Q2 2022 Donegal Group Inc Earnings Call

To your question and answer session for questions submitted ahead of the call speaking today will be president and Chief Executive Officer, Kevin Burke, Chief Financial Officer, Jeffrey Miller, Chief Underwriting Officer, Jeffrey Hay, and Chief Investment Officer, Tony via IV. Please be aware that statements made during this call that are not historic.

The facts are forward looking statements and necessarily involve risks and uncertainties that could cause actual results to vary materially. These factors can be found in Donegal group's filings with the Securities and Exchange Commission, including its annual report on Form 10-K, and quarterly reports on Form 10-Q, the company disclaims any.

Geisha to update or publicly announce the results of any revisions that they may make to any forward looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances. After the date of such statements with that it's my pleasure to turn it over to Mr. Kevin Burke.

Thank you Karen and welcome everyone I will start the call with an update on our strategic initiatives and then ask Jeff Miller to provide details on our financial results for the second quarter of 2022, Jeff Hey will then highlight our commercial and personal lines segment results, followed by Tony BRG with an update on our activities and results within our investment.

Portfolio.

He will then provide a few closing remarks before we address the questions that were submitted to us.

As we have now passed the midpoint of 2022 I am pleased to report that we continue to make solid progress in our ongoing business transformation.

We have now launched our new personal lines products in eight of the 10 states in which we offer personal lines and expect to have the new product suite available in all 10 of those states for policies effective in 2023.

While our new business expectations remain modest as we closely monitor the competitiveness and performance of these products relative to our expectations. We are pleased with the initial agency engagement and early results.

New business volumes are growing each month, and we are working diligently to encourage our agents to re engage with us in the quoting of our new products, whether it's through our state of the art online portal, where the competitive rating systems. The focus of our new systems development efforts has now shifted to commercial lines as we work towards our 2023 release.

Of our new <unk> product as well as migrating our commercial auto and commercial umbrella business lines to a new operating platform.

The new platform will enable enhanced straight through processing capabilities to streamline our agents experience and improve the efficiency of our internal operations. This release of our new systems is a heavy lift for us as we offer commercial lines products in 24 states and we very much appreciate the efforts of our technical and business teams who've.

Been working tirelessly for several years to modernize our systems that will continue to drive business transformation, we need to effectively compete for quality insurance accounts in the years ahead, we announced the hiring of a new senior Vice president of commercial lines underwriting to our team and the April . We're also pleased to add a vice president of commercial.

Your lines operations, and a vice president of personal lines product management and data during the second quarter. All three of these individuals have extensive industry expertise and experience and have already begun to make meaningful contributions within our underwriting departments.

We are positioning our company to successfully execute our strategic plan by making critical investments in infrastructure personnel and capabilities as we look forward to return on these investments as we think about what we can accomplish in the remaining months in 2022, we are already beginning to plan for 2023.

We are emphasizing to the entire Donegal team the importance of remaining focus on our core strategic pillars.

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 policyholders like our peers, we face many headwinds in the current challenging economic environment. We are.

Committed to the execution of our business strategy that we believe will yield successful results in the future and ultimately increase shareholder value at this point I'll turn the call over to Jeff Miller for a review of our financial results for the second quarter.

Kevin I'll provide a brief overview of the quarterly results and then turn the call over to Jeff Hey for more information specific to our commercial and personal lines segments.

We are pleased with the continued modest premium growth in the second quarter, which was mostly related to strong retention results and premium rate increases that averaged eight 5% for all lines, excluding workers' compensation.

While underwriting results were heavily impacted by weather related and large fire losses in the quarter. They also reflected inflationary pressures on loss costs in certain lines of business.

For the second quarter net premiums earned grew by 6% to $204 million with 10% growth in commercial lines, which was primarily related to the additional premiums from our mountain States region that were included in the pooling agreement beginning in 2021.

The overall combined ratio was 105% for the second quarter of 2022 compared to 96, 1% for the prior year quarter. The deterioration of the combined ratio was primarily driven by higher weather related losses, and a lower level of net favorable development of reserves for losses incurred in prior accident years.

