Q3 2024 Donegal Group Inc Earnings Call - Pre-Recorded
Until investor presentation are available in the Investor Relations section of Donegal website at Www Dot Donegal group Dot com.
Please be advised that today's conference was prerecorded and all participants are in listen only mode.
Speaker Change: Speaking today will be president and Chief Executive Officer, Kevin Burke, Chief Financial Officer, Jeff Miller, Chief Underwriting Officer, Jeff, Hey, Chief Operating Officer, Dan Telemeter, and Chief Investment Officer, Tony The Aussie.
Please be aware that statements made during this call that are not historical facts are forward looking statements and necessarily involve risks and uncertainties that could cause actual results to vary materially.
Speaker Change: 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 obligation to update or publicly announce the results of any revision that they may make to any forward looking statements to reflect the occurrence of anticipated.
Speaker Change: 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 Kevin.
Kevin Burke: Thank you Karen and welcome everyone in today's call will provide commentary on our quarterly financial results and an update on strategies and actions that we expect will continue to drive favorable results in future periods.
Kevin Burke: We will outline the factors that contributed to the highest level of quarterly earnings we've achieved since 2020.
Kevin Burke: We achieved net income of $16 8 million or 51 cents per class a share despite incurring $6 million pre.
Pre tax catastrophe losses related to Hurricane Halloween.
Kevin Burke: We will provide more details about weather related losses and other key earnings drivers later in the call.
Kevin Burke: Having completed our strategic non renewals of all commercial policies in the state of Georgia, and Alabama in July our commercial lines growth in the quarter reflected higher levels of commercial lines, new business in targeted states and classes of business as well as solid renewal premium increases and retention levels.
Kevin Burke: We are now ramping up our small business commercial underwriting strategies for all four of our operating regions to build momentum in small business growth, which will be a key area of focus for us in 2025 in the years ahead.
We completed our fourth annual state strategy sessions in August and we are refining our strategies and action plans as we finalize our 2025 business plan.
Kevin Burke: Our team is fully aligned and we're looking forward to capitalizing on opportunities for profitable growth in 2025, we are making excellent progress on the final two software releases within our systems modernization project in fact over this weekend, we will deploy the first phase of one of these releases which will facilitate.
Kevin Burke: The automated conversion of our remaining legacy homeowners and dwelling fire policies converting to our new platform as they renew starting with policies effective in January 2025, as you will hear from the other presenters today, we remain focused on solid execution and I am confident that our strategy is in <unk>.
Kevin Burke: <unk> will continue to generate favorable results through the fourth quarter and looking ahead to 2025 and beyond.
Speaker Change: I will now turn the call over to Jeff Miller to review, our third quarter financial results.
Jeff Miller: Thanks, Kevin for the third quarter of 2024, net premiums earned increased 6% to $238 million.
Jeff Miller: Net premiums written increased by five 9% as strong premium rate increases and retention were offset partially by planned attrition in states and classes of business, we have targeted for profit improvement right.
Jeff Miller: Rate increases achieved during the third quarter of 2024 remained in double digit percentages.
Jeff Miller: Averaging 12, 6% in total and 13, 6% when excluding workers' comp.
Jeff Miller: The combined ratio was 96, 4% for the third quarter of 2024 compared to 104, 5% for the prior year quarter with a decrease in the loss ratio primarily accounting for the improvement the.
Jeff Miller: The core loss ratio declined six six percentage points from the prior year quarter due to a combination of higher earned premiums and improved claim frequency and severity and we were pleased to see improvement in the core loss ratios of all of our lines of business.
Jeff Miller: Weather related losses of $24 4 million or 10, three percentage points of the loss ratio for the third quarter of 2024 were slightly lower than the $25 7 million or 11, five percentage points, we incurred for the third quarter of 2023.
Jeff Miller: The lower impact was primarily due to reduced severity of commercial property losses with $5 $3 million of losses, contributing 10 percentage points to the quarterly commercial multi peril loss ratio compared to $17 five percentage points of the loss ratio for that line of business in the third quarter of 2023.
Jeff Miller: In our homeowners line weather related losses totaled $16 $3 million or <unk> 45, two percentage points of the loss ratio compared to 49 two points in the prior year quarter.
