Donegal Group Inc.
Q1 2015 Earnings Call Transcript

Published: 24 Apr 2015

[Executives:]

Jeffrey Miller - CFO Kevin Burke - COO and Acting CEO Donald Nikolaus - President and Chairman

[Analysts:]

Vincent DeAugustino - KBW

[Operator:]

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 Group's Incorporated First Quarter 2015 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Jeff Miller, Chief Financial Officer, you may begin your conference.

[Jeffrey Miller:]

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 the 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, will 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 submitted to the SEC. You can find a copy of our Form 10-K in the Investor 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 website. We were pleased to report net income of $6.9 million or $0.25 per share by Class A common stock on a diluted basis for the first quarter of 2015. 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 statuary combined ratio of 96.9% for the first quarter of 2015 reflects the significant improvement in our underwriting results when compared to the prior year quarters combined ratio of 103.2%. Reviewing our topline 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 continued to be rate increases across most of our business lines, commercial lines, new business growth and as we have reported previously, a change in Michigan insurance companies external quota share reinsurance agreement. We eliminated Michigan's 20% quota share reinsurance with third party reinsurance that was in place for 2014. We expect this change throughout approximately $20 million to our net premiums written throughout 2015. The main driver of the improvement in our underwriting results was the 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. The February deep freeze resulted in $3 million in property damage claim. Our total weather related 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 five 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 exceedingly also above average $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 writings 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’ve 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 loss ratios for the first quarters of 2015 or 2014. Because it is too early to determine any meaningful trends, we typically do not discuss any details about first quarter loss reserve development. In summary, we view the first quarter underwriting results as a solid start to 2015 and we’re optimistic about our prospects to continue to generate solid underwriting profit 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 a $11.75 per share of our Class B stock, payable May 15 to stockholders of record as of the close of business on May 1. At this point, I’ll turn the call over to Kevin for his comments on the quarter.

[Kevin Burke:]

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 implementing in the coming months. We are pleased with the solid underwriting results and a 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 Michigan insurance company quota the share agreement. We are optimistic that our continuing premium growth combined with sound underwriting discipline will continue to generate underwriting profitability. We routinely review rates indications and market data as we focus 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 its statutory combined ratio of 95.1%. In personal lines we are 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 quarter's combined ratio of 102.7. We are pleased with the improved profitability and these results reflect the benefits of premium rate increases and other underwriting initiatives we have employed. We have implemented and we will continue to file rate increase were necessary and we want to enhance our utilization of predicted modeling tools to refine our pricing and underwriting tools. To give you a sense of recent rate filing activity in personal lines, we continue to file rate increases in homeowners in the 3% to 5% range depending upon the state of subsidiary. Rate increases in personal automobile range in the low single digits depending upon the state subsidiary. Net premiums written for the first quarter increased 4.8% with the 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 establish specific goals to enhance the level of premium written in each of our appointed agents. As we move agents from their current level or premiums 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 the agents commit a greater percentage of the business at Donegal. We have completed 24 spring agency sales meetings as we’re 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 product and technology enhancements and an opportunity for 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 and strengthen 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 reporting commercial lines business. As a result of feedback we have received from the agency focused group 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 personal line system that has been extremely well received by our agents. We are pleased to announce that WriteBiz 2.0 is currently being highlighted with select agents and we anticipate a full roll-out 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 in 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 will turn the call over to Don Nikolaus before we open the line for questions.

[Donald Nikolaus:]

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 point are as follows; net income is $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 a $103.2 for the prior first year quarter, 8.3% increase in net premium written and book value per share of $15.68 compared to a $15.40 at year end 2014. Certainly these capture are not all but some of the most important points of the success of the quarter. And the success of the quarter we believe represents 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 will like to cover is that our management and employees are fully engaged. We had many, many projects and business initiatives whether it be on the technology side, the underwriting side, claims side to make us a better and growing company. So executing on our business plan, we think it 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 at these agency meeting 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 a 100% answers because many of them are new topics but what we do 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 its appropriate. And as you would understand, you can 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.

