Q1 2025 Donegal Group Inc Earnings Call - Pre-Recorded
Karen: Group issued its Q1 2025 earnings release outlining its results. The release and a supplemental investor presentation are available in the investor relations section of Donegal's website at www.donegalgroup.com. Please be advised that today's conference was prerecorded and all participants are in listen-only mode. Speaking today will be President and Chief Executive Officer, Kevin Burke, Chief Financial Officer, Jeff Miller, Chief Underwriting Officer, Jeff Hay, Chief Operating Officer, Dan DeLamater, and Chief Investment Officer, Anthony Viozzi. 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. 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.
Karen: The company disclaims any obligation 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. Kevin?
Kevin Burke: Thank you, Karen, and welcome everyone. We are pleased to provide an update today on our quarterly results and high-level strategies and ongoing tactical initiatives. Following on the heels of a Q4 when we reported the highest quarterly earnings in our history, we are pleased to have eclipsed that record earnings level as positive momentum continued into the Q1 2025. While weather-related and large fire losses were lower than average during the Q1, continuing improvement in our core loss ratios in both commercial and personal lines was once again a significant driver of favorable results. We will provide further details about the factors that impacted net premiums written growth as the call progresses. From my view, the enhanced intentionality behind our actions as well as the level of discipline our team is exercising is evident as we balance the achievement of both growth and profitability goals.
Kevin Burke: We have greater insight and visibility into our underwriting performance and results versus our business plan than ever before. Our robust performance monitoring routines allow us to quickly identify and respond to any areas of deviation from expected results. We are carefully monitoring potential impact of recent economic uncertainty from tariff policies that could affect new and used automobile pricing, the cost of auto repairs, and the cost of construction, all of which are major components of our claims costs. We were nimble in reacting to the elevated inflation that followed the COVID pandemic, and we stand ready now to respond to any increase in our underlying claims costs with timely data-driven actions.
Kevin Burke: To provide a brief update on our systems modernization efforts, our team is making excellent progress on detailed testing activities that will ensure successful deployment of our final major commercial line systems release in July, which will include a new commercial package policy and modernize other middle market commercial products. I am pleased to report that we successfully deployed the first phase of our last personal line software release in February, which allowed us to begin the conversion of all remaining legacy homeowner policy renewals to the new operating platform. Which means that coverage and features of our new business and renewal products will be much more similar. That conversion activity will continue as policies renew over the next year. The second and final phase of this release is on track for deployment later this year.
Kevin Burke: This will facilitate a conversion of legacy automobile and umbrella policy renewals to the new platform, which will continue through mid-2026. When the last legacy policy expires in mid-July 2027, we will have a single policy management system and common data infrastructure for all of our products. As we look forward to the accomplishment and the strategic advantage it brings relative to other carriers who continue to deal with legacy system challenges, we are now ramping up discussions to refine and crystallize our technology roadmap to further leverage technology and data analytics to compete and succeed in the future. We are excited to be able to look ahead and plan for the next milestone on our technology roadmap as we emerge from many years of heavy system modernization and legacy conversion activities.
Kevin Burke: I cannot thank the team enough for their dedication and resilience that has led us to this point and given us an opportunity to build on a solid foundation going forward. At this point, I'll turn the call over to Jeff Miller for a review of our financial results for the quarter.
Jeffrey Miller: Thanks, Kevin. For Q1 2025, net premiums earned increased 2.2% to $232.7 million. Net premiums written decreased by 1.7% as lower new business volume and planned attrition were offset partially by continuing solid premium rate increases and retention levels. A 9.9% decrease in personal lines net premiums written was offset partially by 3.3% growth in commercial lines. Rate increases achieved during Q1 2025 averaged 9.6% in total and 10.6% when excluding workers' compensation.
Earnings release outlining its results separately.
And a supplemental 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.
Speaking today will be president and Chief Executive Officer, Kevin Burke, Chief Financial Officer, Jeff Miller.
Speaker Change: Chief Underwriting Officer, Jeff, Hey, Chief operating Officer, Dan Telemeter, and Chief Investment Officer, Tony V. Aussie.
Jeffrey Miller: The combined ratio was an excellent 91.6% for Q1 2025, a substantial improvement compared to 102.4% for the prior year quarter, with a lower impact of weather and large fire losses adding to a 4.5 percentage point decrease in the core loss ratio compared to the prior year quarter. As a reminder, the core loss ratio is a measure of our underlying underwriting performance after excluding the impact of weather-related losses, large fire losses, and net development of reserves for losses incurred in prior accident years. Compared to the prior year quarter, we achieved a 0.7 percentage point decrease in the commercial line's core loss ratio and a 9.4 percentage point decrease in the personal line's core loss ratio. The substantial improvement in the personal line's core loss ratio was due largely to the ongoing favorable impact of premium rate increases on net premiums earned for that segment.
Speaker Change: 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.
Speaker Change: The company disclaims any obligation 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.
Speaker Change: With that it's my pleasure to turn it over to Mr. Kevin Burke Kevin.
Kevin Burke: Thank you Karen and welcome everyone. We are pleased to provide an update today on our quarterly results and high level strategies and ongoing tactical initiatives.