Compared to the prior year quarter similar to the broader insurance industry. Our results were significantly impacted by numerous severe weather events that occurred in our operating regions. During the second quarter with weather related losses, totaling $19 6 million or nine six percentage points on the loss ratio.

While we did not incur significant losses from any single catastrophe event, the accumulation of losses from smaller events led to a weather claim impact that was higher than our previous five year average for the second quarter, our non weather loss ratio increased six seven percentage points from the prior year quarter.

The differential included three points from lower favorable reserve development 50 basis points from large fire losses, and a three point increase in core losses, which was due in large part to the inflationary impact on repair and replacement costs and our property and auto lines of business, while large fire losses had a relatively low impact to velocity.

Ratio for the first quarter of 2022, we experienced an elevated volume of fire losses in the second quarter totaling $13 4 million or six six points on the loss ratio not impact was relatively comparable to the $6. One point impact on the loss ratio for the prior year quarter. When we also experienced higher than average.

<unk> fire losses, we continued to experience favorable net development of reserves for losses incurred in prior accident years, albeit at a lower amount than in the first quarter of 2022 and prior year second quarter favorable development totaled $7 9 million or a three nine point reduction in our loss ratio for the second.

Quarter, 2022, compared to $13 4 million or a six nine point reduction in the loss ratio for the same period last year, our insurance subsidiaries experienced favorable development primarily related to reserves for accident years, 2021, and 2020 the expense ratio improved to 35% for the.

Second quarter of 2022 compared to 36% for the second quarter of 2021, we primarily attribute the expense ratio decrease to lower underwriting based incentive costs for our agents and employees for the second quarter of 2022 compared to the prior year quarter. The combination of all of the factors I discussed along with pretax net investment.

<unk> losses of $8 4 million resulted in a net loss of $8 $2 million for the quarter.

Excluding the net investment losses, we had an operating loss of $1 6 million for the second quarter. While those results were disappointing. We believe the rate increases we have implemented and will continue to implement as well as strategic shifts in our geographic business mix that Jeff will discuss in more detail will lead to improved profitability in future periods.

From a capital perspective on July 21, 2022, we declared regular quarterly cash dividends of $16 five per share for our class a common stock and $14 75 per share for our class B common stock, which are payable on August 15th 2022 to stockholders of record as of the <unk>.

Those of business on August one 2022 with that let me turn it to Jeff Hey to provide more details about our commercial and personal lines results.

Thank you, Jeff Im first going to start with our commercial line segment, where we continue to execute on a number of strategies to achieve profitable growth.

Premium written growth increased four 3% in the segment continuing our momentum in several states that we have targeted for growth.

And that's being offset by reductions in several states, where we have intentionally reduced exposures in today's challenging environment.

We've strategically decreased our emphasis on new business premiums in the quarter to appropriately allow our premium rates to catch up with the inflationary loss cost increases.

Now as these renewal rates increase and return to adequacy. Our market analysis suggests that producers are also spending less time on new business opportunities, which is evident in our submission volume quarter over quarter offsetting the strategic decline in new business. However, our retention does remain strong holding in the low to mid nineties across.

Most lines of our business and most of our regions. So from a margin perspective, retaining a better class of accounts.

Proves to be a better trade off and accepting potentially under priced new business in our current macroeconomic environment speaking of rate. We have successfully achieved nearly twice the rate increases that we achieved in the second quarter of 2021 at high single digits to low double digits across all major lines of business.

And policy size bands with the exception of Workers' compensation, where we continue to feel downward pressure from the file Bureau loss cost decreases that we are working hard to mitigate where possible based on our own experience. It is important to note that we continue to execute our strategic initiative to provide more refined rate guidance to our underwriters.

Consider both price adequacy loss experience as well as rate characteristics correlated to that loss experience.

We began this approach in commercial auto and have been pleased with the preliminary results, indicating stronger rate achievement in our lowest margin business and higher retention levels and our highest margin business in total commercial lines statutory combined ratio for the second quarter of 2022 was $101 six compared to 94, 3% for the <unk>.

Prior year quarter.