Jeff Miller: In total the quarterly weather claim impact was higher than the previous five year average for the third quarter of nine four percentage points.
Jeff Miller: Our insurance subsidiaries incurred $6 million of net losses from Hurricane Helene, which caused significant homeowners' losses in Georgia in late September.
Jeff Miller: That $6 million impact reflected our insurance subsidiaries full aggregate reinsurance retention amount under their property catastrophe reinsurance agreement with Donegal mutual.
Jeff Miller: Large fire losses, which we define as over $50000 in damages contributed three seven percentage points to the loss ratio for the third quarter of 2024, which was lower than four nine percentage points for the prior year quarter.
Jeff Miller: The decrease reflected lower average severity of commercial fire losses as homeowners fire loss activity was comparable to the prior year quarter.
Jeff Miller: Our insurance subsidiaries had $6 2 million of favorable reserve development for losses incurred in prior accident years.
Jeff Miller: Which decreased the loss ratio by two six percentage points for the third quarter of 2024 compared to $7 3 million that decrease the loss ratio by three three percentage points for the prior year third quarter.
Jeff Miller: Breaking the development down by line of business, we had favorable development of $4 million in commercial multi peril too.
Jeff Miller: $2 2 million and other commercial.
Jeff Miller: $933000 in workers' compensation.
Jeff Miller: And 800000 in personal auto offset partially by $1 6 million of unfavorable development in commercial auto due primarily to higher than expected severity of a handful of claims.
Jeff Miller: The expense ratio was 34, 5% for the third quarter of 2024 compared to 34, 1% for the third quarter of 2023.
Speaker Change: Dan will provide more details about our expense ratio and our ongoing expense reduction initiatives in a few minutes.
Speaker Change: In summary, the combined contributions of underwriting and investment income for the third quarter of 2024 resulted in an after tax net income of $16 8 million compared to a net loss of $805000 for the third quarter of 2023 as.
Kevin Burke: As Kevin stated earlier, we are pleased with this improvement in our net income, particularly considering that the main driver of the favorable performance was an improvement in our core loss ratio.
Kevin Burke: For more details about that improvement and specifics about our commercial and personal lines segment results I will now turn the call over to Jeff.
Kevin Burke: Thank you, Jeff starting with commercial lines net premiums written increased six 4% during the quarter, primarily driven by new business in targeted geographies and classes of business, coupled with strong rate and retention achievement as was already mentioned, we successfully completed our exit of commercial lines business in Georgia.
Kevin Burke: And Alabama, which was a significant profit improvement measure and partially offset our premium growth over the past year.
Kevin Burke: Were now fully focused on our go forward strategy in commercial lines seeking outsized growth in small commercial accounts as we expand our automation and service capabilities for that segment.
Kevin Burke: We're seeing improvements in our straight through processing rate and hit rates on our new small commercial product and service offerings.
Kevin Burke: Which frees up our underwriters to give enhanced time and attention to writing high quality middle market accounts.
Kevin Burke: And as a reminder, we.
Kevin Burke: We are and will continue to be in all lines account writer and from an exposure or policy count basis, we expect growth rates to be largely similar across all commercial lines of business.
Kevin Burke: Last quarter I highlighted several profit improvement initiatives that we're continuing to execute to refine our commercial lines book of business.
Kevin Burke: These efforts include the utilization of new underwriting tools, such as a comprehensive probable maximum loss fire analysis for property risks.
Utilization of aerial imagery enhanced with artificial intelligence to identify root issues point of sale integrations to catastrophe modeling tools and multiple third party data analytical tools.
Kevin Burke: These tools are not only ensuring the quality of the new business, we're writing, but we're also applying them to our renewal business, resulting in the non renewal of a significant number of property risks that those tools have identified as having higher propensity to loss.
Kevin Burke: We're also actively revising underwriting guidelines for certain profit challenged classes of business and rolling out mandatory wind hail deductibles and all catastrophe prone areas across our footprint.
Kevin Burke: We believe all of these actions are contributing in part to the core loss ratio improvement we achieved in the current quarter across all of our lines of business.
