Q1 2021 Donegal Group Inc Earnings Call
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Yeah.
Yeah.
Good day, Thank you for standing by and welcome to the Donegal Group, Inc, Q1, and 2021 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you'll need to press star one on your telephone please.
Please be advised that today's conference is being recorded.
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I would now like to hand, the conference over to your speaker for today, Mr. Jeff Miller, Chief Financial Officer.
Thank you Sir please go ahead.
Thank you very much and good morning, and welcome to the Donegal Group Conference call for the first quarter ended March 31 2021, yes.
Yesterday afternoon, we issued a news release outlining our financial results for a copy of that release. Please visit the Investor Relations section of our website at Donegal group Dot Com and.
In addition, we have made available a supplemental investor presentation on our website.
And today's call, Kevin Burke, President and Chief Executive Officer, who will provide a business update and overview I will follow Kevin's comments with highlights of our quarterly results and then Kevin will return with closing remarks before we open the line for any questions you may have.
Before we get started you should be aware that our commentary today includes forward looking statements that involve a number of risks and uncertainties. We described forward looking statements and our news release and we provided further information about risk factors that could cause actual results to differ materially from those we project and the forward looking statements and the report on form 10-K that we submitted.
To the SEC.
We expect to file our form 10-Q for the first quarter on or around May seven.
You can access our SEC filings through the investors section of our website and also 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, we issued yesterday.
With that I'll turn it over to Kevin.
Thanks, Jeff and welcome everyone. Our results for the first quarter of 2021 demonstrated a continuation of solid progress, we are making and a number of areas.
We believe we are in excellent position to benefit from the economic recovery and our regional markets throughout 2021 as the businesses. We insure continue to recover from the pandemic conditions over the past 12 months.
Many of the strategic initiatives and operational changes, we implemented at Donegal over the past three years are contributing to our improved financial results.
We've made significant investments and technology and analytical capabilities. We are preparing for the deployment of our new personal lines products and we continue to have strong growth and our commercial lines business segment.
And the first quarter of 2021, we reported net income of $10 5 million or <unk> 35 per diluted share of our class a common stock.
The net income compares favorably to the $3 $7 million of 13 cents per diluted share of our class a common stock for the first quarter of 2020.
The increase was driven by several factors, including a net market to market gain on equity Securities. We held on March 31, 2021 that compared favorably to a substantial net market to market loss for the prior year quarter.
We reported net operating income of $8 $6 million with the combined ratio of 98, 5%.
We achieved this level of underwriting profitability, despite unusually severe weather conditions across the country.
And in the case of Donegal higher than anticipated large fire losses for the period.
Donegal achieved net premiums written growth of eight 9% during the first quarter of 2021, with 18, 7% growth and our commercial lines compared to the prior year quarter.
The largest contributor to this growth was the inclusion of commercial premium from our for southwestern States and our consolidated revenues for 2021.
As we announced previously Atlantic States Insurance company, our largest insurance subsidiary began to receive and 80% allocation of the underwriting results of Mountain States insurance group, which became part of Donegal insurance group through a Donegal mutual insurance company acquisition back in 2017, we.
We expect the mountain States insurance group will generate approximately $48 million to $50 million and net premiums written in 2021 of which 80% will be included in our consolidated net premiums written throughout the year.
We also achieved market share gains and premium rate increases that contributed to growth and all of our commercial lines and expect to capitalize on opportunities to obtain additional rate increases due to favorable market conditions.
We have been implementing substantial renewal premium increases and our commercial auto over the past few years and believe we are nearing rate adequacy in that line of business.
And our commercial multi peril line of business, we are closely monitoring pricing and growth metrics as our agents continue to provide us opportunities to write new accounts and where we believe the market will continue to allow higher levels of renewal rate increases.
We've been working to continue to build upon our well established agency network. Despite the challenges inherent with remote working environments and decentralized office arrangements. We continue to view our strong agency relationships as the principal driver of commercial growth and expect to continue to cultivate these relationships further as the <unk>.
