Q2 2020 Donegal Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Donegal Group Inc. second quarter 2020, <unk> earnings Conference call. At this time, all participants happened placed any listen only mode and the four will be opened for your questions. Following the presentation, if you'd like to ask your question at that time. Please.
Press Star one on your Touchtone phone if at any point. Your question has been answered you mean removed or sell from the Q by pressing the pound key I'll now turn call over to Jeff Miller, Chief Financial Officer to begin.
Thank you very much good morning, everyone welcome to the Donegal Group Conference call for the second quarter ended June Thirtyth 2020.
Yesterday afternoon, we issued a news release outlining our quarterly result for a copy of that release. Please visit the Investor Relations section of our website, a Donegal group Dot com.
In today's call, Kevin Burke, President and Chief Executive Officer will provide an update on our business strategy and discuss recent developments I'll follow Kevin's comments with highlights of our quarterly financial results at the conclusion of our prepared comments, we will open the line for any questions you might have.
Before we get started please be aware that our commentary today includes forward looking statements that involve a number of risks and uncertainties.
He described forward looking statements in our news release, and we provided further information about risks factors that could cause actual results to differ materially from those we project in the forward looking statements and the report on form 10-K that we submitted to the FCC you can access our form 10-K through the Investor section of our website.
Also we use certain non-GAAP financial measures to analyze our business results and we refer you to the reconciliation of non-GAAP information also included in the news release, we issued yesterday.
With that I'll turn it over to Kevin.
Thanks, Jeff and welcome everyone. Overall, we're pleased with our second quarter results. We remain cautiously optimistic as we monitor uncertain long term impacts created by the cobot 19 pandemic.
Our employees, an independent agents as well as our customers have proven to be adaptive and resilient in responding to the challenges related to cope with 19 and the related economic disruption.
Conditions in government responses have very widely across our regions with restrictive mandates that may vary even from county, the county within a given state.
We've continued to focus our efforts on serving or agents and customers well paying close attention to all the regulatory activity to ensure compliance with all the state and local requirements that apply to us.
In late March we moved aggressively to equip our employees with the technology and tools they needed to conduct our business remotely.
While the vast majority of our employees continue to work from home. We are beginning to bring small numbers of employees back into our offices.
And when our agents and customers are comfortable doing so our marketing staff and agents are beginning to resume limited in person meetings.
I want to emphasize it we are taking to health and wellbeing of our employees agents and customers very seriously and as such were being extremely vigilant when it comes to making sure our interactions are conducted with appropriate precautions.
All the states in which we conduct business began the east restrictions and reopened their economies during the second quarter, but a number of states have taken a step back following reports of virus resurgence.
Yes. It appears that we may be dealing with starts and stops for the foreseeable future. We're pleased that are online agency portals allow our agency easily generate new business and provide support to our customers as needed.
As a reminder, business is roughly 60% commercial lines, primarily including multi peril automobile and workers compensation products.
While we write our fair share larger accounts, we specifically targets small to medium sized businesses like contractors and main street business owners that serve critical roles in their local communities.
Many of these small businesses received critical well deserved financial assistance through government programs that help to bridge the gap until they could fully or partially reopen for business.
As a result, we experience relative stability within our commercial lines premiums.
The level of new business submissions from our agents remained very strong even as our overall premium retention rate increase during the quarter.
We quickly responded to any request for reductions in commercial premiums because material decreases in exposure related to the pandemic.
Mid term endorsements reduced pre means in excess of $1 million during the second quarter and we expect that we will continue to see declines in spot exposure based premiums.
As we complete premium audits at the end of the policy terms during which shelter in place orders were in effect.
Moving to personal lines, we saw a substantial decline in personal auto claims activity in the months of April and May that led to significant improvement in our second quarter loss ratio.
Auto claims in the month of June began to return closer to our historical experience is driving activity began to increase and we view. The early months of the second quarter is a short term aberration that will not likely re occur.
We will continue to monitor our personal auto results over the course of the remainder of the year in file rate adjustments. We believe are appropriate in light of our loss experience.
I'm pleased to report we continue to make progress on the development of our new auto and homeowners products. We are on track for deployment for the first group of states in July of 2021.