The deterioration in our profitability is primarily attributable to heavy storm activity significant fire losses, and the impact of inflation that Jeff mentioned earlier, we endured storms from many angles as did most of the industry from the widely publicized tornadoes in Michigan and Wisconsin.

Rachel event in Ohio, wind and hail in new Mexico, and wind and hail in the northeast with events occurring across April may and June all across our footprint.

Large fire losses were also elevated in the quarter, but it is important to note that the percent of losses attributable to large fires on a year to date basis was comparable to the first half of 2021 and in line with our expectations largely due to a lower incidence of fire losses in the first quarter of 2022.

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However, inflationary pressures are still evident with core severity, increasing in the quarter compared to the prior year period in nearly every major line of business, particularly in our property and our auto physical damage coverages.

Additionally, we continue to see increases in the cost and duration of repairs due to supply and labor shortages, increasing our overall costs through price increases and labor parts and materials claim frequency remained generally consistent with the exception of commercial auto where frequency continues to gradually increase.

Kris as we returned to normalcy from the COVID-19 pandemic.

We do continue to execute our pricing strategy to return to rate adequacy and.

And we continue to believe our commercial auto performance will benefit from earned premium rate increases in various strategic actions, we have implemented over the past several years to improve the profitability of that line of business and.

And as mentioned last quarter, we continue to evaluate and take action as a part of the state specific strategies for each line of business.

The execution of these strategies has continued to make an impact in the second quarter of 2022 with premiums written in the states to which we assign a growth posture growing at more than twice the rate of our overall commercial segment with lower than average loss ratios and the premiums written our profit improvement states shrinking in the double digits.

This resulting shift in the mix of our overall commercial portfolio will help enhance our profitability as we continue to promote growth in our targeted markets.

Moving on to personal lines.

We're pleased with the return to modest premium growth in the quarter net.

Net premiums written for the quarter increased 4%, reflecting increased momentum from the introduction of our new personal lines product suite.

We successfully launched as scheduled new products in the states of Maryland, Tennessee, and Virginia during the second quarter after seeing a continuing increase in relevance within the marketplace and the states of Indiana, Ohio, and our flagship state of Pennsylvania, where we previously introduced the new products earlier in the year.

In the second quarter, we more than doubled our new business production compared to the same period last year in these states.

We continue to closely monitor the success of these products to ensure overall rate adequacy and segmentation and as such we have already implemented various rate adjustments in reaction to their initial competitive position and performance to keep up with the ongoing inflationary pressures on loss costs.

As we head into the back half of 2022, we do remain on track to release, the new products, and Wisconsin, Delaware and Georgia, However, due to regulatory approval delays, we have delayed our implementation date for the state of Michigan to early 2023.

And as we continue the rollout of the new personal lines product suite. We're also diligently working to maintain the profitability of our legacy renewable book of business.

Policy retention averaged near 90% across both personal auto and home and we have at least two planned rate change revisions during 2022 in each of these lines of business in every state, where we're offering legacy personal lines products.

Cumulative rate filings are currently in the high single digit range and we continue to adjust our automated coverage renewal increase amounts to account for property exposure changes.

Our overall personal lines combined ratio was 107, 5% for the quarter compared to 96, 9% in the same period last year again, driven by fire, whether an inflationary impacts.

Weather related losses impacted the homeowners line of business from the same storms mentioned in my commercial lines commentary.

We're also seeing pressure on claim frequency and severity in our auto line of business as miles driven continues to near pre pandemic levels.

And again, both material cost and time to repair our increasing overall costs with key items, such as vehicle replacement parts appliances, electrical wiring and copper continuing to be among the most difficult resources to obtain and additionally talent shortages and repair shops are also resulting in delays and IND.

Kris and costs will continue to closely monitor the market success and results of our new personal lines products and we are effectively gaining traction to get overall rate adequacy for our legacy personal lines book of business.

Before I hand, the call to Tony I would like to take a moment to highlight a change in our personal lines leadership team.

Effect of $71 2022, David spun it was named our senior Vice President head of personal lines.

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Dave is a longtime Donegal leader, having first joined the organization as an underwriter back in 1990 and has played a critical leadership role in the development of our recent new personal lines market offering Dave's robust industry knowledge leadership and strategic perspective will help navigate the highly competitive and ever changing personal insurance market.