Additional opportunities to interact personally with our agents present themselves and the coming weeks and months ahead.
Overall, we feel very confident that our forward looking strategy fits perfectly with our commitment to the independent agency distribution channel and the market trends, we are observing particularly for commercial lines.
We've expanded our capabilities to serve a broader segment of the commercial market within the classes of business. We have historically served.
We believe Donegal is product and geographic diversity, along with our expanding agency relationships will help provide us with ample opportunities to profitably grow commercial lines in the foreseeable future.
Moving to personal lines, our net premiums written declined six 7% as we continue to emphasize sustainable profitability over growth in anticipation of the launch of our new personal lines products later this year.
We are nearing our targeted level of overall stability and our personal line segment and expect to return to a modest level of growth as we begin to rollout new products and 11 states. Beginning later this year and continuing into 2022.
We feel that we can grow our book of business and deliver profitable results by serving a targeted segment of the personal lines market.
Focusing on customers, who recognize the value of the advice of the trusted independent agent and desire of protection from a highly responsive regional carrier, who is partnering with that agent to serve and support their local communities.
While our new products will include various coverage enhancements that will appeal to our targeted customers.
The primary advantages, we expect relate to the modernized rating methodology, including enhanced pricing segmentation and application.
Our predictive analytical pricing models that leverage external data to a much greater extent than our current product offerings.
As we introduce these new products and pricing capabilities, we look forward of competing more effectively for new quality personal lines accounts through our independent agents.
In summary, we remain committed to the sound underwriting and pricing discipline and working closely with our independent agents to deliver of best in class customer service, which we believe is key to achieving further market share gains and our geographic regions.
We are executing on our business strategy with priorities of achieving sustained excellent financial performance strategically modernizing operations and processes to transform our business capitalizing on opportunities to grow profitably and delivering a superior experience to our agents and customers as we successfully.
Executing the strategies, we expect to continue to grow the book value of Donegal group for the benefit of all of our stockholders.
To that and our book value per share at March 31, 2021 increased to $17 29 from.
And from $17 13 at December 31, 2020 the.
The increase reflected our net income for the quarter, which was partially offset by unrealized losses within our available for sale fixed maturity portfolio due to an increase in market interest rates during the period.
We were also pleased to raise our regular quarterly cash dividend by six 7% to <unk> 16 per share of our class a common stock and we increased our class B common stock quarterly cash dividend of <unk>, 14, and a quarter cents per share the.
The next quarterly dividends are payable on May 17, 2021 to stockholders of record as of the close of business on May three 2021.
Based on Yesterdays closing price of $16 $16 <unk> per share our current dividend rate represents a 4% yield for our class a common stock.
With that I will turn the call over to Jeff for a review of our financial results and then I'll return with a few closing remarks. Thank you.
Thanks, Kevin I'll move quickly through a review of the financial highlights for the first quarter of 2021.
Beginning with net premiums written we reported an eight 9% increased to $215 $9 million with commercial lines, representing approximately 67% of the total and personal lines representing approximately 33%.
The shift and mix for the quarter reflected the inclusion of mountain States business that Kevin mentioned, but also reflected some seasonality at the large number of our commercial policies renewed on January one.
Commercial lines grew by 18, 7% to $144 4 million led by commercial multi peril growth of 28, 1%.
Overall commercial growth included $13 $4 million of premiums the Donegal mutual and its subsidiaries wrote and for southwestern States and that were added to the pool business allocated to Atlantic States insurance company.
Commercial auto premiums increased by 23%, including mountain states premiums as well as premium rate increases of nine 9%, excluding the impact and the impact of no fault reform and Michigan.
And that level of rate increase for commercial auto was consistent with the rate increases we've achieved over the last several quarters and.
And while there are several states, where our commercial auto increases have moderated to mid single digits. We continue to push the larger double digit rate increases and actively reduce exposures and several regions where auto profitability challenges remain.