Jeffrey Miller: Weather-related losses of $8.6 million, or 3.7 percentage points of the loss ratio for Q1 2025, were down from $10.8 million, or 4.7 percentage points for Q1 2024. Commercial property losses from severe weather totaled $2.9 million and contributed 5.4 percentage points to the quarterly commercial multi-peril loss ratio, compared to 4.3 percentage points of the loss ratio for that line of business in Q1 2024. The weather impact to the homeowners line was $4.8 million, or 13.7 percentage points of the homeowners' loss ratio, which improved substantially compared to 21.3 percentage points in the prior year quarter. In total, the quarterly weather claim impact was lower than the previous five-year average for Q1 of 4.6 percentage points.
Kevin Burke: Following on the heels of the fourth quarter, when we reported the highest quarterly earnings in our history. We were pleased to have eclipsed that record earnings level as positive momentum continued into the first quarter of 2025.
Kevin Burke: While weather related and large fire losses were lower than average during the first quarter continuing improvement in our core loss ratios in both commercial and personal lines was once again, a significant driver of favorable results.
Kevin Burke: We will provide further details about the factors that impacted net premiums written growth as the call progresses.
Kevin Burke: From my view, the enhanced intentionality behind interactions as well as the level of discipline. Our team is exercising is evident as we balanced the achievement of both growth and profitability goals.
Kevin Burke: We have greater insight and visibility into our underwriting performance and results versus our business plan than ever before and our robust performance monitoring routines allow us to quickly identify and respond to any areas of deviation from expected results.
Jeffrey Miller: Our insurance subsidiaries did not incur losses from any single event during Q1 2025 or 2024 that exceeded their individual $3 million catastrophe reinsurance retention with Donegal Mutual. Large fire losses, which we define as over $50,000 in damages, contributed 3.3 percentage points to the loss ratio for Q1 2025, which was lower than 6.6 percentage points for the prior year quarter. A decrease in the frequency of both commercial and homeowners fire losses contributed to the decrease. Our insurance subsidiaries experienced $10.5 million of net favorable development of reserves for losses incurred in prior accident years, representing a 4.5 percentage point reduction in the loss ratio for Q1 2025, compared to $8.4 million, or a 3.7 percentage point reduction in the loss ratio for the prior year quarter.
Kevin Burke: We are carefully monitoring potential impact of recent economic uncertainty from tariff policies that could affect new and used automobile pricing the cost of auto repairs and the cost of construction all of which are major components of our claims costs. We were nimble in reacting to the elevated inflation that followed the COVID-19 pandemic.
Kevin Burke: And we stand ready now to respond to any increase in our underlying claims costs with timely data driven actions.
Kevin Burke: To provide a brief update on our systems modernization efforts. Our team is making excellent progress on detailed testing activities that will ensure successful deployment of our final major commercial lines systems release in July which will include a new commercial package policy and modernize other middle market commercial products.
Kevin Burke: I am pleased to report that we successfully deployed the first phase of our last personal lines software release in February which allowed us to begin the conversion of all remaining legacy homeowner policy renewals to the new operating platform, which means that coverage and features of our new business and renewal products will be much more similar.
Jeffrey Miller: Specific line of business detail for Q1 2025 primarily included favorable development of $4.7 million for commercial auto, $4.3 million for commercial multi-peril, $2.3 million for personal auto, offset partially by $1.8 million of unfavorable development for workers' compensation. The expense ratio of 34.6% for Q1 2025 decreased modestly compared to 35.7% for the prior year quarter. The decrease primarily reflected ongoing impacts of expense reduction initiatives and a modest decrease in technology costs related to our ongoing systems modernization initiative. These benefits were offset partially by an increase in underwriting-based incentive costs for agents and employees. In summary, the underwriting income for Q1 2025, combined with $12 million of net investment income, resulted in after-tax net income of $25.2 million, which was a significant increase compared to $6 million for Q1 2024.
Kevin Burke: That conversion activity will continue as policies renew over the next year.
Kevin Burke: The second and final phase of this release is on track for deployment later this year.
Kevin Burke: This will facilitate a conversion of legacy automobile an umbrella policy renewals to the new platform, which will continue through mid 2026.
Kevin Burke: When the last legacy policy expires in mid July 2027, we will have a single policy management system and common data infrastructure for all of our products.
Kevin Burke: As we look forward to the accomplishment and a strategic advantage. It brings relative to other carriers, who continue to deal with legacy system challenges. We're now ramping up discussions to refine and crystallize our technology roadmap to further leverage technology and data analytics to compete and succeed in the future.
Kevin Burke: We are excited to be able to look ahead and plan for the next milestone on our technology roadmap as we emerge for many years of heavy system modernization of legacy conversion activities I cannot thank the team enough for their dedication and resilience has led us to this point and given us an opportunity to build on our solid foundation going forward.
Jeffrey Miller: To provide more details about our commercial and personal line segment results and related initiatives, I will now turn the call over to Jeffery T. Hay.
Jeffery Hay: Thank you, Jeff. We are very encouraged by our Q1 performance, particularly because we believe the significant improvement was not the result of random fluctuations, but rather the outcome of the strategic initiatives and disciplined action plans we implemented over the past several years to strengthen our underwriting practices. For our commercial lines of business, net premiums written increased 3.3% during Q1 2025 as we continue to programmatically prune our business of less profitable classes and individual policies. As market pricing has begun to soften for new business, we are standing firm on our underwriting and pricing discipline to ensure the quality and profitability of our book. Our commercial lines new business during Q1 was in alignment with our targeted geographic and class strategies with over two-thirds of the business written new in highly targeted classes with higher expected profitability.
