Q4 2021 Donegal Group Inc Earnings Call

I will focus my remarks on our strong topline growth and discuss the progress we've made on several strategic initiatives. Jeff will then provide details on our financial results for the fourth quarter and full year and I'll return for closing remarks before we open the lines for questions net.

Net premiums written increased seven 3% for the fourth quarter to eight 4% for the full year of 2021 compared to prior year periods. We are pleased with the strong growth in our commercial lines, which was driven by strong retention and solid rate increases across most of our lines.

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Britain increased 14, 6% for the fourth quarter of 2021 compared to the prior year quarter similar to the first three quarters of 2021 the growth reflected premiums from our mountain States region. As a reminder, mountain states premiums were excluded from our results in 2020 and prior.

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We began placing policies into our underwriting pool effective in the calendar year of 2021 as a result, all of our commercial lines of business achieved growth for the full year led by commercial multi peril with a growth of 27%.

We continue to view commercial market conditions is favorable for growth across our regions and we have targeted several well performing regions for our new business growth. However, given the recent inflationary trends we've seen across multiple industries, we're focused on pricing increases in retention of premium while continuing to grow profitably.

Personal lines net premiums written declined two 8% and four 3% for the fourth quarter and full year of 2021.

Primarily as a result of the strategic underwriting measures, we took over the past several years to improve the profitability of our personal lines business as we awaited the development of new products. We are pleased to announce the successful launch of new personal auto homeowners and personal umbrella liability products and three initial stage.

<unk> in the fourth quarter of 2021, the new products include coverage enhancements.

Modernize rating methodology enhanced pricing segmentation application of new predictive analytical models and expanded utilization of third party data.

As a result of the new product rollout, we implemented a new personal lines agency portal as well as the rating underwriting policy issuance capabilities that will ultimately support our personal lines business in 10 states on our new technology platform.

Currently the portal and systems are fully live in the states of Indiana, Ohio, and Pennsylvania, and the initial agency feedback in the states has been very positive <unk>.

Technical and business teams will continue to support the phased rollout of our new personal lines products and seven additional states throughout 2022.

We are excited to effectively compete for new quality personal lines accounts and expect to generate modest levels of premium growth that will contribute to sustained profitability and stability in our personal lines segment over the next few years.

Jeff will provide more details in a moment.

In summary, our underwriting results for the fourth quarter of 2021 were hindered by several headwinds that prevented us from achieving our profit target while weather related losses were in line with our five year average we saw an increase in large fire losses and experienced higher commercial auto severity compared to the prior year quarter.

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Commercial multi peril results reflect the large fire activity as well as the impact of inflation of the cost to repair properties. While we are pleased with the overall profitability of our personal lines segment in 2021 those results benefited greatly from favorable development of prior year reserves that masked underlying.

Inflationary increases in core loss trends.

As we entered 2022, we continue to experience higher personal auto claims frequency and severity is driving activity has largely returned to pre pandemic levels and the impact of supply chain and labor market disruption is contributing to substantial increases in auto repair and replacement costs.

We are quickly responding by increasing personal auto rates across our regional footprint and it will take some time before 2022 rate increases will begin to offset offset loss cost trends we are experiencing.

At this point I will turn the call over to Jeff for a review of our financial results and then I'll return with a few closing comments.

Thank you Kevin as Kevin mentioned, our fourth quarter underwriting results were impacted by several headwinds that I will describe in greater detail.

The combined ratio was 101, 6% for the fourth quarter compared to 96, 2% in the prior year quarter for the full year of 2021, the combined ratio was one 1% versus 96% in 2020.

While 2021 underwriting results reflected weather related losses that were below our historical average and continued that favorable development of reserves for losses incurred in prior accident years, our fourth quarter and full year 2021 results reflected the combined impact of an increase in large fire losses.

And a return to pre pandemic driving activity and inflationary pressures on loss costs.

These impacts increased non weather loss ratio by seven five percentage points over the prior year quarter to 65, 4%.