As Kevin noted, we experienced a six 7% decline and our personal lines premiums, which was a lower rate of decline that we experienced in recent quarters as retention remains strong and new business activity increased modestly.
Moving from the top line growth to and analysis of underwriting results our loss ratio increased slightly to 63, 7% from 62, 6% and the prior year quarter.
This increase was largely due to a higher incidence of large fire losses during the period with losses over $50000 totaling $10 3 million or five 5% of the loss ratio compared to $6 3 million or three 4% of the loss ratio and the prior year.
The increase was largely due to commercial fires as we received eight fire claims and excess of $500000, which was far above normal for a quarterly period.
While we increased our writings of larger properties. During 2020, we attribute the increased fire loss activity, primarily to additional stress placed on heating and electrical systems during the unusually cold weather conditions during the quarter.
Our analysis is continuing but we did not identify of any concerning trends with respect of the properties we insured.
Also we did not incur a significant amount of claims from weather events or conditions during the quarter weather related losses were consistent with the prior year quarter and below our five year average for the first quarter weather impact.
Commercial lines generated generated a statutory combined ratio of 99, 3% compared to 99, 5% for the fourth quarter of 2020 and 96% for the prior year first quarter.
The personal line statutory combined ratio improved to 92, 6% from 94, 7% and the prior year quarter, and 95, 1% and the fourth quarter 2021.
Overall, we were pleased with our personal lines results considering that we escaped any measurable impact of several unusual weather events that made headlines during the first quarter.
Our exit from the personal lines markets and several weather prone states in 2019 served as well considering the magnitude of severe weather events in those markets and 2020 and into 2021.
With respect to winter storm Yuri Donegal group's results did not reflect any material impact as the claims Donegal mutual incurred from that event were primarily related to commercial properties and new Mexico, and Texas that were insured under policies effective in 2020, and thus were not included in the pooling agreement.
Net development of reserves for losses incurred in prior accident years of $8 2 million reduced the loss ratio for the first quarter of 2021 by four four percentage points compared to $4 $3 million that reduced the loss ratio for the first quarter of 2020 by two three percentage points.
Our insurance subsidiaries experienced favorable development and all lines of business and the first quarter of 2021, and addition of favorable emergence within our personal auto line of business, we were especially pleased that we experienced modest favorable development and our commercial auto line of business during the quarter.
The expense ratio was 34, 1% for the first quarter 2021, compared to 33, 4% for the first quarter of 2020.
And we primarily attribute the expense ratio increased to commercial lines growth incentives for our agents and increase in underwriting based incentives for our agents and employees.
And technology systems related expenses associated with our multi year systems modernization project.
Overall, our combined ratio was 98, 5% for the first quarter of 2021 compared to 97% for the prior year quarter.
Before I turn it back to Kevin for closing remarks, I do on a highlight a couple of items with respect to our investments. We continue to maintain a large percentage of high quality fixed income securities and our portfolio, representing 92, 5% of the $1 $2 billion invested.
The assets at March 31, 2021.
You may remember that in March of 2020, our largest insurance subsidiary of Atlantic States Insurance company obtained a $50 million loan from the federal home loan bank of Pittsburgh to provide ample of contingent liquidity in light of the COVID-19 uncertainty.
And we did not require those funds and repay those borrowings and March of 2021 using proceeds from the maturity of fixed income investments.
Net investment income of $7 5 million for the first quarter of 2021 increased one 8% compared to $7 4 million for the first quarter of 2020, the increase and net investment income primarily reflected an increase in average invested assets relative to the prior year first quarter.
With that let me turn it back to Kevin for closing comments.
Thanks, Jeff I will close by noting that we were pleased that a M. Best recently affirmed our a excellent financial strength rating and revised the outlook on the rating from negative to stable. I include this in my comments largely because a M best cited and their rating rationale.
Donegal group's improved operating performance in the past two years, primarily driven by initiatives implemented to help improve underwriting performance as well as investments in new technology and improved loss reserving trends. We were pleased that a M. Best recognized the efforts, we've put forth into those areas and the resulting favorable impact on our financial.
