Donegal Group Inc. (DGICA) Q1 2015 Earnings Report, Transcript and Summary

Good morning. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donegal Groups Incorporated First Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. Jeff Miller, Chief Financial Officer. You may begin your conference.

Thank you. Good morning everyone and welcome to the Donegal Group conference call for the first quarter ended March 31, 2015. I am Jeff Miller, Chief Financial Officer, and I will begin today's call with comments on our quarterly financial results. Kevin Burke, Chief Operating Officer and Acting Chief Executive Officer will then provide his comments on the quarter and provide a business update. Don Nikolaus, our President and Chairman, while also provide his perspective on the quarter before we open the lines for any questions. You should be aware that certain statements made in our news release and in this conference call are forward-looking in nature and involve a number of risks and uncertainties. Please refer to our news release for more information about forward-looking statements. Further information on risk factors that could cause actual results to differ materially from those projected in the forward-looking statements is available in the report on Form 10-K that we've submitted to the SEC. You can find a copy of our Form 10-K in the Investors section of our website under the SEC filings link. Further reconciliation of non-GAAP information as required by SEC Regulation G was provided in our news release which is also available in the Investor section of our Web site. We were pleased to report net income of $6.9 million or $0.25 per share of our Class A common stock on a diluted basis for the first quarter 2015. That net income compares quite favorably to the $634,000 net loss we sustained in the first quarter of 2014. Operating income for diluted class A share also compares favorably at $0.23 versus a loss of $0.02 last year. Our statutory combined ratio of 96.9% for the first quarter 2015 reflects a significant improvement in our underwriting results when compared to prior year quarters combined ratio of 103.2%. Reviewing our top line growth, our net premiums earned grew by 9.7% and our net premiums written increased 8.3% for the quarter. The three major drivers of the premium growth continue to be rate increases for most of our business lines, commercial lines, new business growth and as we've reported previously a change in Michigan Insurance Company's external quota share reinsurance agreement. We eliminated Michigan's 20% quota share reinsurance arrangement with third party reinsurers that was in place for 2014. We expect this change to add approximately $20 million to our net premiums written throughout 2015. Main driver of the improvement in our underwriting results was a significant reduction in our losses incurred for the quarter. I'll spend a few minutes highlighting the contributing factors. Beginning with the weather losses, the year began with mild weather conditions during the month of January, but we experienced another polar vortex in February with sub freezing temperatures again contributing to water damage from frozen pipes. February deepfreeze resulted in $300 million in property damage claims. Our total weather relative losses of $8.8 million for the quarter were significantly lower than the $15.3 million of weather losses we experienced in the first quarter of 2014 and was in line with our average first quarter weather related losses for the past 5 years. While we typically see an increase in fire losses in the first quarter of each year, large fire losses of $10.8 million were somewhat higher than expected, exceeding the also above average of $10.1 million from last year's first quarter. The increased activity was primarily in our commercial multi-peril line of business, which we attribute to our increased ridings in that business line over the past year and also to a handful of losses that reached our $1 million per loss retention under our property reinsurance treaty. In spite of the fire and weather related losses that impacted our homeowners’ line of business, that line generated a 98.7% combined ratio for the quarter reflecting the benefit of premium rate increases we have taken over the past few years as well as favorable underwriting results in several regions that enjoyed relatively mild winter weather. Our workers compensation line of business continue to perform very well during the quarter as the 87.8% combined ratio demonstrates. Finally, fire accident year loss reserve development was modestly favorable, but it did not have a material effect on our lost ratios for the first quarters of 2015 or 2014. Because it is too early to determine any meaningful trends we typically did not discuss any details about first quarter loss reserve development. In summary we reviewed the first quarter underwriting result as a solid start to 2015 and were optimistic about our prospects to continue to generate solid underwriting profits as the year progresses. Turning briefly to investment income, we reported an increase of 7.2% for the quarter, primarily related to increased dividend income and a lower allocation of expenses to the investment function during the quarter. Our book value per share increased to $15.68 at March 31, 2015, up from $15.40 at year-end 2014 primarily due to our positive earnings. Last week we announced an increase in our quarterly dividend rate, our Board of Directors declared cash dividends of $13.05 per share of our Class A stock and $11.75 per share of our Class B stock, payable May 15 to stockholders of record as of the close of business on May 1st. At this point, I’ll turn the call over to Kevin for his comments on the quarter.