In a minute alternate call over to Jeff for his comments on the results for the second quarter, but I want to highlight our net income of $22.7 million were 79 cents per diluted class a share for the quarter.
We had much improved underwriting performance in our insurance operations with the second quarter combined ratio of 92.3% compared to 102% in.
In the second quarter last year included in our net income figure was $5.1 million or 18 cents per diluted class a share of after tax net investment gains as the market value of our equity security holdings rebounded during the quarter.
The net income coupled with the increase in the value of our available for sale bond portfolio over 7% increase in book value to $16.77 at June 32020, compared with $15.67 at December 30, Onest 2019.
We also continued to maintain our dividend payments and policies throughout recent months as one of Donegals core objectives is to achieve solid results and returns and also reward our stockholders overtime.
We declared a regular quarterly cash dividend of 15 cents per share of our class a common stock and 13 in a quarter cents per share of our class B common stock.
The dividends are payable on August 17th 2022 stockholders of record as at the close of business on August Threerd 2020.
With that I'll turn the call over to Jeff for more details about our second quarter operating results.
Thanks, Kevin as usual I'll highlight a few of the operational and financial metrics for the second quarter and again, we'll be glad to address any questions. Later in the call overall net premiums written decreased 2.1% to $193.7 million and net premiums earned declined 2.3.
3% to $184.4 million for the second quarter 2020.
Included in the net premiums earned figure is the impact of personal auto premium refunds in Michigan.
That totaled approximately $840000.
Net premiums written for commercial lines increased 4%, while net net premiums written in personal lines declined by 8.7% during the quarter.
Commercial premiums accounted for approximately 55.6% of our net premiums written during the second quarter 2020, compared to 52.3% for the second quarter 2019, and 61% during the first quarter of 2020 as a large number of commercial accounts renewed at January onest.
We were pleased that are underwriting activity remained steady during the second quarter in light of the challenges our agents and customers faced as they dealt with significant uncertainty as the current of higher spread and government shutdowns went into effect.
Net premiums written in our commercial auto business grew by 10.5% in the second quarter with premium rate increases accounting for 8.3% of the total growth.
Commercial multi peril increased by 6.7% with virtually no rate adjustment Conversely, workers' comp net premiums written declined 8% with rate decreases responsible for 5.5% of the decline and the remainder attributable to the widespread disruption of business activity due to Corona virus drip.
And restrictions.
In addition to a continuation of steady premium growth. We're also pleased that our commercial lines business segment continued to perform well delivering a statutory combined ratio of 93.5% for the second quarter of 2020, which was comparable to the 92.9% combined ratio for the prior years.
Quarter.
The reduction in personal lines net premiums written continued to be a function of lower new business growth, partially offset by rate increases that averaged 4.1% for the quarter.
The decline was again due to our emphasis on pricing discipline, which resulted in a natural attrition in premiums that exceeded new business writings.
Primarily as a result of lower current claim frequency and personal auto related to reduce driving activity. During the period, we experienced greatly improved underwriting performance as evidenced by the 88.1% statutory combined ratio in our personal lines segment for the second quarter 2020, compared to 108 point.
5% for the prior second quarter.
Moving to the loss factors that impacted our underwriting results, we reported a 57.1% loss ratio for the second quarter of 2020, which compared favorably to the 69.7% loss ratio for the second quarter 2019.
We already mentioned the reduced auto claim frequency was which was one of the price primary drivers of the improvement.
Weather related losses of $18.7 million or 10.1 percentage points of the loss ratio for the second quarter 2020 were higher than $17 million or nine percentage points of the loss ratio for the second quarter 2019.
The weather related loss activity for the second quarter was above our previous five year average of $15.1 million or 8.7 percentage points of the loss ratio for second quarter weather related losses.
Large fire losses, which we define as individual fire losses in excess of $50000 for the second quarter 2020 were 7.4 million or four percentage points of the loss ratio that amount was modestly higher than the large fire losses of $6.2 million were 3.3 percentage points of the loss ratio.
For the second quarter 2019.
