Donegal Group Inc (DGICA) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2003 Donegal Group earnings conference call. At this time all participants are in a listen-only mode with a question-and-answer session to follow the presentation. My name is Kelera and I will be your conference coordinator today. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Wednesday, October 15, 2003. I would now like to turn the program over to your host for today's conference, Mr. Ralph Spontak. Please proceed, sir.

Good morning everyone, and welcome to the Donegal Group Inc. earnings release conference call for the third quarter of 2003. I am Ralph Spontak, Chief Financial Officer, and I will be starting the conference call off by reviewing some of the key financial components for the quarterly results. Don Nikolaus, President and Chief Executive Officer of the Donegal companies will then, as usual, discuss some of the current trends we are experiencing. Before we get started, let me read our forward-looking statement.

All statements contained in this conference that are not historic facts are based on current expectations. Such statements are forward-looking in nature and involve a number of risks and uncertainties. Actual results may vary materially. The factors that could cause actual results to vary materially include the ability of the company to maintain profitable operations, the adequacy of the Company's reserves for losses and loss adjusting expenses, business and economic conditions in the Company's primary operating areas, competition from various insurance and noninsurance businesses, changes in regulatory requirements, weather, events, and other risks that may be described from time to time in reports Donegal files with the Securities and Exchange Commission. Undue reliance should not be placed on such forward-looking statements.

The third quarter was marked by a number of items, including a major weather event, hurricane Isabel. It was also marked by higher levels of premium growth than we have been seeing earlier this year, and it was also marked by a continuation of the favorable underwriting results we have experienced in recent quarters. Net income for the third quarter of 2003 was $4,001,385 or 40 cents per common share on a diluted basis, compared to $3,015,676 or 33 cents per share on a diluted basis for the third quarter of 2002. This represents a 33 percent increase in net income when compared to the prior year results.

Current quarter results include property losses from hurricane Isabel of $1 million that reduced net income by approximately $650,000 or 7 cents per share on a diluted basis. Diluted earnings per share were reduced slightly due to a higher number of fully diluted shares outstanding, 9.9 million for the quarter and the fully diluted calculation that resulted from the effect of our higher market value on the outstanding options.

Net income for the first nine months of 2003 increased 57 percent over the first nine months of 2002 with net income of $13,114,770 or $1.37 per common share on a diluted basis, compared to $8,375,226 or 91 cents per share on a diluted basis for the first nine months of 2002. The annualized return on equity was 12.5 percent for the first nine months of this year. As mentioned, even with the impact of hurricane Isabel the third quarter continues the trend we saw first in 2002 towards stronger underwriting results.

The Company posted an excellent GAAP combined ratio of 96.8 percent for the third quarter ended September 30, 2003 compared to 99.5 for the third quarter of 2002. Excluding the hurricane-related claims the combined ratio would have been 94.8 percent. The GAAP combined ratio for the year-to-date is 95.4 percent compared to 100.2 percent for the quarter of 2002 with the Company's loss ratio improving to 65.9 percent for the first nine months of this year, compared to 69.3 percent for the first nine months of 2002.

Our pure loss development continues to be very good this year with only $31,000 of total loss development in the third quarter of this year compared to $455,000 worth of loss development in the third quarter of 2002. The Company's combined ratio continues to benefit from improvements in operating expenses and increased efficiency with the Company's GAAP expense ratio standing at 30.4 percent during the third quarter. This expense ratio continues to be slightly higher than we would have expected it at the beginning of the year due in large part to incentives tied to the Company's very good underwriting results. The expense ratio was impacted by a full percentage point related to increases in contingent commission, employee incentives and agency trip incentives in 2003 compared to a year earlier.

The Company's book value per share increased to $15.69 per common share at September 30, 2003. Total revenues in the third quarter increased 6.3 percent with premiums earned also increasing 6.3 percent. But net written premiums showed some acceleration during the quarter, increasing at a rate of 8.6 percent for the third quarter when compared to a year earlier.

At this point, I would like to turn the call over to Don Nikolaus, President and Chief Executive Officer of the Donegal companies.

Good morning, everyone. I would certainly like to add my welcome to all of you joining us on the call. As Ralph has just outlined for you and was released earlier in the press release of our earnings, we have had a very solid quarter in the third quarter even in spite of a severe hurricane, which did cause a not insignificant number of losses and as Ralph has indicated, $1 million of losses in the third quarter.

We are particularly pleased with the continuing significant levels of profitability which to us indicates that our business plan is on target and our strategies for conservative underwriting and profitability are very much on target. And we are also pleased to see that in the third quarter that net premiums written accelerated as Ralph has indicated to 8.6 percent for the quarter as compared to year-to-date of 5.2 percent. In addition to profitability, which is certainly our key goal but we have certainly been looking to accelerate topline growth, and we think that it is beginning to become evident as the result of the figures that we are showing for the third quarter.

We would also indicate at this point that we see a continuing opportunity for rate firmness; as all of you are aware, certainly in property lines with a significant hurricane on the East Coast, that certainly is an event that all of us in the insurance industry would wish did not occur. But there is a side effect, and we think it is a positive one in that it will continue to provide an opportunity for rate firmness and rate increases, particularly as it relates to property risk. We also see increasing opportunities that are being presented to us as a regional carrier as the result of actions on the part of other national and large regional companies resulting from particular circumstances of those companies such as profitability and other issues. And it is providing opportunities for us in our market areas in which we do business. It does not in any way represent a needed for us to change our strategy, simply to work our strategies to take full advantages of the opportunities that are presenting themselves.