[Jeffrey Miller:]

Thank you, John. Eric I think we’ll ready to open the line for questions.

[Operator:]

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

[Vincent DeAugustino:]

Hi, good morning gentlemen. Just to start off so pretty happy to see the rate trend particularly on the commercial lines setting holding up really well there. And so I was just hoping to touch base, get a little bit of color there in terms of whether you think it's - just your market being excepting of that level of rate increases that may be that speaks to the relationship comment you had in the press release this morning or if there is any component of - I mean taking a more disciplined approach even this the markets softens a little bit.

[Kevin Burke:]

Well, it’s a combination and I'll let some others speak to. I think it’s a combination of things. What we have endeavored to do is to focus rate increases in two respect. If we have accounts where there has been some losses, we’re 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 would understand whether have been losses, it's easier to get rate increases. Also we make sure there are underwriters stay in contact with the agent. We just don’t sent out the rate increase, we make sure that we have dialogue to make sure that it's acceptable and that it will work because part of this is getting the agency engage 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 smaller to mid-size accounts. I think that what some of the industry literature would indicate but the market becomes somewhat softer on large account. Now its starting to filter down a bit into mid size accounts and we would not deny that. However so far, we had been successful in getting reasonable increases.

[Vincent DeAugustino:]

All right, thank you very much for that Don. And then on the weather side, you guys heard a little bit better than let's say our caution would have suggested, so again good to see there. At this point now that we kind into the – that tail end of April, I’m just curious to see how some of the ice stemming claims and those type of things that may be take a little bit of time to develop, if those types of claims are still coming in or if things are quite down to the point that you feel like you have a good handle on the ultimate exposure.

[Jeffrey Miller:]

Sure, Vincent, this is Jeff, I will be glad to respond to that. The ice stemming claims generally come from areas where you've had significant snowfall and certainly in the New England and especially in the Boston areas, the news would have covered, level of record snow falls 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 certain subsidiaries but we don’t 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, the type of ice stemming claims that you’re 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 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 - that we're operating we did not have significant weather activity particularly in the Midwest. We didn’t see the same level of the claims in 2015 that we've seen in 2014 particularly in Michigan where they had significant snow in 2014s first quarter. 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 we’re not seeing any significant reporting of other claims from the winter weather.

[Vincent DeAugustino:]

Okay. Very good color there. Thank you. And then sticking with you Jeff, just to make sure I understood the comment on reserve side. So basically at this juncture or earlier in the year, there is really not, I would say - I guess an opportunity for significant deviation away from your kind of expectations and so that's what underpins the comment there.

[Jeffrey Miller:]

That's correct. And generally, I think last year in the first quarter we had a similar development and later in the year we saw some additional adverse development. We’re hopeful that we have that behind us. Last year we did receive a number of claims that were related to the weather activity, it was occurred in the last part of 2013. We do not have a recurrence of bad weather in the fourth quarter of 2014. And so we’re hopeful that development will remain modest going into the remainder of the year. So that remains to be seen - the comment that 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 that it start on a favorable note.

[Vincent DeAugustino:]

Okay. And as far as the individual lines or accident years that - can I assume that there’s no anomalies in there that net out to things being pretty flat in aggregate?

[Kevin Burke:]

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 adverse loan there and the other thing is that particular line reflects is that our actuaries were conservative in the 2015 fix, as a result of some of the development we experienced in that line in past several years. So that line would be the only outlier, the other lines have generally been favorable from a development perspective.

[Vincent DeAugustino:]

Okay, excellent. And then last one. On the workers comp side, so that the premium growth have been running pretty good and still one good this quarter, but just a little bit of dip lower asking the prior quarter pace. So just wanted to check in and see if the change in appetite or any results in much better here just to hit it less than the rate needed?

[Jeffrey Miller:]

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

[Vincent DeAugustino:]

Okay. All right guys and thank you very much. Nice quarter here and wish you best of luck.

[Jeffrey Miller:]

Thank you.

[Operator:]

[Operator Instructions]

[Kevin Burke:]

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

[Jeffrey Miller:]

Yes, thank you everybody.

[Operator:]

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