Thank you, Jeff. Good morning, everyone. I will review the commercial and personal lines underwriting segments of our business, as well as touch upon our expanding agency distribution system and provide a brief update on the technology enhancements we look forward to implement in the coming months. We’re pleased with the solid underwriting results and the continued premium growth for the first quarter of 2015. The first quarter’s net premiums written increased 8.3% compared to the first quarter of 2014. This increase represented a combination of 12.4% growth in commercial lines and 4.8% of personal lines. These growth percentages include the impact of the change to the Michigan Insurance Company for the share agreement. We’re optimistic that our continuing premium growth combined with sound underwriting discipline will continue to generate underwriting profitability. We would keenly review rate indications and market data as we focused on rate adequacy and quality underwriting to achieve our targeted profitability levels, in both commercial lines and personal lines. As mentioned, our commercial lines business performed well in the first quarter, achieving a statutory combined ratio of 95.1%. In personal lines we’re pleased with the improvement in our underwriting results as we achieved a 98.4% statutory combined ratio for the first quarter. This is a solid improvement as compared to the prior year's quarters combined ratio of 102.7. We are pleased with the improved profitability and these results reflect the benefits of premium rate increases in other underwriting initiatives we have employed. We have implemented and we’ll continue to file rate increases where necessary and we will enhance our utilization of predicted modeling tools to refine our pricing and underwriting tiers. To give you a sense of recent rate filing activity in personal lines, we continue to file rate increases in home owners in the 3% to 5% range, depending upon this state subsidiary. Rate increases in personal automobile range in low single-digits depending upon the state subsidiary, net premiums written for the first quarter increased 4.8% with a large percentage of that increase representing increases in rate versus increases in exposures. In commercial lines, renewal premium increases during the first quarter generally ranged in the 5% to 7% area while we are continuing to see opportunities to obtain favorable renewal premium increases. We will be closely monitoring our competitiveness within our regions of commercial markets. As I mentioned earlier we achieved strong growth in our commercial lines during the first quarter with net premiums written increasing 12.4%. Turning to our marketing efforts, I want to highlight the continued expansion of our independent agency distribution system, we continue to identify and appoint new high quality agents throughout all of our operating areas, placing emphasis on appointing agents that have a commercial lines focus. This ongoing initiative has contributed to the increase in commercial lines premium growth and our expectation is, this will continue. In the first quarter we appointed 30 new agencies throughout the regions in which we operate. In addition to the appointment of new agencies we have been working diligently to obtain further growth by enhancing our market position within our existing independent agencies. As a key component of our 2015 business plans, we established specific goals to enhance the level of premium written in each of our appointed agents. As we move agents from their current level or premium strata to the next higher level, we further enhance the overall business relationship between the agent and Donegal. And we have seen the quality and frequency of submissions improve as agents commit a greater percentage of their business to Donegal. We have completed 24 spring agency sales meetings, as we are pleased to report that we had excellent attendance at each of these meetings, our agency sales meetings vary in size from 50 to 160 agents attending each of these meetings. And it is one of our major marketing initiatives that we conduct each year. We view these meetings as great opportunities to update our agents on products and technology enhancements in an opportunity for our agents to interact with Donegal management, and marketing and underwriting personnel. In the fall we will travel to Michigan to conduct agency sales meetings with the Michigan Insurance Company agents. Those opportunities are invaluable as we promote Donegal to our newer agencies in strength and long standing business and working relationships. I would like to just spend a few minutes to discuss a number of technology enhancements Donegal is working on as part of our commitment to leverage best in class technology to ensure ease of doing business with our agents and policy holders. At the end of 2014, Donegal announced the upcoming introduction of WriteBiz 2.0 to our agents. WriteBiz is Donegal’s agency interface for quoting commercial lines business. As a result of feedback we received from agency focus groups and users, we have made extensive enhancements to this newest version of WriteBiz system. The new version WriteBiz 2.0 is more closely aligned from a technology standpoint with our right pro personal line system that has been extremely well received by our agents. We are pleased to announce that Rightbiz 2.0 is currently being piloted with select agents and we anticipate a full rollout in the second and third quarters of 2015. We are pleased to announce the Midwest call center service center expansion project, Donegal is expanding its current call center and service center capabilities to the Midwest by utilizing the facility to Le Mars, Iowa. As part of our ongoing initiative to provide best in class service to our agents and policy holders, we are pleased to announce the expansion of the Donegal call center and service center. The new center is planned to open in the third quarter of 2015. We continue to make great progress on the development of our new billing system which will ultimately replace our legacy billing applications and provide enhanced opportunities to serve the billing needs of our customers. We expect to gradually roll this new system out to select states beginning in the third quarter of 2015. At this point I'll turn the call over to Don Nikolaus before we open the line for questions.