Kevin Burke: At this point I'll turn the call over to Jeff Miller for a review of our financial results for the quarter.
Jeff Miller: Thanks, Kevin for the first quarter of 2025 net premiums earned increased two 2% to $232 $7 million.
Jeff Miller: Net premiums written decreased by one 7% as lower new business volume and planned attrition were offset partially by continuing solid premium rate increases in retention levels.
Jeff Miller: Nine 9% decrease in personal lines net premiums written was offset partially by three 3% growth in commercial lines.
Jeff Miller: Rate increases achieved during the first quarter of 2025 averaged nine 6% in total and 10, 6% when excluding workers' compensation.
Jeffery Hay: Our overall commercial rate and exposure increase was an 11.5% increase, excluding workers' compensation, for Q1 2025, as we continue to emphasize driving the most rate in the areas where the intersection of class, line of business, and geography are most challenged. Renewal rate increases were led by commercial multi-peril at 12.4%, followed by commercial umbrella at 10.9%, and commercial auto at 10.7% during the quarter. Our average in-force policy premium across all commercial lines of business is $7,500, representing a 6% increase from the prior year, driven both by rate and underlying shifts in account size. From a profitability perspective, the commercial line segment combined ratio of 94.7% improved 6.9 percentage points over the prior year quarter, with the loss ratio accounting for 5.6 percentage points of that improvement.
Jeff Miller: The combined ratio was an excellent 91, 6% for the first quarter of 2025% a substantial improvement compared to 102, 4% for the prior year quarter with a lower impact of weather and large fire losses, adding to a four five percentage point decrease in the core loss ratio compared to the prior.
Jeff Miller: Year quarter.
Jeff Miller: As a reminder, the core loss ratio is a measure of our underlying underwriting performance. After excluding the impact of weather related losses large fire losses, and net development of reserves for losses incurred in prior accident years compared to the prior year quarter, we achieved a 0.7 percentage point decrease in the commercial lines core.
Jeff Miller: Loss ratio and a nine four percentage point decrease in the personal lines core loss ratio.
Jeff Miller: A substantial improvement in the personal lines core loss ratio was due largely to the ongoing favorable impact of premium rate increases on net premiums earned for that segment.
Jeffery Hay: In terms of the loss ratio components, the core loss ratio improved by 0.7 points, and the impact of weather-related losses was comparable. Large fire losses decreased by 49%, driven primarily by lower frequency. Favorable prior year development reduced the loss ratio by 5.1 percentage points compared to 4.1 percentage points in Q1 2024. Diving further into the commercial loss trends for Q1 2025, overall frequency continued to show a favorable negative trend. For workers' compensation, while we have observed increases in indemnity and medical severity that we consider a reversion to historical trend lines in recent quarters, we experienced an anomalous increase in claim severity in Q1, driven by a small number of severe injury claims.
Jeff Miller: Weather related losses of $8 6 million or three seven percentage points of the loss ratio for the first quarter of 2025 were down from $10 $8 million were four seven percentage points for the first quarter of 2024.
Jeff Miller: Commercial property losses from severe weather totaled $2 $9 million and contributed five four percentage points to the quarterly commercial multi peril loss ratio compared to four three percentage points of the loss ratio for that line of business in the first quarter of 2024.
The weather impact to the homeowners line was $4 8 million or 13, seven percentage points of the homeowners loss ratio, which improved substantially compared to 21 three percentage points in the prior year quarter.
Jeffery Hay: The workers' compensation market continues to be very competitive, with margin pressure from continued negative rate filings from bureaus that show no signs of abating as we head further into 2025. Despite the current quarter losses, we still consider ourselves rate adequate in this line due to the continuing negative frequency trends and in-check severity trends overall. For commercial auto, frequency continued to adhere to the longer-term decreasing trend, but we saw an anomalous increase in auto physical damage severity that was above the historical trend line during the quarter. This is an area we will monitor closely, considering the potential for pricing pressure on imported automobile and repair parts. Commercial auto liability severity continued to increase above the trend line, similar to what we saw in the Q4 of last year. We are seeking higher commercial auto rate increases to offset the increasing loss costs.
Jeff Miller: In total the quarterly weather claim impact was lower than the previous five year average for the first quarter of four six percentage points.
Jeff Miller: Our insurance subsidiaries did not incur losses from any single event during the first quarter of 2025 or 2024 that exceeded their individual $3 million catastrophe reinsurance retention with Donegal mutual.
Jeff Miller: Large fire losses, which we define as over $50000 in damages contributed three three percentage points to the loss ratio for the first quarter of 2025%, which was lower than six six percentage points for the prior year quarter.
Jeff Miller: A decrease in the frequency of both commercial and homeowners fire losses contributed to the decrease.
Jeff Miller: Our insurance subsidiaries experienced $10 5 million of net favorable development of reserves for losses incurred in prior accident years, representing a four five percentage point reduction in the loss ratio for the first quarter of 2025 compared to $8 $4 million or a three seven percentage.