Kevin Burke: Renewal rate increases remained strong in the quarter as we achieved an average 12, 8% rate and exposure increase across our commercial lines, excluding workers' compensation.
Kevin Burke: This was led by multi peril at 14, 5% followed by commercial automobile at 11, 6% the commercial.
Kevin Burke: <unk> statutory combined ratio for the third quarter was 89, 8% a seven seven point improvement from 97, 5% in the prior year quarter.
Large fire loss activity was down 39% year over year with lower average severity driving the decrease we expect to see a continued reduction in the likelihood of large fire losses through the implementation of various strategic actions. We also saw a reduction in our weather related losses within our commercial lines, given the light weather quarter outside the <unk>.
Kevin Burke: Headline event that occurred at the end of the quarter Hurricane.
Kevin Burke: Hurricane Helene, which made landfall as a category four hurricane on September 26th devastated key areas of our footprint, including Georgia, The Carolinas, Virginia, and Tennessee, Fortunately for both our Insureds and our results the impact of the storm had minimal impact in terms of commercial lines reported losses to date.
Kevin Burke: Turning to other loss trends for commercial auto we're continuing to see the end of post pandemic frequency increases and a return to our longer term decreasing frequency trend.
Kevin Burke: Auto physical damage severity increases are continuing to moderate and sit in line with our historical trend line.
Kevin Burke: While liability severity during the quarter ticked down just below our historical trend.
Kevin Burke: Commercial multi peril loss severity, while still elevated is moderating due to lower impact of large fire losses, but we are monitoring gradual increases in liability severity trends that reflect industry concerns around the impact of social inflation legal system abuse jewelry anchoring third party litigation financing.
Kevin Burke: And higher propensity for nuclear verdicts.
Kevin Burke: To date favorable frequency trends have largely offset the increase in severity, but we're monitoring it closely and attempting to adjust our pricing to stay ahead of the trend changes.
Kevin Burke: For our workers compensation line of business, we saw medical severity returned to our longer term trend line affirming our assumption of an anomalous increase in the first half of 2024.
Kevin Burke: Overall workers' compensation loss frequency continues to follow a negative trend even steepening in recent quarters and recent observations of indemnity severity increases are continuing due to wage inflation.
The workers compensation market is very competitive with pressure from continued rate decreases filed by bureaus.
Kevin Burke: As we look forward to 2025, we do not see any signs of this downward rate pressure abating in the near term, but nevertheless, we are confident that we can maintain rate adequacy due to the negative frequency trends, we continue to experience in this line of business.
Kevin Burke: Shifting to our personal lines business segment net premiums written increased five 4% for the third quarter driven by a continuation of aggressive premium rate increases and strong policy retention that were offset by two factors first as we previously shared we are intentionally reducing our new business writings in an effort to maintain profitability.
Kevin Burke: <unk> given the naturally elevated loss ratios new business typically generates.
Kevin Burke: Second effective in September we began non renewing our peninsula insurance company subsidiaries legacy personal lines business in the state of Maryland, given recent profitability issues for that book of business that represents approximately $20 million in premiums.
Kevin Burke: We expect this initiative to partially offset the impact of rate increases on our personal lines premium growth through August 2025, when that peninsula runoff will be complete.
Kevin Burke: Primarily as the result of the factors I just described our personal lines policies in force declined seven 3% compared to the prior year period.
Kevin Burke: Despite the start of the peninsula run off our overall personal lines retention was consistently strong at 86, 4%, indicating the policyholders continue to accept higher renewal premiums.
Kevin Burke: Personal auto and homeowners renewal rate and exposure increases were 15, 7% and 13, 2% respectively for the third quarter.
Kevin Burke: We estimate we are essentially rate adequate and personal lines overall, and we'll continue to pursue rate increases in states and lines of business combinations to offset loss trends.
Kevin Burke: Furthermore, our net premium earned now reflects rate increases that exceeded loss cost increases, which is resulting in targeted margin expansion.
Kevin Burke: That leads me to a few metrics on personal lines profitability.
Kevin Burke: Statutory combined ratio was 104, 7% compared to 119, 4% in the prior year period.