Commercial and personal auto losses increased substantially due to more active driving patterns and higher average claim severity.

Additionally, large fire losses, which we define as losses in excess of $50000.

Were $10 9 million or five five points on the loss ratio for the fourth quarter of 2021.

That is more than double the impact in the prior year quarter with higher activity in both commercial and home property fires.

We continue to closely review the details of all large fire losses, but have not identified any commonality among the causes.

Donegal group is also not immune to the ongoing inflationary pressures that continued to make headlines and we are seeing significantly higher costs related to property and automotive repairs and replacements.

We are implementing premium rate increases across most lines of business to offset the loss trends and improve the performance of our book of business.

Fourth quarter of 2021 weather related losses were in line with historical averages for the fourth quarter at $8 7 million or four three percentage points of the loss ratio net.

Net favorable development of reserves for losses incurred in prior accident years was $5 $3 million, reducing our fourth quarter of 2021 loss ratio by two seven percentage points compared to $2 $6 million, which reduced the loss ratio by one four percentage points for the prior year quarter.

We had favorable development in the reserves for personal auto commercial auto and commercial umbrella liability losses during the quarter.

We expect continued favorable development as we progress into 2022, albeit to a lesser extent in 2021, when the significant favorable development reflected pandemic related disruption to historical claim emergence patterns that contributed to lower than anticipated incurred loss development.

On a statutory basis, the commercial auto and commercial multi peril combined ratios were 126% and 115, 4% respectively for the fourth quarter of 2021.

The deterioration in profitability from the prior year quarter for these lines was attributable primarily to higher claims severity, including the large fire loss activity and inflationary increases I mentioned earlier.

Workers' compensation and other commercial which represents primarily commercial umbrella liability remain profitable with combined ratios of 82, 5% and 94, 5% respectively.

In personal lines, the auto loss ratio deteriorated nine one percentage points compared to the prior year quarter. As a result of higher claims frequency due to increased driving activity and higher claims severity due to macroeconomic inflation trends that accelerated during the fourth quarter of 2021.

Our expense ratio for the fourth quarter decreased to 31, 4% compared to 32, 4% in the prior year quarter. The decrease reflects lower commercial growth incentive payments to our agents lower underwriting based incentive costs for our agents and employees.

And a release of Covid related bad debt reserves, we determined are no longer required.

Our own our ongoing systems modernization project resulted in an increased allocation of costs that partially offset the other expense reductions.

For the full year, our expense ratio was relatively in line with 2020 due to similar offsetting factors.

Within our investment operations net investment income increased eight 6% to $8 2 million for the fourth quarter of 2021 compared to the prior year.

We generated higher investment income due to growth in average invested assets with 94% of our consolidated investment portfolio held in fixed maturity securities as of December 31, 2021.

Total investments increased $55 6 million during 2021 to $1 3 billion.

The average investment yield was two 6% and the average fixed maturity duration was four seven years.

The portfolio yield remained relatively consistent throughout 2021, and we expect it will generally hold steady in 2022 as recent reinvestment rates are now closer to those are maturing investments than they were a year ago.

Net after tax investment gains were $1 1 million for the fourth quarter contributing to net income of $5 3 million.

On a diluted class a per share basis net income was <unk> 17 per share compared to 49% <unk> 49 per share in the prior year quarter.

With that let me turn it back to Kevin for closing comments.

Thanks, Jeff in 2021, we've made significant progress in our ongoing systems modernization progress.

Project in August we successfully implemented the second major release, including a primarily the delivery of a new agency portal and the rating underwriting and policy issuance capabilities necessary to support the launch of new personal lines products with the full rollout to 10 states to be completed in 2022 as.

As we close out 2021 and have begun a new year, our focus remains on several primary strategies.

<unk> sustained excellent financial performance strategically modernizing operations and processes to transform our business capitalizing on opportunities to grow profitably and delivering superior experience to our agents and customers.