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I'll now turn the call over to Tony <unk>, Chief investment Officer for an investment update Tony.

Thank you Jeff over the course of the last 12 months, we have been able to take advantage of widening spreads in certain fixed income sectors, which resulted in a few modest asset allocation adjustments.

It is important to note the last quarter, we announced that our average reinvestment rate exceeded the rate we were receiving on bond cash flow, which consists of maturities calls and mortgage backed security prepayments.

We are happy to note that this positive development continued in Q2 and appears to be trending positively again in the third quarter.

Total investments increased by $22 4 million.

From December 31, 2021, as new funds invested or partially offset by $41 5 million of unrealized losses within our available for sale fixed income portfolio due to rising market interest rates.

Net investment income of $8 2 million is an increase of seven 2% from the second quarter of 2021.

Investing new money from premium growth and profitable operating results had allowed us to consistently maintain and increase our investment income if market rates remain stable, we expect to experience a lift on new investments and see the end of market value declines.

Our short term investment yields have improved from one basis point, a year ago to approximately $1 two 5% and we expect short term rates will continue to move higher in 2022 as the fed continues its tightening plan to fight inflation.

Net investment losses of $8 $4 million for the second quarter of 2022 were primarily related to unrealized losses in the fair value of the equity securities held as of June 32022.

Equity values have begun to rebound somewhat in the last few weeks.

In the second quarter, an increase in interest rates resulted in a decrease in the market value of our available for sale bonds with the tax adjusted unrealized loss impacting our stockholders' equity by $32 $8 million and impacting our book value by $1 <unk> per share.

That decrease coupled with the loss events impacting our quarterly results contributed to a 6% decline in book value per share from year end 2021 to $15 87.

As of June 32022.

I will now turn it back to Kevin for closing remarks.

Thanks, Tony we are excited about <unk> future as our strategic commercial lines focus new personal lines product suites, and ongoing underwriting and rate actions combined yield favorable results over time, while single quarter's results may be tempered by significant weather and ongoing economic volatility we remain encouraged by the path that we're on.

On.

We know our work is not complete and each day brings a new set of challenges Donegal is hard working staff remains determined and continuing the transformation to a better future at Donegal. Thank you to our employees and shareholders for your continuing support of those efforts at this time I'll ask Karen our Investor relations consultant and voice.

President at the equity group to moderate our question and answer session.

Thank you Kevin I'd like to take a moment to discuss the format for the question and answer section along with the announcement of Donegal second quarter 2022 earnings and webcast schedule, we requested and received questions from interested parties and advance well.

We have worked to answers to some of these questions into our prepared remarks, where appropriate there were a few questions that we will address directly.

The first question relates to the losses in the quarter can you. Please provide additional detail in the fire losses and weather related losses in terms of geographical location are suddenly impact I can take that one this is Jeff hey, and thank you for the question.

On the weather side of the equation.

We're hit across our footprint from the from the widely publicized tornadoes in Michigan and Wisconsin.

<unk> had a derecho event in Ohio, we had hail and wildfires in new Mexico, Hail and wind in the northeast and those events occurred across April may and June on the fire side of the equation as I mentioned earlier in my commentary, there's really nothing out of trend from a year to date perspective and the <unk>.

Experience was pretty random across our geographic footprint.

With the notable exception of our large personal lines fire in northern Virginia, and wildfire related loss in new Mexico.

Great. Thank you following up on the comments, we have several related questions about the loss ratio impact of weather and fire losses by segment.

Sure Karin I can provide some more granular details as to the loss ratio impact starting with the weather and fire losses.

Weather impact was weighted more heavily to our personal lines segment, representing 14, five percentage points of our personal lines loss ratio versus six six percentage points of our commercial lines loss ratio.

For fire losses, there was a $1 $5 million increase in commercial property fires compared to the prior year quarter with fire losses, representing five nine percentage points of our commercial lines loss ratio, while the overall dollar impact of homeowners fires was comparable to the prior year quarter. We had two large home fires that exceeded $1 $5 million in.