We had favorable reserve development from losses incurred in prior accident years of $6.6 million, reducing the second quarter of 2020 loss ratio by 3.6 percentage points.
The development was primarily in our personal auto and workers compensation lines of business, Although we had modest favorable development across our other major business lines of business as well.
We continued to increase overall reserve strength with Actuarially determined reserve increases continuing to exceed the rate of exposure growth during the second quarter.
The expense ratio was 34.3% for the second quarter 2020, compared with 31.3% for the second quarter 2019, we attribute the increase to several factors, including an addition of $1.6 million to our reserve for potential premium receivable write offs as result of Covance.
18 economic disruption.
An increase in technology systems related expenses commercial lines growth incentives for our agents and higher underwriting based incentive costs for the second quarter 2020.
Overall, our combined ratio was 92.3% for the second quarter, comparing favorably to the 102% combined ratio for the prior year quarter.
Net investment income of $7.2 million was down $118000 for the second quarter 2020.
1.6% decrease relative to the prior year quarter, primarily due to a decrease in the average investment yield.
As a reminder, we increased our short term funds in the first quarter 2020 by borrowing $50 million from the federal home loan bank to bolster our liquid assets, we're continuing to maintain a higher than usual level of short term investments and the very low investment rates on those funds further contributed to the decline in the average.
In our portfolio compared to the prior year quarter.
Net investment gains of $6.5 million for the second quarter 2020 compare compared favorably to the $1.6 million for the prior second quarter.
Net investment gains in 2020 were due primarily to improvements in the value of equity Securities. We held at June Thirtyth 2020.
As the equity markets rebounded from the curve in 19 concern driven sell off at the ended the first quarter.
In conclusion net income excluding net investment gains was $17.6 million were 61 cents per diluted class a share for the second quarter 2020, compared to $3.6 million or 13 cents per class a share for the second quarter 2019.
With that I'll turn it back to Kevin for closing comments.
Thanks, Jeff I want to again, thank everyone at Donlin gold further resilience and perseverance as we continue to navigate uncharted waters, it's been a challenging time for all of us in the commitment of our agents and employees has been phenomenal.
Despite the headwinds from Corona virus, driven economic disruption our solid operational results for the second quarter reflected improving underwriting profitability operational efficiency and our ability to successfully compete the marketplace. Our focus on operational excellence is gradually translating into improved financial.
Performance in book value growth.
In closing 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 open the lines for any questions that you may have thank you.
Thank you as a reminder, if you would like to ask your question. Please press Star then the number one on your telephone keypad again that is star one to ask your question.
Our first question comes from the line of Sean Rautenbach of KBW.
Hi.
So my first question is what are you guys seem with workers comp compensation claim frequencies in the quarter and what do you expect that Ford is it going to sustain the rate the current rate decreases going forward.
Good morning, Sean Thanks for that question. This is Jeff we did see.
Significant decline in frequency in the early months for the quarter April.
Particularly.
Then the second half of May and into June we saw a fairly steep.
The increase in the frequency that came back very close to kind of our normal.
Claim reporting levels in some of the regions, we didn't see as much of a drop off as we did and others but.
There was a kind of a short term decline in the frequency.
And one of the things that impacted the the overall.
Loss ratio for workers comp is that we did see a a lesser amount of favorable prior year reserve development compared to the second quarter 2019, So thats somewhat skewed the loss ratio.
You compare quarter over quarter.
As it relates to the rate deak decreases that you mentioned, we continue to see some modest declines in the overall rate impact workers' comp.
It's been fairly steady over the last four or five quarters.
This quarter was 5.5%.
Which is relatively close to what it would have been in the toward the end of 2019.
We believe we will continue to see some modest declines in the overall rate impact to our book of business.
I know some has been suggesting that we might be nearing a bottom.
We are not necessarily seen that we do expect those declines to somewhat moderate but we're continuing to see.
Very good experience in workers' comp and so we kind of expect that.
The rate bureaus, and NCC I will continue to.
Show Us some lower.
Rates going forward.
Thank you for that and then also on auto claim frequency I think you guys talked about it reverting back do you expect that to be kind of sporadic coming back or a steady climb from here and do you have any read on kind of future frequency in terms of changing consumer habits.
