Donegal Group Inc. (DGICB) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Donegal Group Inc's Q1 2016 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. Jeff Miller, Chief Financial Officer, you may begin your conference.

Thank you good morning everyone and welcome to the Donegal Group conference call on March 31, 2016. So we are getting an echo on our end. I don’t know if that's a technical difficulty with listening at your end. I'm Jeff Miller, Chief Financial Officer and I will begin today's conference call with commentary on our quarterly financial result. Kevin Burke, our President and Chief Executive Officer, will then provide his comments on the quarter and provide an update on our business operations. Don Nikolaus, our Chairman, will then provide his perspective on the quarter before we open the line for questions. You should be aware that certain statements made in our news release today 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 submitted to the SEC for 2015. You can find a copy of our Form 10-K in the Investors section of our website under the SEC Filings link and reconciliation of non-GAAP information, as required by SEC regulation G, was provided in our news release which is also available on our website. We are very pleased to report net income of $11.8 million or $0.46 per share of our Class A common stock on a diluted basis for the first quarter of 2016. That net income compares favorably to the $6.9 million or $0.25 per share of our Class A common stock on a diluted basis for the first quarter of 2015. Operating income for diluted Class A share also compares favorably at $0.44 compared to $0.23 last year. Our statutory combined ratio of 92.1% for the first quarter of 2016 reflects our excellent underwriting results, which improved over the favorable prior year quarters combined ratio of 96.9%. Both our personal and commercial lines segments were profitable for the quarter, as a result of decreased weather related claims, fewer large fire losses, as well as a general decline in the volume of the incoming casualty claims. We are also pleased with our top line growth as our net premiums earned grew by 8.2%, and our net premiums written increased 8.6% for the quarter. The major drivers of the premium growth were strong commercial lines in new business growth, an increase in our personal lines solid account and modest premium rate increases in most of our business line. As I indicated earlier, our excellent underwriting results were primarily driven by a significant reduction in our loss ratio for the quarter. Well I’ll spend a few minutes highlighting some of the loss details. Starting with weather, our weather related losses of $6.9 million for the quarter decreased from the $8.8 million for the prior year quarter and were lower than the $8.5 million average for the first quarters of the previous five-years. Our first quarter results have historically reflected the impact of winter weather claim activity and that was certainly the case last year when we experienced sub-freezing temperatures that contributed to frozen pipe claims. Fortunately, we did not experience a recurrence of such extreme temperatures in 2016. And while there was a significant snow event in January and a wind event in February that each generated over $1 million in claims throughout most of the quarter our regions enjoyed relatively mild winter weather. On a similar note, while we typically see an increase in fire losses in the first quarter, large fire losses of $5.8 million were much lower than the $10.8 million we incurred during the last year's first quarter. We sustained very few large commercial fire losses during the first quarter of 2016. And we also noted a significant declined in the number of fire losses in our homeowners line. We attribute the decrease to comparatively warmer temperatures in 2016. Combination of decreases in both weather and fire losses led to excellent combined ratios in our commercial multi-peril and homeowners line of business. Our workers compensation results were also quite favorable for the first quarter as the 86.5% combined ratio in that line demonstrates. We had fewer new claims reported compared to the prior year quarter and we benefited from favorable settlements of prior year claims during the quarter. Now we typically do not discuss first quarter loss reserve development detail, because it is too early to determine development trends as any degree of certainty. In total, there was no adverse reserve development and either the first quarter of 2016 or 2015. In summary, we are very pleased with our first quarter underwriting results and they represent a strong start for 2016. Turning briefly to investment income, we've reported an increase of 12.1% for the quarter primarily related to increased interest and dividend income from the 8% higher level of average invested assets compared to the prior year quarter. We were pleased that our investment income increased 2% over the fourth quarter of 2015 investment income, indicating that the increase in invested assets is more than compensating for the impact of lower reinvestment rates, relative to the yield we were realizing on called and maturing investments. Our book value per share increased to $16.29 at March 31, 2016 up from $15.66 at year-end 2015 primarily due to our positive earnings and to a lesser extent in increase in unrealized gains. Consistent with our historical practice, we did not declare a dividend during the first quarter. Our Board of Directors will meet tomorrow to consider our quarterly dividend rate for 2016, and we expect to issue a press release after that meeting to announce our regular quarterly cash dividend. At this point, I'll turn the call over to Kevin for his comments on the quarter.