Jeffery Hay: Commercial multi-peril loss trends continue to moderate, due in large part to reduced frequency and severity of large fires. Favorable frequency declines for this line accelerated in the last two quarters. While I mentioned that the auto liability severity ticked up in the past two quarters, the severity in the general liability sub-line of commercial multi-peril has shown signs of settling closer to the longer-term trend line. We are continuing to monitor all of these trends closely and will act swiftly to respond to any changes, including the impact of social inflation related to the proliferation of attorney advertising, jury anchoring, third-party litigation financing, and the growth of nuclear verdicts that are impacting the insurance industry at large. Within our underwriting operation, we're working to increase scale in our small commercial segment while continuing the positive momentum in our middle market commercial segment.
Jeff Miller: Point reduction in the loss ratio for the prior year quarter.
Jeff Miller: Specific line of business detail for the first quarter of 2025, primarily included favorable development of $4 7 million for commercial auto for $3 million for commercial multi peril $2 3 million for personal auto offset partially by $1 $8 million of unfavorable development for <unk>.
Jeff Miller: Workers compensation.
Jeff Miller: The expense ratio of 34, 6% for the first quarter of 2025 decreased modestly compared to 35, 7% for the prior year quarter the.
Jeffery Hay: To that end, we've made several organizational changes to further define our focus and to position our operations for sustained success. Our commercial lines operation is now functioning as two divisions that we refer to as middle market and small commercial. We've described in previous calls the large-scale investments we have made in small business products and service capabilities as a part of our technology transformation efforts. As Kevin G. Burke mentioned earlier, we look forward to the July 2025 deployment of another major commercial software release that will represent the largest investment in company history in our middle market products and capabilities. We have shored up the systems, talent, product, and processes needed to deliver on our commitment to market-leading product and service offerings in both of these commercial divisions that are critical to our future growth and success.
Jeff Miller: The decrease primarily reflected the ongoing impacts of expense reduction initiatives and a modest decrease in technology costs related to our ongoing systems modernization initiative.
Jeff Miller: These benefits were offset partially by an increase in underwriting based incentive costs for agents and employees.
Jeff Miller: In summary, the underwriting income for the first quarter of 2025 combined with $12 million of net investment income resulted in an after tax net income of $25 2 million, which was a significant increase compared to $6 million for the first quarter of 2024.
Jeff Miller: To provide more details about our commercial and personal lines segment results and related initiatives I will now turn the call over to Jeff.
Speaker Change: Thank you, Jeff we are very encouraged by our first quarter performance, particularly because we believe the significant improvement was not the result of random fluctuations, but rather the outcome of the strategic initiatives and disciplined action plans, we implemented over the past several years to strengthen our underwriting practices.
Jeffery Hay: Turning to our personal lines business segment, net premiums written decreased 9.9% during the Q1 2025, driven by our strategies to accelerate our return to profitability by lowering new business volume and non-renewal of a legacy Maryland book business. Drilling down further into those strategies, we have intentionally limited our new business volume, producing only $1 million of new business in the quarter, compared to $10 million for the Q1 2024. Given the naturally elevated loss ratio new business generates, our intentional limiting of new business volume has helped us accelerate our return to profitability. Secondly, our non-renewal actions in Maryland are well underway and accounted for approximately half of the decrease in net premiums written during the quarter.
Speaker Change: For our commercial lines of business net premiums written increased three 3% during the first quarter of 2025, as we continue to programmatically prune our business of less profitable classes and individual policies.
Speaker Change: As market pricing has begun to soften for new business, we are standing firm on our underwriting and pricing discipline to ensure the quality and profitability of our book.
Speaker Change: Our commercial lines new business during the quarter was in alignment with our targeted geographic in class strategies with over two thirds of the business written new and highly targeted classes with higher expected profitability.
Jeffery Hay: That impact will continue as non-renewals will occur through August of this year. The removal of these historically unprofitable policies will further improve our profit margin and reduce our exposure to hurricane catastrophe risk. We believe it is helpful to consider the quarterly premium decline in personal lines within the context of a broader time horizon. We had outsized premium growth in 2023 and early 2024, primarily as a result of rate increases, also reflecting significantly higher amounts of new business. In fact, at 31 March 2025, our average in-force premium per policy was 16% and 15% higher in auto and homeowners respectively, compared to prior year periods. We are not alarmed at all by the recent premium decline that is essentially right-sizing our overall product mix.
Speaker Change: Our overall commercial rate and exposure increase was 11, 5% increase excluding workers' compensation for the first quarter of 2025 as we continue to emphasize driving the most rate in the areas where the intersection of glass line of business and geography are most challenged renewal rate increases were led by commercial multi peril.
Speaker Change: At 12, 4% followed by commercial umbrella at 10, 9% in commercial auto at 10, 7% during the quarter.
Speaker Change: Our average enforce policy premium across all commercial lines of business is $7500, representing a 6% increase from the prior year driven both by rate and underlying shifts in account size.
Speaker Change: From a profitability perspective, the commercial line segment combined ratio of 94, 7% improved six nine percentage points over the prior year quarter with the loss ratio accounting for five six percentage points of that improvement.
Jeffery Hay: That said, we are currently putting in place several strategies to slow that rate of decline as 2025 progresses, ultimately seeking to maintain a relatively stable personal lines premium level as we emphasize commercial lines growth in the years ahead. Our real retention rate for personal lines, excluding the impact of the Maryland non-renewals, was a healthy 86.7%, with overall rate achievement of 9.3%. Renewal rate increases during the Q1 averaged 5.8% for personal auto, slowing a bit from 2024 levels since we have essentially achieved rate adequacy in that line, and 15.9% for homeowners. We will be ready to adjust our rate strategies in the event that underlying costs shift due to any inflationary impact of changes in economic policies. Our personal lines combined ratio improved 16.7 percentage points to 83.6% in the Q1 of 2025.