The results.
Looking forward, we will excel is of high performing regional carrier by developing appropriate product diversification and strong agency distribution partners with growing quality relationships.
Prudent capital allocation and our focus on shareholder value of that rewards our various stakeholders over time, we have an exceptional team at Donegal and looking forward of what we can accomplish as we move forward.
At this time, we will ask the operator to open the lines for any questions that you may have.
Ladies and gentlemen at this time, if you'd like to ask a question. Please press star and then the number one on your telephone keypad. Once again and then at Star and then the number one.
Yeah.
And your first question comes from the line of and Jamie Inglis with Jeff.
Yes.
I was wondering if you guys could give me a sense of.
How you think.
Your business is correlated to GDP and the reason I'm asking on is it the commercial lines growth was very nice.
Yes.
Big chunk of that was the mountain states, but I'm trying to think of.
And how your business might be.
React given the economic and environment, where coming into the sort of post COVID-19 stimulus.
And that we're in now.
And is there anything particular about your book of business in terms of lines of business geographies of whatever that.
Give us a sense of where your relative growth rates of GDP.
First off Jamie welcome and thank you for the question. This is Kevin and I'll respond to that and Jeff. If you of any additional comments on it it's going to vary by region. As we all know the impact of COVID-19 and it was handled by a state by state.
Method and so it varies by region and so it's hard for me to pinpoint and say and overall and and all of our operations. This is what we expect do we think it is tied to the overall obviously economic.
Recovery, most certainly that was one of the reasons why we put that in our comments that we do see that the.
And the economy is starting to recover.
We think that we're going to benefit from that.
And all indications right now and when we look at the businesses that we insure and we look at how they have been able to sustain this past year, we're optimistic that we're going to be able to see the benefits of that recovery. So I do think that it's aligned but it is going to vary greatly.
And between <unk>.
State like New Mexico.
It was very very conservative and their abilities to open up.
Economically.
Versus states and the mid Atlantic which were different versus.
Versus Michigan, they all have different.
Places, where they're at and the curve in terms of their recovery, but overall, we do we do think that we will see a and.
And the economic rebound and based on the accounts that we have that we write the market segment I think that will benefit from that as well.
So there isn't any particular concentration and businesses that.
May or may not recover quickly, obviously, you don't and share airlines and hotels or whatever but you know what I mean is that there is.
And sort of a very broad base.
Standard lines book of business at the end of the day.
Yes.
It's a very diversified book of business I mean, everything from obviously the restaurant industry and hospitality was impacted by that share, but we've got from contractors all way through to some very very large accounts and so one of the things that has US encouraged is when we started to look at.
<unk>.
Basically the the commercial lines and paying their premiums and staying in business. We have not seen any major downturn now the second quarter is going to be interesting because that's when the impact of COVID-19 really hit so quarter over quarter for the second quarter <unk>.
<unk> to see how those numbers.
The work out, but I will say, it's really reflective of the diversified book of business that we have in commercial lines and also it's a testament to the quality of the underwriting that we do.
Okay.
Good morning, Bob.
A couple of questions here and probably more more in terms of getting more details. So mountain states you had the $13 million and so of premium could you just give us maybe a breakdown of what lines of business makeup that $13 million and how the business has performed I know the mutual.
And he's kind of been Rehabbing net business over the past few years is it pretty comparable to the year. Your core book at this point.
Sure. This is Jeff glad to address that question in terms of the overall mix of business and mountain States.
It's a little bit different than the the mix of business and our and our other regions CMP would've been $6 4 million of the total commercial auto of $4 8 million of.
Other lines, primarily are the umbrella of liabilities $1 5 million and then workers' comp is 700000, so the book of business and mountain States as less concentrated on workers' comp and we would have.
The concentration we have and our other regions, primarily because of there are some.
And mono line workers' comp writers that the that address that market in terms of the performance of the mountain States.