Thank you, Kevin. Good morning, everyone. Welcome to our earnings call. I will just have some brief summary. I'm sure all of you have read the press release. And the first five bullet points are as follows. Net income of 6.9 million, or $0.25 per diluted Class A share compared to a net loss of 634,000 for the first quarter of 2014. Results reflect lower winter weather losses of 8.8 million, compared to 15.3 million in 2014 in the first quarter. Statutory combined of 96.9 compared to 103.2 for the prior first year's quarter. 8.3% increase in net premiums written and booked value per share of $15.68 compared to $15.40 at year-end 2014. Certainly these capture, but not all, but some of the most important points of the success of the quarter. And the success of the quarter we believe represents an implementation, a continued implementation of our business strategy to enhance underwriting, to raise premiums, to do business geographically where we have the best opportunities. One of the other topics that I would like to cover is that our management and employees are fully engaged. We have many, many project and business initiatives whether it be on the technology side, the underwriting side, claim side, to make us a better and growing company. So executing on our business plans, we think has been the fundamental of how we've been doing business over the last number of years. Kevin made reference to the agency meeting. One of the things that takes place with these agency meetings is that at the end agents write out questions on cards and those are immediately answered by a number of executives attending the meeting. We don’t necessarily give 100% answers, because many of them are new topics, but what we do, is from all of these 26 to 28 meetings we gather all of those questions and requests and we have a process whereby we analyze the pros and cons. Because at the end of the day, if there are suggestions that bring about a better company, we want to make sure that we're listening and that we are responding if it's appropriate. And as you would understand, you can't agree to do everything that you're asked to do. But there are many times questions and suggestions that agents see from the broad marketplace that if we adopt can make us a better company. At this point I will turn it back to Jeff Miller.

Thank you Don. Eric I think we're ready to open the line for questions.

[Operator Instruction] Your first question comes from the line of Vincent DeAugustino with KBW. Your line is open.

Just to start off. Pretty happy to see the rate trend, particularly on commercial lines holding up really well there. So I'm just hoping to touch base, get a little bit of color there in terms of what are you thinking, does your markets being accepting of that level of rate increases or maybe that speaks to the relationship comment you had in the press release this morning. Or if there is any component of -- are we taking a more disciplined approach even as the market softens a little bit?

Well, it's a combination and I'll let some others speak too. It's a combination of things. What we have endeavored to do is to focus rate increases in two respects. If we have accounts where there has been some losses, we are not hesitant to increase it more than the average. So that we are getting adequate premium for the exposure, so we have a in depth analysis particularly of larger accounts and the loss experience. And as you had understand, where there has been losses, it's easier to get rate increases. Also, we make sure that our underwriters stay in contact with the agents. We just don’t send out the rate increase. We make sure that we have a dialogue to make sure that it's acceptable and that it will work because part of this is getting the agency engaged in helping with getting the rate increase because longer term it's in their benefit as well as ours. So it is a process. Also we are writing small to midsize accounts, I think that what some of the industry literature would indicate but the market has become somewhat softer on large accounts. Now it's starting to filter down a bit into midsize accounts and we would not deny that. However, so far we had been successful in getting reasonable increase.