Kevin Burke: Personal auto loss ratio decreased 10, three points compared to the third quarter of 2023, largely driven by a decrease in core losses and slightly favorable prior year Reserve development.
Kevin Burke: Homeowners saw an improvement of nine eight points from the prior year period with comparable large fire impact and slightly improved weather related losses. Despite the impact of hurricane Helene. This major catastrophe, primarily impacted our policyholders in Georgia with ancillary losses in other states contributing $5 8 million in losses.
Kevin Burke: For our personal lines segment.
Kevin Burke: We understand that many of the policyholders in the state of Georgia faced significant losses and disruptions during the aftermath of Hurricane Helene and as always it is our top priority to serve our policyholders during severe events and many thanks to our claims team who are well prepared to take action and provide the much needed support.
Kevin Burke: Just two weeks after hurricane Helene Hurricane Milton made landfall in Florida.
Kevin Burke: At this time, we have received no claims related to Milton as this was largely a Florida event, where we have no exposure for those across the southeast corridor, we want to extend our heartfelt thoughts to everyone affected by these natural disasters.
Kevin Burke: As an offensive component of our personal lines strategy, we're actively diversifying the geographic footprint of our property book to optimize the diversification benefit and mitigate the impact of weather related losses.
Kevin Burke: We've identified down to the county level within the 10 states in which we write personal lines, where we're looking to grow and where we're looking to shrink in order to execute this strategy during the third quarter, we successfully reduced our policies in force by 12, 8% and counties, we wanted to shrink exposure compared to only a 3% reduction.
Kevin Burke: In counties, where we view our concentrations is acceptable.
Kevin Burke: Our ongoing execution of this strategy will allow us to achieve manageable concentrations within our geographic footprint and resulting in more predictable and stable weather related loss impacts.
Speaker Change: With that I will turn the call over to Dan Delamater Dan.
Dan Delamater: Thank you, Jeff I will begin my comments by providing an update on our expense reduction initiative that we discussed in previous calls for.
Dan Delamater: For the third quarter, we operated at an expense ratio of 34, 5% compared to 34, 1% for the third quarter of 2023.
Dan Delamater: The modest increase in the expense ratio, primarily reflected higher underwriting based incentives for our agents and employees incurred during the quarter as a result of the improved loss ratio versus the third quarter of 2023 excluding.
Excluding those incentives are expense ratio decreased by approximately half a point compared to the prior year quarter we.
Dan Delamater: We have recognized significant improvement due to the impacts of various expense reduction initiatives, including agency incentive program revisions Commission schedule adjustments targeted staffing reductions and deferred replacement of open employment positions among others.
Dan Delamater: As a result, we are now operating at a year to date expense ratio of 34%, which compares favorably to 34, 9% in the same period last year.
Dan Delamater: And as a reminder, these expense reductions are even more noteworthy considering we are realizing the peak expense impact of project Nautilus are multi year systems modernization project in 2024.
Dan Delamater: Because of multiple targeted initiatives across virtually every department in the organization, we are on pace toward our expectation to reduce our expense ratio by one full point in 2024 and two points by the end of 2025.
Dan Delamater: We are proud of our team's commitment and resilience. They have shown in this effort. These initiatives are difficult and have full visibility across the company.
Dan Delamater: For every high profile initiative, there are dozens of smaller initiatives that contribute meaningful and sustainable expense improvement.
Dan Delamater: One of the initiatives that is meaningful but reported as a separate income line item rather than an expense reduction is our implementation of a surcharge on credit card payments to.
Dan Delamater: The surcharge became effective in the second quarter of 2024 and explains the substantial increase in installment payment fee income in the third quarter of 2024.
Dan Delamater: In summary, we recognize the need for broader efficiencies and long lasting expense improvement to contribute to our operating profitability.
Dan Delamater: I'd also like to provide an update on our state strategy initiatives that define our desired product mix right targets marketing strategy and growth objectives. In every line of business within each state, where we are active for either commercial lines personal lines or both.
Dan Delamater: We recently completed our annual state strategy meetings, where representatives from our regional product underwriting and marketing teams collaborate with senior leadership to align plans for the year ahead.