Obviously with just bringing in the premiums for policies effective in 2021, we did not have a large amount of earned premiums that of found their way into our results.
The loss activity there were continued to be fairly conservative and our and our loss picks and that region. So it did not have a material impact on our results, but at this point of it would've been of a modestly adverse impact on the on the bottom line.
Does that address your question.
Yeah, I think we'll we'll see over time, how that performs relative to your core book, but at least it gives us the start.
In terms of the reserve to one and Thats, probably the first time and quite a while you have been able to see all lines of developed favorably can you give us a kind of a breakdown as to the.
And what developed and from what accident years.
Sure Yes.
And I said in my prepared remarks, $8 $2 million of favorable development for the quarter, which is the highest level I think we've probably ever had and one single quarter and in terms of the lines of business personal auto was $3 4 million commercial auto $1 9 million workers.
Workers comp $1 4 million CMP was around 900000 and.
In terms of the the swing from first quarter last year, we saw improvement in commercial auto from a $1 million adverse development to one nine and favorable so almost of.
The $3 million swing, there and then in the <unk>.
Homeowners. We also had went from a modest unfavorable development in the first quarter last year to modest favorable development of about $1 million swing and that line of business.
As we looked at the development and thought about what's driving that.
And it occurred to us that if you remember back in 2018, the first quarter 2018, we did some fairly significant reserve strengthening we primarily increased reserves and the accident years of 2016 and 2017 and then from that point forward, we have been reserving more conservatively in terms of our loss pick.
Expecting later development later.
The information reporting and so our reserves from basically the last five accident years have now been established that the stronger levels and so it makes sense to us that we would see and.
The increase and the favorable development. It's important to note, we did not take down IV and our and the current quarter, we actually increased our loss.
<unk> by almost $4 million and we also increased our loss expense reserves. So we're continuing to add to our reserves and.
And we feel very good about the current reserve position.
The the commercial auto the favorable development and so thats youre basically, saying thats of the more recent accident years, because those have been.
More and more conservatively reserved.
Correct.
Of course, the the majority of that would've been in the last two accident years and 2020 of course of there was some.
Uncertainty as to the impact of COVID-19 on loss reporting and payment patterns. So that we do believe we were somewhat conservative in terms of what we're seeing and loss emergence, but yes. It was the last two accident years that were primarily.
Impacting commercial on them.
Okay. Thanks for that and one last question I have is on the the under.
The other underwriting expenses.
So you noted and the text debts, you had increased and.
<unk> cost generic some technology costs and Theyre, just trying to get a feel for how much of those costs.
The proportion of your expense ratio are made up of those types of costs and what.
Are we going to expect those cost to continue going forward in other words.
And you're going be continuing to spend on technology for the year, you're going to continue to pay incentive costs for your agents or whatnot and I'm just trying to get a feel for how that expense ratio is going to move over time.
Sure. This is Jeff again, and let's start with the technology expenses, and then ill transition to the incentive costs on the technology front.
The impact of the ongoing.
Modernization initiatives was about $1 million, so about <unk> five.
Percent on the expense ratio, we expect of that will be the the run rate here for the first half of the year and then as we.
Implement our next release of the software.
Currently scheduled for the end of July.
That will result in some of the increased allocations to Donegal group subsidiaries and we expect that the impact of the expense ratio will increase to about one point for the for the later part of the year and then that will be the run rate until we get to the next release, which is sometime in 2022.
That's according to plan.
Within our expectations that at the peak that project would add one point to one five points of our expense ratio.
We are looking to address the expense ratio and in other ways and reducing expenses and a number of the areas, but we havent yet seen much impact from that.
We've reduced some staff, but of course were accruing for severance costs and we do that so.
And that benefit won't be achieved immediately on the incentive compensation.
The last first quarter, when we made our estimates those and.
And then ended up being somewhat.
Light, so we had to catch up and the second quarter as.
As we established our accruals for the first quarter of 2021, we use the 2020 payouts as the basis for our accruals.