What the impacts of that might be.
Sean This is Kevin Yes June we did see we started to see a return back to.
Some level normalcy.
On the auto and private passenger auto in particular.
The activity, it's clearly picking up and despite again some starts and stops in different regions were seeing that theres a lot more activity on the road. If you go back and you just reflect on two months ago.
Just to even within the state of Pennsylvania, you go back two months ago. When you think about what the traffic was like or lack thereof.
And today there is a very noticeable increase in so we did start to see frequency of claims increase in June.
As we look forward over the next two quarters, it's very very difficult to forecast.
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What what may happen however.
Our view on it is that we're going to continue to see an uptick and getting back to normal driving habits, because we're not anticipating necessarily that you're going to see a shutdown that we had dealt with in April and May I think that if anything by the ended the year, we may get back to that breakeven.
Point in terms of loss ratio.
So thats what were anticipating but again, we're going to be keenly watching a quarter after quarter.
And.
So we'll see we'll see with the remainder of the year looks like.
Thank you.
Your next question comes from the line of Bob Farnam abandon them Scattergood.
Hey, good morning, I have a question.
The reserve development.
Can you.
One can you offer kind of doubt the dollar amounts of development you saw and two I wanted to talk about the personal auto because I know that's been a troublesome mine.
I was kind of surprised me saw pretty good amount of favorable you mentioned a pretty good about a favorable development. There. So just wanted to know what was driving that.
Sure Bob This is Jeff.
I'll start with the auto and then I can talk about the other lines, but personal auto.
Favorable development in the quarter was about $3.4 million.
And we were pleasantly surprised by that number as well.
As you know that was aligned that gave us some some difficulties a few years ago and I think thats part of the explanation is that as we strengthened reserves in 2018.
We wanted to be sure that we were conservative at that point and we are seeing some.
Modest favorable development in several of the older accident years really from 2015, all the way through 2019 were seeing.
Relatively comparable favorable development in each of those accident years for that for the liability claims so that would tell us that.
We we got it right in our estimation at least at this point in time as we're looking back on it.
That we were slightly conservative.
In terms of the physical damage claims we are also seeing some favorable development in the physical damage portion of the personal auto.
Book and that contributed about half of the development of the in the current quarter and again the the physical damage claims that's a very short short term short line of business there.
Short tail lines of business.
And.
We know fairly quickly what those claims are going to be and we had been.
Increasing IB in our over the last several years to make sure that we adequately reserved for primarily weather impact that would spillover from.
Late and an accident year into the next accident year in so most of that's in the 2019.
Accident year and.
Basically our reserves were redundant in in the physical damage portion.
As it relates to other lines of business Workers' comp was about $1.3 million a favorable development in the quarter.
That is much lower.
As I mentioned than the second quarter of 2019, it was as high a $6.5 million, which was unusually high in that particular quarter. We are seeing some moderation in the favorable development workers comp, which is not surprising with the rate declines that we've seen over the past two years, but.
We are pleased to see the deadline continues to to performed well and and to have some modest redundancy in our reserves.
The rest of the development is kind of split across the remaining lines CMP had some modest favorable development as did homeowners.
Commercial auto was roughly pretty much flat.
But again that the line that we were just pleased not to have any adverse development because the line that we've been.
And working on to to get our reserves up.
So hopefully that gives you the color you're you're asking for yes, no. That's that's good I'm just curious about the person the auto the auto side.
I guess any any higher expense ratio I know you you mentioned a couple of factors that was driving at higher maybe can you can you provide like more detail as to how much the.
The the.
The agent incentive drove that number higher and that's the first question in the second question is the reserve for the credit losses.
Do you see that continuing or is that are one time, you should as mark has a onetime charge.
Sure.
Jeff again that was.
Excellent question the receivable reserve they premiums receivable reserves of 1.6 million dollar impact.
In the current quarter, we don't necessarily expect that to increase.
We had put.
About $400000 up in the first quarter. So we're sitting with a $2 million reserve for potential.
Uncollectible premiums are our cash receipts have been very strong.
We had suspended cancellations for a 60 day period.
From the end of March to at the end of May when we.