Speaker Change: In terms of the loss ratio components, the core loss ratio improved by 0.7 points and the impact of weather related losses was comparable.
Speaker Change: Fire losses decreased by 49% driven primarily by lower frequency and favorable prior year development reduced the loss ratio by five one percentage points compared to four one percentage points in the first quarter of 2024.
Speaker Change: Moving further into the commercial loss trends for the first quarter of 2025 overall frequency continued to show a favorable negative trend for workers compensation, while we have observed increases in indemnity and medical severity that we consider a reversion to historical trend lines in recent quarters, we experienced an anomalous increase in claim severity.
Speaker Change: <unk> in the first quarter driven by a small number of severe injury claims.
Speaker Change: The workers compensation market continues to be very competitive with margin pressure from continued negative rate filings from bureaus that show no signs of abating as we head further into 2025.
Jeffery Hay: By line of business, homeowners' combined ratio improved 19.1 percentage points to 83.8%. The improvement in homeowners was partially driven by a 50% reduction in large fire losses compared to Q1 2024 as a result of both lower frequency and severity. Homeowners' non-weather trends were largely in line with expectations, and for the first time in several quarters, we experienced a decrease in the frequency of weather claims that contributed 7.6 percentage points of improvement in the homeowners loss ratio compared to the prior year quarter. The personal auto combined ratio improved 14.8 percentage points to 85%, with 10 percentage points of improvement in the core loss ratio and more favorable impact of prior period reserve development. Personal auto physical damage severity was generally in line with the longer-term trend line, and personal auto liability frequency continued to increase moderately, also consistent with the long-term trend line.
Speaker Change: Despite the current quarter losses, we still consider ourselves rate adequate in this line due to the continuing negative frequency trends and in Czech severity trends overall.
Speaker Change: For commercial auto frequency continued to adhere to the longer term decreasing trend, but we saw an anomalous increase in auto physical damage severity that was above the historical trend line during the quarter. This.
Speaker Change: This is an area, we will monitor closely considering the potential for pricing pressure on imported automobile and repair parts.
Speaker Change: Commercial auto liability severity continues to increase above the trend line similar to what we saw in the fourth quarter of last year, we are seeking higher commercial auto rate increases to offset the increasing loss costs.
Speaker Change: Commercial multi peril loss trends continued to moderate due in large part to reduced frequency and severity of large fires favor.
Speaker Change: Favorable frequency declines for this line accelerated in the last two quarters.
Speaker Change: Mentioned that the auto liability severity ticked up in the past two quarters. The severity in the general liability sub line of commercial multi peril has shown signs of settling closer to the longer term trend line. We are continuing to monitor all of these trends closely and will act swiftly to respond to any changes, including the impact of social inflation related to the proliferation of attorney.
Jeffery Hay: Overall, we are pleased with the underwriting improvements across nearly every major line of business compared to the prior year quarter. The early signs of progress began to emerge in Q3 2024, and we believe our enhanced performance and profitability serve as clear evidence of the sustained impact of the strategic initiatives and the disciplined action plans our team has diligently executed over the past several years. I will now turn the call over to Dan DeLamater for an update on our operational strategies and developments. Dan?
Speaker Change: Advertising, Jerry anchoring third party litigation financing and the growth in nuclear verdicts that are impacting the insurance industry at large.
Speaker Change: Within our underwriting operation, we are working to increase scale in our small commercial segment, while continuing the positive momentum in our middle market commercial segment to that end. We've made several organizational changes to further define our focus and to position our operations for sustained success.
Dan DeLamater: Thank you, Jeff. I will share an update on a few operational initiatives and how we are navigating the current competitive landscape. We are certainly pleased with our excellent profitability in Q1, and we are confident that our strong performance reflects the impact of our numerous initiatives and changes we implemented over the past several years. To name just a few, they include our consolidated regional structure, a disciplined state strategy planning process, a one-team alignment between marketing, underwriting, and product teams, enhanced price sophistication, and continued company-wide expense reduction efforts. Our product team members continue to collaborate closely with our underwriting and marketing teams to actively manage each regional product portfolio.
Speaker Change: Our commercial lines operation is now functioning as two divisions that we referred to as middle market and small commercial.
Speaker Change: We have described in previous calls the large scale investments we have made in small business products and service capabilities as a part of our technology transformation efforts.
Kevin Burke: As Kevin mentioned earlier, we look forward to the July 2025 deployment of another major commercial software release that will represent the largest investment in company history, and our middle market products and capabilities.
We have shored up the systems talent product and processes needed to deliver on our commitment to market, leading product and service offerings in both of these commercial divisions that are critical to our future growth and success.
Dan DeLamater: Plus, our analytics team continues to deliver valuable insights to ensure that our teams are equipped with the quick and easy access to key metrics across regional, state, territory, and agency levels, in conjunction with our technical data team, who provide robust and consumable data to enable us to make intelligent, data-driven decisions. This alignment is essential as we look to balance necessary rate achievement with top-line growth objectives. As part of our ongoing monitoring of the broader markets in each of our regions, we are keeping a careful eye on economic inflation and the potential impacts of the federal tariff policy. We also continue to monitor social inflation as an industry-specific challenge.