And those payouts were high higher than normal and COVID-19 could have had some impact on that.
Losses were somewhat lighter and several business line. So we may be on the conservative side, we do not expect the 34% to be the run rate going forward, we are certainly targeting.
Out of 33% expense ratio for the year.
Because we had so much commercial lines premium that was written and the first part of the year here with the.
As I mentioned the January 1st renewals, we think some of that expense has been frontloaded, but it all depends on the profitability for the year and.
We'll continue to monitor that we did put in into effect a new profit sharing plan for our agents for 2021 and that is designed to reward our agents. If our results are very good and two not reward them as much of our results.
The loss ratio has increased so hopefully the agents the incentive compensation is more closely aligned with our performance as we as we go through 2021.
Okay very good thanks for the details that you.
Youre welcome.
Your next question comes from the line of James West.
And with K B W.
Hello, and thanks for taking my question I wanted to go back to reserve development and I wanted to just get a clear understanding of how much of it is tied to the 2018 underwriting actions and versus kind of the COVID-19 uncertainty impacts.
Sure that's an excellent question James.
The primary.
The development is and the 2000 22019 years. So most of it would be related to the more conservative reserving practices that we have had in place over the last several years.
Not so much from the accident years that were impacted by the reserve strengthening we do still have about $1 million of the favorable development from the accident years 2016 and 17.
But of the $8 2 million the vast majority is from the previous three accident years.
Do you have sort of a breakdown of that by a year.
Sure, it's about $3 $2 million and $2022 $8 million, and 2019, $1 $1 million and 2018.
And then about 900000 in 2017 and.
170002 thousand 16.
Perfect.
And just one more question on commercial lines of what's going to be fueling or what will fuel commercial lines growth. What's currently fueling and is there anything and the market beyond just the rate environment, that's driving the small commercial growth.
Well the the.
This is Kevin and the small commercial growth continues to be and excellent spot for us it's really our sweet spot in terms of where we continue to grow and gain market share a lot of it has to do with our relationships with the the agents.
And they like working with the regional carrier they like.
Working directly with and underwriter and working through and account and so that level of service and responsiveness and accessibility.
Actually makes up part of the reason why we continue to grow and gain market share and that area.
As we had noted that the market is also and.
Very favorable for us to continue to.
Look at renewal rate increases, we think that that is something that is going to continue at least for the remainder of the year, if not a little bit longer.
And so those are all of the.
And the reasons why we continue to see this positive uptick and commercial growth the.
The other aspect is when you look at where we do business and the various states are geographical locations. There is there is tremendous opportunity for us in terms of gaining additional market share we have a lot of runway and and all of the states and that includes Pennsylvania, even where our where we're domiciled.
There's plenty of opportunities to have good solid profitable growth in the foreseeable future and we're going to continue to stick with what's working for us and it's proven to be of good.
Good methodology to get it done.
And I would just add to that that the mountain states impact for the remainder of this year, we are projecting that for the year Mountain States will add 10% to our commercial growth.
And then all of the.
The factors of Kevin just mentioned.
And we'll add on top of that so the rate increases we expect to continue to have an impact and the first quarter about half of the growth.
Outside of the mountain states was related to rate increases and the other half related to exposure just market share gains.
Perfect. Thank you that copies of it all from me.
Thank you Youre welcome.
Your last question comes from the line of Douglas Eden with ECM.
Good morning, Kevin and Jeff I'm.
And wondering Doug.
I have two questions for you on first.
And with scale being so critical and personal lines, obviously since we're competing against direct writers and direct response company to have.
And our expense ratio advantages and can charge less for their products to grow their market share. My question is really around what premium level do you believe donegal, ultimately needs to be and personal lines and <unk>.
Maintain long term growth and profitability and.
And when do you reasonably expect that we could get to that level.
And then secondly.
And around share buybacks.
I know there are issues with the public company repurchasing shares due to premium the surplus.