Thank you Jeff, good morning everyone, we are very pleased with the continued growth and profitable results we achieved for the first quarter of 2016. Our focus on our long-term business goals including our commitment to sound underwriting discipline, our focus on providing best-in-class technology, being responsive to our agents and customers and our strong relationships with our independent agents have contributed to these positive results. Maintaining our competitive position within the markets that we serve is a priority for us. We routinely review rate indications and market data to maintain our focus on rate adequacy and quality underwriting, which are critical in achieving our targeted profitability levels in both commercial lines and personal lines. I will review the commercial and personal lines underwriting segments of our business, as well as touch upon our agency distribution system and provide a brief update on our technology initiatives. The commercial lines segment of our business performed very well in the first quarter, we are pleased with the new business growth that we are seeing and a consistent flow of new commercial opportunity is being presented to us. While we appreciate the increase in new business opportunities, we remain focused on our strong underwriting philosophy just to ensure long-term profitability. Our commercial lines retention levels remain strong and we believe we are in an excellent position within the marketplace to continue to grow profitably in commercial lines. In the personal lines segment of our business, we are pleased to report an increase of 5.4% net premiums written compared to the first quarter of 2015. This steady increase in premium growth along with the improved loss ratio highlights our commitments to improving a profitability level of our personal lines segments. We have implemented and we will continue to file rate increases where appropriate, we will continue to expand the utilization of our predictive modeling tools to refine our pricing and underwriting criteria. To give you a sense of recent rate filing activity in personal lines, we have filed rate increases in the homeowners for the 2% to 3.5% range, depending upon the state and subsidiary. Rate increases in personal automobile ranged in the low single-digits, depending upon the state and subsidiary. In commercial lines, renewal premium increases during the first quarter generally range from 3% to 5%. We continue to see opportunities to obtain modest renewal premium increases, but there is increased competition for quality accounts. Turning to our marketing efforts, we continue to expand our independent agency distribution system by appointing new high quality agents throughout all of our operating areas. This ongoing initiative has contributed to the increase in commercial lines and personal lines premium growth over the past several years, and it is our expectation that new agencies will continue to represent additional growth opportunities for us. For the first quarter, we appointed 39 new agencies throughout the regions in which we operate. We are excited about the potential quality growth opportunities these additional agencies represent. With our existing agencies, we continue to emphasize premium growth and profitability to further develop and increase the loyalty and commitment of our agents. We believe Donegals commitment to the independent agency system and the value we bring to our agents and customers, major contributors to our continued success for the first quarter. Within the past few years, we have seen significant growth in the number of what we call leaders agents. These are Donegal agencies that generate the highest level of premium within our group of companies. we continue to have additional agencies in the pipeline moving towards that objective. Our efforts to enhance our relationship with these agencies have resulted in an increase in new business submissions; and we believe the leaders agents would be an excellent source of future premium growth for our organization. In 2016, our agency sales meetings are nearing completion during the first quarter. We travelled throughout the regions and held group sales meetings with a large representations of our agents. The attendance of these meetings has been excellent with approximately 70 to 150 agency personnel attending each meeting. It’s a great opportunity for our agents to learn more detail about our 2016 initiatives, interact with Donegal’s regional and home office staff and it allows a one-on-one dialogue with our agents. Finally, I want to spend a few minutes on the technology enhancements we implemented recently. These initiatives are all part of our ongoing commitment to leverage our best-in-class technology to enhance ease of doing business with our agents and policyholders. We continued with the phase rollout of our new billing system which is now live for new business policies in several states. New billing system will ultimately replace our legacy system and provides flexible billing, payment plan options along with a new format or billing forms that easier to understand. Implementation of Donegal’s new policy rating engine for personal lines is near completion. The new rating engine allows for greater speeds to market for rate coverage actions. We are starting to see the benefits of this new technology as we make refinements for our personalized products. To continue to build upon our reputation as a strong regional carrier, it’s important that we have the ability to bring products to market quickly and be nimble and react to market trends. At this point, I will turn the call over to Don Nikolaus for his comments before we open the line for questions.