Kevin Burke: Turning to our personal lines business segment net premiums written decreased nine 9% during the first quarter of 2025, driven by our strategies to accelerate our return to profitability by lowering new business volume and non renewal of a legacy, Maryland book of business drill.
Kevin Burke: Drilling down further into those strategies, we have intentionally limited our new business volume producing only $1 million of new business in the quarter compared to $10 million for the first quarter of 2024.
Kevin Burke: Given the naturally elevated loss ratio new business generates our intentional limiting of new business volume has helped us accelerate our return to profitability secondly, our non renewal actions and Maryland are well underway and accounted for approximately half of the decrease in net premiums written during the quarter.
Dan DeLamater: Considering this broadening inflationary pressure, critical attention to fundamentals such as policy language, line of business and class management, coverage limits, and pricing discipline is as important as ever to mitigate the impact of social inflation on our claim costs. Additionally, our claims team continues to monitor the specific impact from medical inflation on our bodily injury liability claims. We are not seeing outsized medical inflation in workers' compensation and other bodily injury claims. These costs have been relatively stable, with increases generally in line with economic inflation. However, we have recognized an increase in medical utilization rates, manifesting itself in more medical visits, more diagnostic testing, and a greater use of prescription medications. While this escalation in medical utilization applies upward pressure on our claim costs, we are closely managing rate levels to achieve targeted returns.
Kevin Burke: That impact will continue as non renewals will occur through August of this year, but the removal of these historically unprofitable policies will further improve our profit margin and reduce our exposure to hurricane catastrophe risk.
Kevin Burke: We believe it is helpful to consider the quarterly premium decline in personal lines within the context of a broader time horizon.
Kevin Burke: We had outsized premium growth in 2023 in early 2024, primarily as a result of rate increases, but also reflecting significantly higher amounts of new business and.
Kevin Burke: In fact at March 31, 2025, our average in force premium per policy was 16% and 15% higher in auto and homeowners, respectively compared to prior year periods.
Dan DeLamater: We are working diligently with more than 2,000 independent agency partners to drive sustainable, profitable commercial lines premium growth. At present, construction represents the largest industry within our current in-force book of business at 36%, with the vast majority of those accounts in specialty trades, followed by services and retail industries. In order to further diversify our commercial risk portfolio, we have refined and expanded our underwriting appetite, identifying specific additional industries and classes that we view as attractive profit opportunities but are underrepresented in our portfolio mix. We are emphasizing to our agents the risks we want to write. We expect that our recently implemented interactive appetite guide will provide enhanced clarity to our agents, and we look forward to increased quoting opportunities in those targeted classes.
Kevin Burke: We are not alarmed at all by the recent premium decline that is essentially right sizing. Our overall product mix that said we are currently putting in place several strategies to slow that rate of decline is 2025 progresses ultimately seeking to maintain a relatively stable personal lines premium level as we emphasize <unk>.
Kevin Burke: <unk> growth in the years ahead.
Kevin Burke: A real retention rate for personal lines, excluding the impact of the Maryland non renewals was a healthy 86, 7% with overall rate achievement of nine 3%.
Kevin Burke: Renewal rate increases during the first quarter averaged five 8% for personal auto.
Kevin Burke: Slowing a bit from 2024 levels since we have essentially achieved rate adequacy in that line and 15, 9% for homeowners.
Dan DeLamater: Additionally, leaders and team members across the organization have continued to embrace our expense management efforts, enabling us to incrementally reduce our expense ratio by nearly 2 percentage points over the past 2 years. As we work toward further improvement, we have developed a comprehensive and sustainable budgeting and expense monitoring tool that we expect will further empower our teams toward expense and efficiency improvement and accountability for our results. We expect to achieve additional efficiencies from sizable investments we have made in technology systems and analytical capabilities over the past several years. Last year, we incurred the peak expense impact of our multi-year systems modernization project, accounting for 1.3 percentage points of the expense ratio. We project a modest decline in 2025 to 1 percentage point of expense impact related to that project.
Kevin Burke: We will be ready to adjust our rate strategies in the event that underlying costs shift due to any inflationary impact of changes in economic policies.
Kevin Burke: Our personal lines combined ratio improved 16, seven percentage points to 83, 6% in the first quarter of 2025.
Kevin Burke: By line of business homeowners combined ratio improved to 19, one percentage points to 83, 8% the.
Kevin Burke: The improvement in homeowners was partially driven by a 50% reduction in large fire losses compared to the first quarter of 2024 as a result of both lower frequency and severity homeowners.
Kevin Burke: Homeowners non weather trends were largely in line with expectations and for the first time in several quarters, we experienced a decrease in the frequency of weather claims that contributed seven six percentage points of improvement in the homeowners loss ratio compared to the prior year quarter.
Dan DeLamater: As a result of our loss ratio improvement in Q1, we incurred a higher level of expense for estimated underwriting-based incentive compensation for agents and employees compared to the prior year Q. Even so, we lowered our expense ratio by 1.1 percentage points from the prior year Q. Overall, we believe we are well-positioned to face the challenges in today's dynamic insurance landscape. With that, I'll turn it over to Anthony Viozzi for an investment update. Tony?