<unk> and contributed to a total of seven six percentage point large fire impact on our personal lines loss ratio.

Thank you for those details. The next question is on the commercial lines state specific strategy to exit our grow in targeted areas can you give us an idea of the progress that has been made and when should we expect to see target areas be fully assembled or disassembled.

Jeff Hey, here again, and thank you for that question are state specific strategies developed late last year are being successfully utilized to support the growth in our most profitable states.

In this quarter, we grew our states with a growth posture at more than twice the rate of our overall growth in the commercial segment in those states had lower than average loss ratios as well.

Our profit improvement state are shrinking in the double digits and we're in we're seeing improved loss ratios as a result of the underwriting actions that we're taking there.

This reshaping of our book I would say is more of a journey than a destination as we want to continually look to steer our portfolio growth and our most opportune geographies and industries.

<unk> been actively seeking out ways to play offense in the right classes and lines of business, even though in our less profitable states.

The next question is on personal lines.

What percentage of total personal lines premium is currently coming from your new personal lines product.

And where do you expect this number to be by 2024. Thanks for that question I'll take that one Jeff Hey here again.

As we roll out our new states, we are only allowing new business writings in the new product.

So from a new business perspective, we're already writing about two thirds plus of our new business and the new product with the states. We have life now and that will increase to 100% with the final rollout of states.

Late this year and early into 2023.

In total we're really at less than 5% of our total book today and that may grow to as much as a quarter of our total book over the next couple of years.

However, we are being very deliberate about our growth of the new product, especially in today's dynamic environment.

And while our new business production is up significantly over recent prior years, it's now only at a level to allow us to save the shrinking of our book that we've experienced over the past several years and will allow us the moderate single digit growth that we need from the personal lines business segment overall to complement our commercial lines of business.

Thank you. The next question relates to favorable reserve development can you provide the impact of reserve development on loss ratios for individual lines of business and the related question are the significant reserve releases from personal and commercial auto related to the lower than expected frequency due to the pandemic largely by.

And you at this point in time.

This is Jeff Miller I can address those questions.

Favorable reserve development for the quarter was split among major lines of business with workers' compensation at $3 6 million commercial auto at $3 5 million in personal auto at $2 7 million offset partially by commercial multi peril and other commercial that had combined adverse development of $2.

$8 million related to a handful of specific case reserves as the reserve releases related to the pain Demick period, we did experience a slowdown in the favorable development for our automobile lines in the second quarter compared to the first quarter, which we fully expected.

My expectation is I do think the favorable development related to the lower frequency in the accident year is influenced by the pandemic is largely behind us as the impact was primarily in the 2020 accident year for which we now have substantial reported claim data that underlies the actuarial estimates for the relatively immature 2000.

'twenty one accident year, we continued to carry a fairly substantial amount of actuarially determined reserves for the auto lines.

Considering that the assumptions that go into the selection of actuarial estimates are largely based on recent loss experienced in trends and the fact that the effect of many of the underwriting actions. We've taken is not yet fully reflected in that recent loss history, particularly in commercial auto I believe it's reasonable to expect that our auto reserves will continue to develop favorably.

Within a reasonable range in future periods.

The final question is regarding the investment portfolio, how have you changed your portfolio, thus far in 2022 to create a better performing portfolio in today's market.

Thank you Karen we have gradually moved excess cash this year into higher performing yet cash flowing mortgage backed security product. This allows us to pick up income today, yet provides cash flow for reinvesting at higher rates in the future.

In addition to MBS purchases, we have been able to take advantage of spread product in both agency debt and taxable municipal bonds, we continue to ladder the portfolio and use a barbell approach when appropriate with the slight changes in the fact that the market is moving off of historical lows.

We feel positive about our current and projected investment income.

Thank you and that wraps up the questions received in advance of the call. If there are any further questions. Please feel free to reach out to us. Thank you to all interested parties for submitting questions and listening in today I will now turn it back to Kevin for any final remarks.

Thanks, Karen we will continue to execute our strategic and tactical initiatives to generate and sustain positive financial results. We appreciate the ongoing support and thank you for joining us today.

This now concludes the second quarter of 2022 earnings webcast you may now disconnect.