Thank you Kevin. Good morning everyone. Welcome to our earnings conference call. You have heard the comments of both Jeff and Kevin. I think they have summarized things very well. I'm simply going to add some brief remarks. Our significant increase in net income from the quarter totally benefitted from improved weather, but in our judgment it is substantially the result of implementing effectively our business plan and strategies over a period of years. As stated previously, we believe Donegal Group will continue to benefit from these strategies in the future and some of you might say “well, what are these strategies?” We have said it many times, but it’s extremely important. We have a strong focus on underwriting profitability and in order to do that what is in involved in addition to the rates, you need to have a very good understanding of the risk that you are ensuring and we believe that we have honed that process very well and that its certainly an important part of why our frequencies are down and our severities is somewhat better than it has been. Second, rate adequacy, I think Kevin talked about rate adequacy. Clearly we have a very strong what we call research and development department, which is part of our actuarial staff that looks at all of our lines of business to make sure that we have the right rate in the right territory for the particular risk whatever it might be. Growth and strengthening of our distribution system, Kevin gave a nice overview of that and clearly those that are selling your products and the emphasis they places upon your company is extremely important if you want to do well. Superior technology, I think that we would say that we don’t think we are second to any other company and clearly anyone near our size in terms of investing in technology. The use of predictive modeling and a significant increase in the use of data. As we all know, there are hundreds of articles in various insurance magazines that talk about data, predictive modeling and clearly it is important and what we have worked to do is to make sure that we stay current and that we don’t fall behind the curve. Geographic and profitable product focus. where you do business and the product lines that you write in our judgment are extremely important. We believe that it play a key role in how your profitability overtime is going to do. Now, these numbers have already been quoted, but in closing good things are worth repeating. Net income of $11.8 million or 72.9% increased over the first quarter of 2015. 8.6% increase in net written premium, a statutory combined of 92.1% a 12% increase in investment income and our book value has increased to $16.29 from $15.66 at the year-end 2015. So that hopefully gives you somewhat of a summary in addition to the very excellent comments of Jeff and Kevin and I’ll turn it back to Jeff Miller, so we could move on to questions.

Okay, thank you Don. Nicole we are ready to open the lines for questions. Can you give some instructions there please?

[Operator Instruction] Your first question comes from the line of Meyer Shields from KBW. Your line is open.

Am I coming through?

Good morning Meyer, you are coming through now.

Okay I’m sorry. It's got a bit of an echo. So strong results right through. One quick question I had is there is almost a $3 million increase in other underwriting expenses on a year-to-year basis. Is that incentive related, or is there something unusual going on there?

It is primarily related to increased profit sharing for the agents based upon the excellent profitability on the loss ratio side. So at least half of that increase would be related to profit sharing expenses. There is also some increase to salaries expense related to employee incentive accruals as well, but it’s all underwriting based increases.

Okay. That is helpful. One thing, Jeff, I want to make sure I understood your comments. When you are talking about workers compensation, did you mention there that there was favorable settlements is that a reserve related issue or something else or did you mean something else?

It would be a favorable settlement of claims during the first quarter and those are actual settlements that were at a lesser amount than the reserves that would have been in place for those particular claims at the end of the year. The dollar amount is not a very significant number, I think for the quarter, the development was somewhere in the $1 million to $2 million range for those favorable settlements. But they were across a couple of our subsidiaries and it just happened us to go to the right direction as far as some of those were in litigation, others were just favorable settlement that we were able to reach with the claimants.

Okay. Fantastic, one last question if I can. Is it possible to get any sort of update on specific rate changes within the workers compensation book?

Well in workers’ comp as you know most rate changes are controlled by the rating bureau for the states for workers comp, and then we as a company have the right to change what is known as our loss cost multiplier and you have varying states that are may be going in opposite direction, some of the states are minor decreases, some of the states are increases. But what we do as we look at what our loss experience is, and we take the opportunity either to leave our loss cost multiplier where it is or to increase it if that appropriate. And generally, we could say that our increases in workers' comp maybe somewhere in the 2% to 3% range, because there are some state where there is actually some modest decrease and that’s caused as I said by the action of the rating bureau.

Okay. Fantastic. Thank you very much.

There are no further questions at this time.

We want to thank everyone for participating in the conference call and we are pleased to report a nice positive quarter and look forward to talking to you in July. Thank you everyone.

Thank you.

Thank you everybody, we appreciate it.

This concludes today’s conference. You may now disconnect.