Kevin Burke: The personal auto combined ratio improved 14, eight percentage points to 85% with 10 percentage points of improvement in the core loss ratio and more favorable impact of prior period Reserve development.
Kevin Burke: Personal auto physical damage severity was generally in line with our longer term trend line in personal auto liability frequency continued to increase moderately also consistent with our long term trend line.
Kevin Burke: Overall, we are pleased with the underwriting improvements across nearly every major line of business compared to the prior year quarter.
Anthony Viozzi: Thanks, Dan. As we continue to navigate an increasingly complex and volatile investment market environment, I want to reiterate that our investment strategy includes a prudent, disciplined approach that is intended to achieve capital preservation, risk mitigation, and long-term value creation. We have all witnessed the recent heightened uncertainty across the market, driven by shifting economic indicators, persistent inflationary pressures, geopolitical tensions, and rapid movements in interest rates. Against this backdrop, our conservative approach has proven effective. We prioritize high credit quality and attractive spread products to provide consistent investment income and to ensure that our portfolio remains resilient, particularly in the face of short-term market disruptions. During Q1 2025, net investment income totaled $12 million, representing an increase of 9.2% from the prior year quarter. The average tax equivalent yield was 3.50%, up from 3.40% for Q1 2024.
Kevin Burke: The early signs of progress began to emerge in the third quarter of 2024, and we believe our enhanced performance and profitability serve as clear evidence of the sustained impact of the strategic initiatives and the disciplined action plans. Our team has diligently executed over the past several years.
Speaker Change: I will now turn the call over to Dan <unk> for an update on our operational strategies and developments Dan.
Dan: Thank you, Jeff I will share an update on a few operational initiatives and how we are navigating the current competitive landscape.
Speaker Change: We're certainly pleased with our excellent profitability in the first quarter and we're confident that our strong performance reflects the impact of our numerous initiatives and changes we implemented over the past several years.
Speaker Change: To name just a few they include our consolidated regional structure, a disciplined state strategy planning process, a one team alignment between marketing underwriting and product teams enhanced price sophistication and continued companywide expense reduction efforts.
Speaker Change: Our product team members continue to collaborate closely with our underwriting and marketing teams to actively manage each regional product portfolio plus our analytics team continues to deliver valuable insights to ensure that our teams are equipped with the quick and easy access to key metrics across regional state.
Anthony Viozzi: In terms of portfolio mix, we have methodically reduced our exposure to lower spread fixed income assets, gradually replacing them with what we view as high-quality, credit-focused corporate debt and structured notes. Fixed income reinvestments for Q1 2025 provided an 85 basis points boost in yield compared to the maturing and called bonds during the quarter. We are currently investing new funds at rates north of 5.50%, representing a spread of close to 150 basis points from the average yield on bonds maturing and called during Q2 2025. We project $130 million in bond cash flows over the next 12 months, currently yielding 3.55%, which will provide additional opportunities to increase our portfolio yield if rates continue to remain higher than that level. We positioned our relatively modest equity portfolio defensively in anticipation of heightened market volatility.
Speaker Change: Territory and agency levels in conjunction with our technical data team, who provide robust and consumable data to enable us to make intelligent data driven decisions.
Speaker Change: This alignment is essential as we look to balance necessary rate achievement with topline growth objectives as.
Speaker Change: As part of our ongoing monitoring of the broader markets in each of our regions. We are keeping a careful eye on economic inflation and the potential impacts of the federal tariff policy.
Speaker Change: We also continue to monitor social inflation as an industry specific challenge.
Speaker Change: Considering this broadening inflationary pressure critical attention to fundamentals such as policy language line of business in class management coverage limits and pricing discipline is as important as ever to mitigate the impact of social inflation on our claim costs.
Speaker Change: Additionally, our claims team continues to monitor the specific impact for medical inflation on our bodily injury liability claims we are not seeing outsized medical inflation in workers compensation and other bodily injury claims. These costs have been relatively stable with increases generally in line with economic inflation. However, we have recognized an increase.
Anthony Viozzi: As a result of that cautious approach, we finished the quarter with minimal net investment losses, outperforming the S&P 500 index during the quarter. Moving forward, we will maintain a defensive stance on equities until the market stabilizes. Our goal is to strike a balance between equity growth opportunities and downside protection. On the fixed income side, we will continue to stay the course, prioritizing high-quality spread products. We will remain vigilant, poised to take advantage of opportunities that the market presents while adhering to our disciplined investment approach and positioning ourselves for long-term success. As of 31 March 2025, our book value per share increased 5.7% to $16.24 from $15.36 on 31 December 2024. The increase of $0.88 since year-end was driven by strong underwriting results and investment income, along with a modest improvement in the value of our available-for-sale fixed income portfolio.
Speaker Change: In medical utilization rates manifesting itself in more medical visits more diagnostic testing and a greater use of prescription medications. While this escalation in medical utilization applies upward pressure on our claim costs. We are closely managing rate levels to achieve targeted returns.
Speaker Change: We are working diligently with more than 2000 independent agency partners to drive sustainable profitable commercial lines premium growth.
Speaker Change: At present construction represents the largest industry within our current in force book of business at 36% with the vast majority of those accounts and specialty trades, followed by services and retail industries.
Speaker Change: In order to further diversify our commercial risk portfolio, we have refined and expanded our underwriting appetite identifying specific additional industries and classes that we view as attractive profit opportunities, but are underrepresented in our portfolio mix.