And then on the weather side, you guys heard a little bit better than I’d say our caution would have suggested so again good to see there. At this point now that we’re kind of into the tail end of April, I'm just curious to see how some of ice damming claims and those type of things that maybe take a little bit of time to develop if those type of claims are still coming in or things have quieted down to the point that you feel like you have a good handle on the ultimate exposure?

This is Jeff. I’d be glad to respond to that, the ice damming claims generally come from the areas where you’ve had significant snowfall and certainly in the New England and especially in the Boston area, the news would have covered the level of record snowfalls in those areas. We of course are not active -- don’t have a significant concentration of business, we do some small amount of business in our subsidiaries, but we do not have a significant concentration of property business in New England. So we don't have any claims coming in from that area. In our other regions we did not have the level of snowfall in 2015 that we had in 2014 and when we did receive snows they melted fairly quickly and we didn’t have significant accumulations on roofs where you would see the type of ice damming claims that you are referencing. So most of the claims that we had for the winter were related to the deep freeze, where you have pipes that burst because they're frozen and then the water damage that ensues and we had some severe losses in some commercial properties where that occurred. But in some of the regions where we were acting, that we’re operating, we did not have significant weather activity particularly in the Midwest. We didn’t see the same level of claims in 2015 that we’ve seen in 2014, particularly in Michigan where they had significant snow in 2014's first quarter. So hopefully that gives you a bit of color. We don’t expect to see a significant development going forward from the winter weather. The freezing claims, we've already exceeded the retention under our reinsurance and so that we won’t see any further development on that particular event and that we’re not seeing any significant reporting of other claims from the winter weather.

And then sticking with [indiscernible] just to make sure I understood the comment on the reserve side, so basically at this juncture or early in the year there is really not -- I would say, I guess an opportunity for significant deviation away from your kind of expectation, so that’s what’s I am looking at the comment there?

That’s correct and generally I think last year in the first quarter we had similar development and later in the year we saw some additional adverse development. We’re hopeful that we have that behind us and last year we did receive a number of claims that were related to the weather activity that occurred in the last part of 2013. We did not have a recurrence of bad weather in fourth quarter of 2014. So we’re hopeful that development will remain modest going into the remainder of the year. But that remains to be seen, the comment we generally make in the first quarter is that it's kind of early to make any meaningful conclusions from the trends that you're seeing in the first quarter, but certainly glad to see it start on a favorable note.

And as far as the individual lines are [indiscernible] can I assume that there is no anomalies in there net out to seem being pretty flat in aggregate?

The only anomaly would be some slight development of the commercial auto side and you probably noticed that the commercial auto combined ratio was a bit higher than the other lines of business. And we did have a modest amount of average development there and the other thing is that, that particular line reflects is that our actuaries were conservative in the 2015, as a result of some other development we experienced in that line in past several years. With that said, if that line would be the only out wired, the other line have generally been unfavorable from the development perspective.

Excellent and then, last one. On the workers comp side, so that the premium [indiscernible] have been running pretty good and still running good this quarter. But just a little bit of a bit lower from the prior quarter pace. So just wanted to check and see if have we changed in appetite or if the underwriting results have been much better here just to [indiscernible].

Well, I think it’s a combination of things, that the rate increases for workers comp in 2015 are slightly lower than they were in 2014. And so that may explain part of it, also we moved away from the few larger workers comp accounts which is part of our business strategy to focus on underwriting and we think our discipline and not bashful about moving away from an account that has produced losses. And I think that, that underwriting discipline plus rate increases has been the reason why we are doing quite well in our combined ratio on workers comp.

Okay, alright guys. Thank you very much. Nice quarter here and wish you best of luck.

Thank you.

[Operator Instructions]

Seeing no other questions lining up in the queue, I believe Eric we're ready to close the call. We thank everyone for your participation this morning.

Thank you, everybody.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.