Given the current macroeconomic environment, we expect to see continuation of headwinds for the insurance industry as a whole we will focus on measuring the emphasis on profitability over growth in the near term and take deliberate and strategic steps in response to the increase in loss activity, while we remain conservative in our <unk>.

Writing approach, we will continue to be selectively pursue new business accounts across segments of our business, where we see the best potential for profitable growth.

With a compounded annual growth rate of six 5% since 2018, our book value per share was at $16 95.

At December 31, 2021, with a cumulative dividend payout of $2 35.

Over the past four years.

Our board of directors declared a regular quarterly cash dividend of <unk> 16 per share of our class a common stock in 2014, and a quarter cents per share of our class B common stock that were paid on February 15 2022.

In conclusion, the World has forever changed in the past two years, but we remain optimistic for the future. We've made significant progress in recent years and believe we have a long term strategy that will enable us to improve financial performance and increase shareholder value over time.

At this time, we will ask the operator to open the lines for any questions that you Matt.

At this time, if you'd like to ask a question simply press star one on your telephone keypad again that is star one for any questions. We'll pause for just a moment to compile the Q&A roster.

Our first question will come from the line of major shells with caveat will you. Please go ahead.

Great. Thanks, good morning.

I apologize if I missed this I don't think I data I was hoping you could clarify your comfort with the personal lines rate levels in the four states, where the product the new products being rolled out.

Good morning, there. This is Kevin I'll respond to that we feel very comfortable and confident with the new products that we've rolled out from a rate perspective in Indiana, Ohio and Pennsylvania.

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And analytics department in place.

This new product the <unk>.

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Getting external data as well to make sure that when we look at where we are price that we're looking and doing a comparative analysis and so we've got that data available to us.

As we roll this product out I feel very very comfortable that.

The pricing has dialed in and it's something that we are constantly monitoring it.

And more importantly, we now have the tools and the ability to monitor that.

At a time that we'd never had before so I feel very confident with where we're going with that.

Okay. Thanks, Thats good news Thats very helpful.

Related note how.

How should we think about agency count growth.

Maybe focus on personal lines as the products rolled out as a complement to the product itself.

Well first off in terms of the agency plant that we currently have I mean, when we went through and decided how we were going to phase phase.

Phase in the new product, we did it in three different phases and that's by.

By design, It was Indiana, Ohio, and Pennsylvania, Pennsylvania, obviously being.

Our home state of key state for Us that has many agents with long standing relationships that have substantial personal lines books with us.

Indiana, and Ohio, particularly Indiana is more what I'll categorize a new state and.

We started there the agency response has been very good we have not had to appoint.

New agents in those three particular states.

As it relates to the personal lines.

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We think that we've got a very solid agency plant in place and right now, it's really about gaining market share.

The only place where we've really added agents to any level. This year has been in a state like Texas, Utah, where we're continuing to grow.

Our presence in those new states the existing states.

We already have a good agency plan in place and it's really about making sure that we keep that franchise value in place.

And so we think that we've got the right agency plant to continue to grow this new personal lines product and it's also about reengagement.

Youre well aware a couple of years ago, when we started to take.

Fairly aggressive rate action.

To bring a book of business back into profitability.

We did not have the analytical tools that we have today and so it's also part of the Reengagement with those agents.

And so far the results have been very positive so I'm optimistic.

As the rest of these states come online for personal lines in 2022.

Okay. That's helpful. Thank you very much.

Again that is star one for any questions. Your next question comes from the line of Bob Farnam with Boenning and Scattergood. Please go ahead.

Yes, thanks, and good morning.

A question on personal lines and a question on commercial lines and they're both related to pricing.

Versus the loss trends so it sounds like from your commentary that the loss trends.

Exceeding.

Your pricing ability right now and it's going to have to you're going to have to catch up over time.

Are we taking that to assume that.

In 2000 2022.

You might have some deterioration in the core.

Core loss ratio, just because pricing is falling short of where the loss trends are.

Sure. Bob This is Jeff. Thank you for that question. It is it is a bit of a different story between commercial lines and personal lines, let's talk about personalized first since that's where the.