Speaker Change: We are emphasizing to our agents the risks we want to right. We expect that our recently implemented interactive appetite guide will provide enhanced clarity to our agents and we look forward to increased quoting opportunities in those targeted classes.
Anthony Viozzi: With that, I will now turn it back to Kevin for closing remarks.
Kevin Burke: Thanks, Tony. With three sequential quarters of favorable operating performance, we are pleased with the positive momentum. We announced an increase in our quarterly cash dividend last week, which is further evidence of our confidence in our business strategies that are designed to achieve our long-term objective of excellent financial performance. We look forward to reporting our ongoing progress in future calls. I will now turn the call back to Karen.
Speaker Change: Additionally leaders and team members across the organization have continued to embrace our expense management efforts, enabling us to incrementally reduce our expense ratio by nearly two percentage points over the past two years as we work towards further improvement we have developed a comprehensive and sustainable budgeting and expense monitoring tool that we expect will further empower.
Speaker Change: Our teams towards expense and efficiency improvement and accountability for our results.
Karen: Thank you, Kevin. While we requested and received questions in advance of today's call, we have worked answers to these questions into our prepared remarks. If there are any additional questions, please feel free to reach out to us. This now concludes the Donegal Group Q1 2025 earnings webcast. You may now disconnect.
Speaker Change: We expect to achieve additional efficiencies from sizable investments, we have made in technology systems and analytical capabilities over the past several years.
Speaker Change: Last year, we incurred the peak expense impact of our multi year systems modernization project accounting for one three percentage points of the expense ratio.
Speaker Change: We project a modest decline in 2025 to one percentage point of expense impact related to that project as a result of our loss ratio improvement in the first quarter, we incurred a higher level of expense for estimated underwriting based incentive compensation for agents and employees compared to the prior year quarter.
Speaker Change: Even so we lowered our expense ratio by one one percentage points from the prior year quarter.
Speaker Change: Overall, we believe we are well positioned to face the challenges in today's dynamic insurance landscape.
Speaker Change: And with that I'll turn it over to Tony Piazza for an investment update Tony.
Tony Piazza: Thanks, Dan as we continue to navigate an increasingly complex and volatile investment market environment I want to reiterate that our investment strategy includes a prudent disciplined approach that is intended to achieve capital preservation risk mitigation and long term value.
Speaker Change: Creation.
Speaker Change: We have all witnessed the recent heightened uncertainty across the market driven by shifting economic indicators persistent inflationary pressures geopolitical tensions and rapid movements in interest rates against this backdrop, our conservative approach has proven effective.
Speaker Change: We prioritize high credit quality and attractive spread products to provide consistent investment income and to ensure that our portfolio remains resilient, particularly in the face of short term market disruptions.
Speaker Change: During the first quarter of 2025 net investment income totaled $12 million, representing an increase of nine 2% from the prior year quarter.
Speaker Change: The average tax equivalent yield was 350% up from $3 four zero for the first quarter of 2024.
Speaker Change: In terms of portfolio mix, we have methodically reduced our exposure to lower spread fixed income assets gradually replacing them with what we view as high quality credit focused corporate debt and structured notes.
Speaker Change: Fixed income reinvestment for the first quarter of 2025, providing an 85 basis point boosting yield compared to the maturing and called bonds during the quarter.
Speaker Change: We are currently investing new funds at rates north of 550%, representing a spread of close to 150 basis points from the average yield on bonds maturing and called during the second quarter of 2025, we project $130 million in bond cash.
Speaker Change: Flows over the next 12 months currently yielding 355%, which will provide additional opportunities to increase our portfolio yield if rates continue to remain higher than that level.
Speaker Change: We positioned our relatively modest equity portfolio defensively in anticipation of heightened market volatility as.
Speaker Change: As a result of that cautious approach, we finished the quarter with minimal net investment losses outperforming the S&P 500 index during the quarter.
Speaker Change: Moving forward, we will maintain a defensive stance on equities and tell the market stabilizes. Our goal is to strike a balance between equity growth opportunities and downside protection.
Speaker Change: On the fixed income side, we will continue to stay the course prioritizing high quality spread products, we will remain vigilant poised to take advantage of opportunities that the market presents while adhering to our disciplined investment approach and positioning ourselves for long term success.
Speaker Change: As of March 31, 2025, our book value per share increased five 7% to $16 24.
Speaker Change: From $15 36 on December 31, 2020 for.
Speaker Change: The increase of 88.
Speaker Change: Since year end was driven by strong underwriting results and investment income along with a modest improvement in the value of our available for sale fixed income portfolio.
Kevin Burke: With that I will now turn it back to Kevin for closing remarks.
Kevin Burke: Thanks, Tony with three sequential quarters of favorable operating performance. We are pleased with the positive momentum we announced an increase in our quarterly cash dividend last week, which is further evidence of our confidence in our business strategies that are designed to achieve our long term objective of excellent financial performance.
Kevin Burke: We look forward to reporting our ongoing progress in future calls I will now turn the call back to Karen.
Speaker Change: Thank you Kevin while we requested and received questions on the back of today's call. We have worked to answers to those questions into our prepared remarks. If there are no additional questions. Please feel free to reach out to us.
Speaker Change: Now concludes that Donegal group first quarter 2025 earnings webcast you may now disconnect.