Ended that suspension, we essentially brought all of those past due balances current and spread them across any remaining installments that our customers had on their policies to give them. Some additional time to pay those premiums.
That has resulted in obviously know cancellation activity and it has.
To this point it appears that we are collecting those premiums.
But we'll we'll see what the remainder of the year.
Brings to US we know that there are some places that are the economies are again and we're seeing some restrictions that may result in additional business closure. So.
At this point, we hope that that $2 million reserves is conservative, but time will tell.
In terms of the incentives the commercial lines incentives for for growth.
We're around $800000 in the second quarter.
At the is partially we believe attributable to.
As we look at the strong new business growth that we were able to book in the second quarter. We believe it's partially attributable to those incentives that we.
Put out there for our agents.
The major impact on the expense ratio woods was the incentive based compensation with the better lower loss ratios. The agency compensation profit sharing as well as employee incentive accruals were higher than they would have historically.
Ben and that also the technology systems related expenses. They were that was about a 700000 dollar impact quarter over quarter.
Specifically related to the.
Technology initiative, what we call project Nautilus.
We expect that will continue throughout the year.
Great I assume that the loss ratio based incentives.
That's probably more of a onetime things based on on the auto experienced during the quarter, probably returning back to normal second accuracy that huge benefits on the loss ratio going forward.
That is correct to the expense ratio is directly inverse to to the loss ratio in that in that respect.
Right and one more question.
Kevin.
You said that you are probably expecting further premium pressure due to audits and whatnot going forward heavy can you give us any color as to maybe what you've seen thus far in terms of audits.
Yes, we really have not.
Completed many of the audits at this point, what we've done Bob is for the first six months.
Really had had backed off in terms of the access to access to the accounts. So one of the challenges that we're having is trying to forecast what that premium adjustment might be as noted in my comments there was a premium adjustment of about $1 million.
So far one of the things that we're seeing though is are the accounts are paying their premiums were not having a lot of businesses go out of business. The interactions that we've had with our agents in working closely with then they tell us that.
Despite the economic challenges the majority of their accounts are in business, even if they are partially reopened and so those are all very very positive signals.
Where we end up in terms of potential.
Premium reductions the is to be determined I would hate to forecast that at this point.
Alright.
Given the trial.
What what you thought but.
I appreciate the effort you are not the only one of this asset class positive apps youre.
Okay Thats it for me thanks, guys.
Thank you.
Your next question comes from the line of Jamie English pilots.
Hi, good morning, guys.
James.
He can you talk about the.
Homeowners line the all in the combined ratio improved by about four points and you talk to weather related losses may be one point to that.
What else is behind that.
Sure Jamie this is Jeff.
Couple of.
Metrics here I can give use it to help them under splits so the core loss ratio and homeowners.
Second quarter 2019 was around 27.3% that actually.
Declined to 24.9% in the second quarter of 2020.
The weather impact was about five points higher in 2020.
The fire loss impact was about two points lower and the remainder was kind of a shift in the development impacts that we had an adverse development impact in the second quarter 2019 of just around five points and we had.
Favorable development of about three points in the second quarter 2020, So a number of moving parts there.
That contributed to the.
Decline quarter over quarter, we have reduced some of our exposures will terms of some of the homeowners numbers of policy right past year.
That's correct okay.
Okay. Good.
And switching over to.
Commercial auto.
Which showed a nice improvement obviously permit for the reasons you talked about.
What I'm trying to get a sense of this do you have any steels for.
What might happen to the loss ratio head.
Miles driven been has been the same or whatever I mean, you guys have done a lots of improve the underlying book of business.
And then can you get a sense of whether that impact is still company. So working for you or is it not not helping anymore anymore thoughts on that will be great.
Continued action that we're taking on it has absolutely health and I also ask Jeff to comment on this as well.
It would be very very difficult to forecast the impact that the pandemic has had on the loss ratio for commercial auto clearly less miles driven less activity has had some roll.
To pinpoint that is going to be very difficult. What we've continued to do is be fairly aggressive on taking rate average rate for the second quarter was 8.3% and commercial auto and we've also taken several steps to limit just the exposure of having the number of vehicles.