This situation is.

I think most impacted by inflation personal auto are indications right indications jumped significantly from the second half to the to the latter half of 2021. So we were in a position around the first half of the year, we felt really good about.

Our ability to stay ahead of the loss trends and our rate increases for for.

But what we were planning from that point forward.

That changed dramatically in the second half of the year. So we do find ourselves now with indications that are in excess of what we believe we can.

Address with rate increases in the near term.

We believe we can.

Achieved rate increases that are keeping pace with loss trend.

But it's not going to be a situation, where we're able to.

And make significant progress in reducing those indications for.

For some period of time, there'll probably be some time 2023 before our rate increases are.

We're catching up.

And making significant progress in reducing the overall indications. So the direct answer to your question is I do believe in personal auto it is going to be a challenge to maintain the core loss ratio.

Wood.

And the early part of 2021, our hope would be that.

We start to make progress towards the towards the second half of the year in terms of rate increases, but the earned premium impact of that will take some time.

Into 2023 and beyond on the commercial line side.

Commercial auto indications, we're in really good shape.

With the exception of the state of Georgia, which we've talked about in previous calls.

We were actually.

At the point, where we expected to do actually see.

Some profitability in that line.

At the end of 2022.

And we were planning to scale back on rate increases with the recent inflationary changes.

Expect to continue to achieve double low double digit rate increases in commercial auto which is well ahead of loss trend and we believe we will.

We'll be able to sustain our plan to have that have that line at the rate adequacy by the end of 2022. So we're feeling better about commercial auto with the exception of the state of Georgia, where we're just increasing rates significantly and working to reduce exposures.

Commercial multi peril is the line that is most impacted.

On the property side.

We are seeing higher severity on property claims.

Again, we're going to be going out to the market in 2022 with low double digit rate increases.

Which again is well in excess of loss trend. So we believe that we can we can address the inflationary pressures in commercial auto with discretionary pricing adjustments.

We're not expecting a significant deterioration in the loss our core losses.

CMP.

But again it takes time for those rate increases to be earned.

So we could see some of that in the near term.

The other lines like workers' comp.

That's fairly steady we aren't seeing a significant impact there homeowners, we have an automatic inflation guard, which helps to increase coverages and premiums were taking some additional rate in homeowners.

There we think we can we can easily keep up with the loss trends.

Hopefully that gives you an overall picture.

Picture, Yes no.

That's a good summary, I think so for the <unk>.

Personal lines.

Personal auto rate increases are you coming across any pressure from the regulators to kind of limit how much youre asking for.

That's a great question, we had at this point are going to the regulators with rate increases that are not significantly above what we believe we can achieve.

It will take probably several rounds of rate increases to get to the right level, we need to be so.

We understand there are certain limitations in terms of what we can achieve and what will get approved and so we're going to file.

File rate increases in the first half of the year that we believers basically is highest.

We'll be allowed to be enacted and then come back with another round of rate increases later in the year.

Okay Alright.

Hi.

And second question, Jeff while you're here is so the expense ratio it sounds like in the press release, you had a few moving parts in the expense ratio for the quarter.

Just curious if you back that stuff.

Looking for more for like a run rate what should we use going forward because it sounds like the 30 31 is kind of low.

It is low and it's really the impact of the reduction in some of the incentives in the fourth quarter as the loss ratio.

Ticked up the expenses come down and Thats typically what you see what we have a very profitable quarter in terms of loss ratio youll see a higher expense ratio.

For the full year, we came in around 33.

With some additional technology expenses next year and assuming that.

We have a higher level of profitability.

A run rate that.

We would be landing on is somewhere at 34% to 34 and a half.

For 2022.

Okay, and thats, not including the policyholder dividends correct Thats just the expense ratio right right. Okay. Thank you.

Thank you we have no further questions at this time I will turn the conference back over to management.

Well, we thank everyone for your participation.

Have a good day. Thank you.

Ladies and gentlemen that will conclude today's call. Thank you all for joining and you may now disconnect.

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