And RBC constraints, but with the stock continuing to trade at a discount of the book value is there an opportunity perhaps for Donegal mutual to utilize some of it on encumbered surplus to increase its ownership and the public company.
Thought of rationale around and I think that buying back shares at below book value.
And with both increase EPS going forward and also reduce the cash expense that the public companies paying for dividends on the retired shares.
Doug This is Kevin I'll take the the first part of the question on the personal lines piece of it excellent question, it's something that we spend a lot of time.
Thinking about and obviously, we're we're anxious for the new product to be rolled out later this year.
Couple of things that I'm encouraged by.
And what I think the prospects are for our ability to grow personal lines profitably.
And most recently we've spent a fair amount of time doing our agency reviews, which is an annual process that we go through with the marketing representative coming in for the various territories and working through each of the agents.
One of the things that the.
And I saw through that process is that we have.
A number of very large <unk>.
Agents that are writing personal lines, they're doing it well theyre doing it profitably and.
Have existing books of business personal lines books of business.
And with with Us.
As you are aware of the last two years, we have backed off until we had our pricing dialed in and those agents are anxious.
Obviously of waiting for us the rollout this new product and.
And so one of my first concerns was being able to Reengage. This agency plan to be able to write personal lines with Donegal and those concerns.
We're we're alleviated a little bit over the last couple of weeks based on what Im seeing from the agency plant. So I'm encouraged by that.
The other piece that we have started to see and the last several months.
As our rate increases.
We've taken very very modest rate increases.
Example is in personal auto it is less than 1%.
Homeowners is less and for $3 nine actually on.
And all of the personal lines one of $1 nine we've taken a very modest rate increases.
And most recently we saw of <unk>.
Great indications and in certain states, where it was actually flat or even negative and so number one and it tells us that we're at rate adequacy and hence the profitability that we're seeing but we've also now started to see an uptick in the quoting of the existing product that we have and also a and uptick in.
New policies and force so without even rolling out the new product yet. We're also we're starting to see some modest growth letters of la.
Levels and that again gives me encouragement.
Your question is right on point, we are we play and the standard marketplace and we are going to end up going out there and going head to head with some of the large nationals direct writers.
For US there is still a market segment out there Doug that wants to meet with and independent agent ensure that their assets are appropriately covered.
And there is also a fair amount of of policyholders and customers that may have gone direct over the years and maybe they were under insured and did not have a good experience and so for US you often hear me say that the new personal lines product for US is about some modest growth that we will see and 2022.
<unk>.
More importantly that it's going to be profitable and that will continue to make some headway in that area.
Yes, Doug and this is Jeff I would just add to that the we have done some forecasting of what we expect in terms of our personal lines performance over the next five to 10 years based upon the expectations of the performance of the legacy book as well as the new.
The new products that are going to be coming on board and so from a scale perspective, our expectation is that we can write personal lines and profitably.
The new products, obviously, writing new business.
And it takes a few years before there is adequate earned premiums for a new product to be <unk>.
Profitable and our expectation is that the the legacy book, which will not have any new business written and it for the net.
Several years.
Or at all going forward that that book.
The perform more favorably.
So when you put it all together we expect to have.
Combined ratios and the 95% range going forward.
We will be looking very closely at the expense side of it we do need to reduce the expense ratio, particularly as it relates to the personal lines premiums and.
We're implementing a new expense allocation model.
This year that will allow us to be more granular and how we track those expenses to make sure that.
We are reducing that expense ratio.
And in terms of the your question on Donegal Mutual's purchase of the Donegal group's shares.
It is something that we have done over the years and fact Donegal mutual has purchased shares.
To support the market and and <unk>.
Recent years and purchasing some of the stock options from executive officers.
Going to the market and purchasing shares and the open market is certainly an option for Donegal mutual but.
But as you know we've been working fairly diligently over the last year or so to increase the level of ownership by external shareholders, and we would really like to to broaden our shareholder base and to.
Sure of that we have.
Effective outreach to two.
Outside of shareholders to try to increase the level of interest and our stock and.
