a 30-day pause if you will when travel restrictions started to be implemented, of course with some of the external vendors that we used to lie on as well. And so it did create about a 30-day pause on what we call Project Nautilus, which is that modernization of our Legacy systems. I'm happy to report two weeks ago. We started the next phase of that. So as everyone settled into working from home and working efficiently with our external vendors. We have now started the next phase of that of that project and we did we completed release one and so the timing of it, you know, the founding is is never good with the current situation that we're dealing with. However, we did complete release one. It was fully deployed things went very well.
And then covid-19 showed up and so we were thankful that we were not Midstream in terms of one of these major releases. We had just completed the first release that went. Well we pause for 30 days Doug and two weeks ago we started back in and so we're we're watching the progress that we make on that.
That's great. That's great. Well, thank you both and keep up the good work. Good luck in the second quarter.
Thank you.
Again to ask a question, please. Press star one on your telephone keypad. Your next question is from the line of Meyer Shields with
thanks big picture question for Kevin. I'm trying to get a handle on what insurance agents are actually looking for as we go through the crisis.
What insurance agents are looking for well, first and foremost they are anxiously awaiting to see from an economic standpoint, you know, when the various States because it varies state by state in terms of opens up. The economy. Georgia is a good example as as we know Georgia has been opened up somewhat in the last days a week and so we'll be monitoring what actually occurs within that state in the 24 States in which we operate, you know, that's going to vary. So the agents are anxiously awaiting to see that part start to open up secondly is they have gotten very efficient in terms of being able to work remotely off there. We put together some aggressive plans to help them grow on the commercial line side of it. So the agents are in a position where they're they're ready to move for
Forward but at the same time the macro issues at hand are are limiting their ability to to grow and we work very closely with our aging we've got great relationship with our agency partners. But may I wish I had a clearer picture from an economic standpoint what they might be looking for and I I also asked Jeff if he's got any additional comments as it relates to that. Yeah, certainly, you know, the communications we we've been in constant Communications with our agents and through our Marketing Group. They're also looking for flexibility. We are trying to be as flexible as we can be with our customers, you know on the commercial side we're endorsing policies to reduce payroll exposure wage. For example, we're providing a commercial Auto layup availability so that if there are commercial Autos that are not being used they can basically wage
Kind of set those aside and not pay premiums for commercial vehicles that are not being used on the, you know, premium receivable side. We've of course as I think all other insurance companies probably have done at this point. It's suspended any cancellation activity for at least sixty days and not charging any any late fees on on Thursday the for those customers who can't afford to make their premium payments currently. So, you know that flexibility I think is important and we are stressing that with our with our agents that we will do whatever we can to assist our customers during this challenging time.
Okay.
That's very helpful. I think it'll pay off in the long term. Are you changing the your new money investment allocation to maybe reduce some Investment Banking more because of all the other risks of emerging acts apparently.
Well, as you know may or we have a very conservative approach to our Investment Portfolio with a very modest allocation to equity Securities which for service as well in the past 30 days or so. We are not making any significant changes. Although we have been building liquidity and you know, if you've looked at our eight-seat we had I think $125 million dollars of cash and short-term Investments at the end of March which included the the $50 that we borrowed from the the federal Home Loan Bank. So we've been building a kind of a a, you know, a war chest of potential money. If we if we need it now to this point as I said earlier, we we really haven't seen a significant decrease in our income and cash flows and with most activity down somewhat from the the lower business activity and driving activity, you know, we're in really good shape, but yep.
We're not really investing as aggressively as as we may have in in the bond portfolio. Although there had been some opportunities that we've taken advantage of to put some money to work. But at this point we're just taking a very conservative approach not necessarily investing in more equities or any other risky classes of of Investments, but trying to try to make sure that we we maintain some level of investment yield, you know, especially as the the interest rates of have dropped significantly so far the second quarter we've been able to maintain the investment yield and in terms of what's been maturing and what we've put back into the portfolio. So, you know, we're kind of holding our own at this point.
Okay, fantastic. So helpful.
There are no further questions.
We appreciate everyone's participation and the good questions, and we look forward to speaking with you again after we release our second-quarter results. Thank you everyone. Thank you.
This concludes today's conference call. Thank you for your participation. You may now disconnect.
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