That we're currently writing and that does vary by geography. So we have certain regions that we have continued to struggle with in terms of getting our commercial auto profitable and as you can imagine we're being more aggressive in that area not just on rate, but also from an underwriting standpoint in limiting exposure going forward other regions.
Have performed adequate and so we continue to take rate, but we're not being as aggressive in terms of living limiting exposure.
From that standpoint, so we hope that over the next continued quarters that that is going to continue to work itself through the book of business and we will continue to see a drop in loss ratios.
This this is Jeff just to add to that I think one other.
Consideration is that we have been raising.
Rates now for almost three years so.
We are.
On average over the past two years, our rate increases quarterly rate increases have been just under 9%.
We have in this is the third year that were reporting.
Rate increases in excess of 8%, so thats theres, a compounding of those rate increases over the last several years and.
Despite that Weve continued to struggle to get a lot of business profitable, but we do believe that.
That significant additional rate.
We'll eventually.
Compensate for the the loss ratio.
Yes, Kevin said, it's really unfortunate in some respects the though.
We've had the the pandemic effect, because it's difficult to parse the.
That's experience improvement from.
What would have happened in the absence of it. So we're we're continuing to work at that line of business and we do expect to see.
We know that the the decline in claim frequency on the commercial auto was much less impactful than it was in personal lines obviously.
But there is there was some impact there.
Okay, great. Thanks, a lot.
Thank you.
Once again, if you would like to ask your question. Please press Star One. Your next question comes from the lineup Douglas TB of Sam.
Good morning, Kevin and Jeff.
Good morning, Doug.
Yes, congratulations on another strong quarter.
It hasn't gone on recognize that all that you've now reported six straight quarters of stable reserve on favorable loss.
Development, so well done by by you all in the team.
I do have two questions first.
Not in states that still on track to come into the public company domain I think we've talked before about January or sometime in the first quarter of 2021 and number two.
Any any sampling a little bit early perhaps but on reinsurance pricing I know you guys go well lagged in advance talking to the brokers with regard to co bidding and so forth and any sense on what reinsurance pricing is going to be for you all at the next renewal.
Doug This is Kevin I appreciate the appreciate the supportive comments.
On our results.
As far as mountain States is concerned it is on track we are looking for a January probably a january timeframe that we would bring them into the pool.
The results have continued to get better quarter after quarter, and Jeff and I continue to look at it on a monthly basis, just making sure that.
The book of business is reflecting the changes that weve. The underwriting changes that we made a couple of years ago, we're continuing to see some solid growth in a couple of those states.
We've got a targeted one of which is Utah and so right now that is currently on on track and we're pleased to be able to potentially bring them in so and I'll defer to Jeff on the reinsurance question.
Sure. It is a bit early Doug as you can imagine we've just started to talk to our our intermediaries about the reinsurance renewal.
We're pulling together information data to prove to provide to the reinsurance market.
In the next month or two.
And the early indications are certainly there's a lot of talk about reinsurance rates firming and that will be somewhat.
Dependent upon the individual loss experience of given carrier.
We expect that there will be some pressure on reinsurance rates going into 2021.
We have had some loss activity.
On the property per risk side.
So much on the casualty side and are not not on the cat side. So we don't expect any significant rate increase but there could be some just pressure on the on the casualty program as social inflation continues to be a concern of the reinsurers and certainly not with the with the coated.
Losses that could.
Puts some pressure on reinsurance rates, even though we haven't had any any coven losses directly.
We do expect there'll be a lot of attention on the exclusionary wording related to the pandemic losses.
And that doesn't necessarily concern us because all of our policies have.
Those exclusions, but we expect that the reinsurance contracts will.
The reinsurers will want some sort of exclusions on the on the reinsurance side as well.
That's helpful. Thanks, Thanks to you about another great quarter.
Thanks, Doug Thanks, Doug.
At this time there are no further questions ill now turn the call to Jeff Miller for any additional comments.
We appreciate everyone's participation today. Thank you for joining the call and we look forward to speaking to you again after reporting our third quarter financial results have a great. Thank you.
Thank you for participating in today's conference call you may now disconnect.
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