Dan Delamater: These efforts are especially important as we actively manage our property concentrations and weather prone areas. They also help guide our regional and national accounts teams toward intentional product mix and growth plans in all lines and even identifying specific classes of business, we want to emphasize for profitable growth.
Dan Delamater: Many of those discussions involve action plans to expand our small business strategy and to build on early successes as we leverage our capabilities to provide specialized services to this market segment. It enhances our ability to bolster our middle market presence for our independent agency partners across the country. Furthermore, we collaborated on refining growth postures for each.
Dan Delamater: State to ensure an intentional alignment of our strategic objectives and growth expectations across our operating regions and functional disciplines.
Dan Delamater: This alignment will translate to a cohesive business plan for 2025, resulting in an effective allocation of resources, where needed and cascading down to coordinated regional business plans and ultimately specific plans with our independent agency partners.
Dan Delamater: We are pleased with the progress realized in the third quarter of 2024 and recognized it as a step forward towards the operating results we expect.
Dan Delamater: We will continue to obtain appropriate rate increases to offset economic inflation large loss activity social inflation and claims cost generally.
And we will continue to maintain discipline in our expense reduction efforts executing on each of these initiatives is paramount to the achievement of sustained excellent financial performance.
Dan Delamater: For additional insight into our investment results I'll now turn it over to Tony Piazza.
Tony Piazza: Thanks, Dan our investment strategy as always aligns with our conservative principles. We continue to focus on holding high quality credits that are characterized by strong investment income and low volatility.
Tony Piazza: Ultimately our goal is not only to preserve capital, but also to managing portfolio that is resilient adaptable and capable of generating consistent returns regardless of market conditions.
Tony Piazza: During the third quarter of 2024 net investment income increased two 8% from the prior year quarter to $10 $8 million.
Tony Piazza: The average net investment income yield for the quarter was $3 two 8% up from 322% for the third quarter of 2023.
Tony Piazza: Current market interest rates remained generally elevated compared to the past decade, allowing us to reinvest our portfolio cash flow in two bonds with significantly higher yields.
Tony Piazza: Overall, our average reinvestment rate of 525% during the third quarter represented an 89 basis point improvement over the bond cash flow yield during the quarter.
Tony Piazza: We expect approximately $100 million in cash flow from maturities calls and Paydowns over the next 12 months.
Tony Piazza: The average yield we are currently receiving on those bonds is 370%.
Tony Piazza: During the third quarter, we continued our move out of agency debt and shifted into corporate debt.
Tony Piazza: We actively monitor macroeconomic indicators and market conditions to identify opportunities that may arise during periods of volatility.
Tony Piazza: With that we have continued to increase our equity position gradually with a 39% increase in equity holdings compared to year end 2023.
We achieved $1 9 million of net investment gain on equities in the third quarter compared to a loss of $1 2 million in the prior year third quarter.
Tony Piazza: Year to date net investment gains on equities was $4 7 million.
Tony Piazza: Compared to $930000 last year to date.
Tony Piazza: As of September 32024, our book value per share was $15 22.
Tony Piazza: An 83 increase compared to $14 39.
Tony Piazza: As of December 31, 2023 to.
Tony Piazza: The increase in book value was primarily attributable to net investment income along with our gains on available for sale bonds and the equity portfolio, which was partially offset by a modest year to date underwriting loss and declared cash dividends.
Kevin Burke: With that I will now turn it back to Kevin for closing remarks.
Kevin Burke: Thanks, Tony as we shared throughout the call today are underlying results are beginning to reflect all of the efforts our entire team has put forth.
Kevin Burke: For several years I have been optimistic and hopeful that the significant organizational changes and investments in systems capabilities and talent would yield positive results that optimism has led to growing confidence that our strategies will yield the intended results and we look forward to providing further updates to you in our year end call.
Speaker Change: I will now turn the call over to Karen.
Karen: Thank you Kevin while we requested and received questions in advance of today's call. We have worked to answers to these questions into our prepared remarks.
Speaker Change: Any additional questions. Please feel free to reach out plus this now concludes the Donegal group third quarter 2024 earnings webcast you may now disconnect.