And we really don't want to impact of the liquidity of the shares that are on the open market. So that's the other side of.
Could donegal mutual purchase shares and the open market to support the price of the stock perhaps.
But we think longer term, it's in everyone's best interest including.
Donegal mutual and the.
The independent shareholders that we try to get the increased interest and the stock outside of our and our own holdings.
Yes, yes.
Really understand its a balancing act because we want to get other shareholders involved and I know you all are actively involved with that.
And I think it'd be nice also to take advantage of the immediate opportunities too.
If others don't take advantage of it and the.
We avail ourselves of the opportunity now that the mutual has some some of that unencumbered surplus since more of us being more of a mountain states for example.
And now being public.
Public company.
It's something to look at it and at an ongoing basis, because hopefully the stock won't be trading below book.
And I noted the the updated investor presentation, which by the way I think is excellently prepared.
That one slide which talks about the price to book and.
Donegal is one of only the two companies left trading below book.
So and.
And hopefully this won't be occurring for much longer.
While it is I, just think it would be and opportunity to take advantage of that even if others don't see that opportunity.
Absolutely we understand your perspective on it and it's something we can certainly take under consideration and just and just going back. Thank you for the thorough response on personalized just just for clarification.
We exited the seven states or so.
And the last couple of years the.
Is it 16 states is that the number of states that we are doing personal lines and at this point.
11 states.
Okay 11 states 11 on it.
Yeah.
Okay and.
And and the new product, Kevin that you mentioned and how many and how many states will that of the 11th the new product be rolled out.
<unk> and <unk>.
Sure. What we're doing is we're going to roll it out and Indiana, Pennsylvania, and Ohio first so thats. The first what we're calling batch states that really starts at the end of July but it's for new business starting September one.
And Thats why when I talk about the new personal lines product, obviously, we're excited about deploying it.
But the reality of it is we're really not going to see any meaningful lift until.
Until 2022, but that's the first group of states, Doug that will be.
Issued.
Okay, and then throughout 2022 the.
By the end of the year next year all of the states would have the new product is the is the Gulf net.
That is correct right, we will be rolling out some of the different states and the November timeframe. According the current schedule on November 2021, and then the remainder will be in early 2022.
Okay. So from a top line standpoint, and the personal line segment and maybe we should see of stabilization next year, but really the growth trajectory more significantly the following year.
Yes.
And that depends.
It depends on the engagement of the agents and how well those parts.
And those products that received that would be our expectation.
Okay terrific. Okay. Thank you both and by the way I didn't mentioned it before but congratulations on the ninth straight quarter of <unk>.
Favorable reserve development that's net.
The good customer testimony to the actuarial and finance team and a big improvement from a couple of years ago. So that was there I think that was one of the positives for the quarter and it's duly noted.
Thanks, Doug Doug.
And there are no further questions at this time.
Alright, well before we close the call I just wanted to make one last comment I know several of the analysts and our discussions with them and in the reports of mentioned the core loss ratio increase and the quarter and as we dug into that there is one element that we thought we should bring to everyone's attention and that is that we established loss expense.
<unk> reserves and bulk and those loss expense reserves are allocated to the lines of business based upon the existence of case reserves and I've been on loss reserves and as a result.
We don't allocate those bulk.
Loss expense reserves, two fire losses or weather losses for example, until they are paid and as a result of the core loss ratio for the current year current quarter, and CMP looks a little bit higher than.
And what we would've expected and as we dug into those details. It is because of those bulk loss expense reserves were not included in the and the fire loss category. So if you pulled that out our core loss ratio would have been much similar much more similar to the first quarter 2020.
And it's something we will look into a little closer as we go forward and our reporting methodology, but just wanted to make that.
Distinction for the for the group.
And with that thanks to all of you for joining the call today, we look forward to speaking to you again after we report our second quarter results.
Great day, Thank you.
Ladies and gentlemen, this concludes today's conference call. We thank you for your participation you may now disconnect.
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