We, as you know, have announced some weeks ago that Donegal Group was proceeding with a demutualization in cooperation with Le Mars Mutual Insurance Company in Iowa, and that Donegal Group would be acquiring Lamar's as the result of the completion of the demutualization. We have, as planned, completed the policyholders' meeting, which was quite successful and from the standpoint that a very high percentage voted in favor of the demutualization, and we held the hearing before the Insurance Department of the Iowa Insurance Department the following day, and we are awaiting action by them. It will be our anticipation that that will be forthcoming within the next 30 days, and we would believe that will be a favorable decision by that department. We would anticipate that the transaction would close either late this year or very, very early in January of the new year.

The return on equity figure that Ralph quoted for the nine months year-to-date, 12.5 percent, we are on target therefore to meet our budget and goal for return on average equity. And within our industry we know that that compares very favorably, and we certainly want to continue that and to accelerate that. At this point we can open the call to questions and proceed accordingly.

(OPERATOR INSTRUCTIONS) David Lewis at SunTrust Robinson Humphrey.

Congratulations on the fabulous quarter. A couple of questions. Can you talk a little bit about the rate environment? You mentioned that hurricane Isabel is likely to have some impact on the property rights anyway. You already actually seeing that, or is it just an intuitive --?

I think Dave it is a little intuitive on my part, but I believe that it will reflect itself in property rates, particularly in homeowner rates. And particularly in the affected states. So we would -- our company, as an example, will anticipate a round of homeowner rate increases in the beginning of year 2004 as the result of an annual review that we do and generally rate increases that we take in homeowners. But we would believe that rate increase will be positively affected in that we would be anticipating a higher rate increase as the result of that particular storm.

Can you give us an idea of what you're planning on filing?

Our actuarial people are just in the process of working on that, but I would say that in states that were affected, which would have been Virginia, Delaware, Maryland -- I'll talk about those for a moment. We would probably be talking somewhere in the 7 to 9 percent range and in Pennsylvania we would be probably talking somewhere in the 6 to 8 percent range.

Any other thoughts on pricing in other areas?

I believe from what we are seeing that private passenger automobile rates, that we see and we do a fair amount of monitoring of what other companies are doing, there are advisory services that keep us and others posted on that. And there appears to be a continuation of rate increases in that which is our major line of business. And we think that that will continue throughout 2004. And in the commercial, commercial which has had, as you know, some very healthy rate increases over the last two to three years, there are I think continuing opportunities there for rates to firm, but I think the important news is that we don't see any signs of them slacking or declining, which some in the industry have anticipated at some point that that would occur. We don't see real signs of that taking place, and at least in the markets that we do business in and the products the insurance products that we sell. So we think its a very constructive environment currently.

Thanks, Don, can you give me a little more color on the rate increases you might be seeing in the auto sections?

Well, what we are seeing from some of the information that we are gathering on competitors, they would be ranging anywhere from 4 percent to 12 percent, depending upon the Company and depending upon the state. And which are some fairly healthy rate increases in that particular line. Now our round of rate increases we have already of course taken them for year 2003, and we will be reviewing, our actuarial people will be reviewing for 2004, which we would be filing in the early part of the year. But we are certainly always monitoring where -- not only our own actuarial results -- but monitoring where the marketplace is. And I think that we are pleased to see that there is a fair amount of activity in increasing rates.

Thanks very much.

Adam (indiscernible) of Cochran (indiscernible).

This is actually Mark Finkelstein. I have a couple of questions here, in terms of the 8.6 percent written growth in the third quarter, could you indicate how much of that was rate versus unit growth? And the second question is regarding loss cost trend. Clearly frequency across the industry has gone down over the last couple quarters, and I'm just curious if that trend continued in the third quarter and what is going on with severity as well?

As far as the increase in premiums, always a difficult task to try to break it down, but I would say that our best bet would be about two-thirds of the increase in premium as a result of rate increases, and a third as to other growth. As far as loss cost or loss frequencies are concerned, of course the third quarter results are somewhat skewed because of the events of the hurricane, so obviously our loss or number of claim statistics are pretty well skewed at this point. So it will be a little bit before we can pull those out. But I would say the impression that we got is that there seems to be a continuation of improvement in the loss frequency area and that there might be some slight increase in severity.

One quick follow-up on the growth. Were there any certain lines or geographies that had disproportionate growth in the quarter?

The commercial lines did have a higher level of growth or the commercial lines had a higher level than personal lines. Commercial line growth year-to-year for the quarter was right around 12 percent with personal lines coming in just under 7 percent at 6.8 percent. So within those two groupings it was fairly well spread by individual line of business.

Okay, perfect. Thank you.

David Lewis of SunTrust Robinson Humphrey.

A couple follow-ups. Ralph, can you give us the pre-SFAS 115 book value?

Yes, the effect of the SFAS 115 is 57 cents at the end of September. So if you just back that off that will give you the pure number.

Okay, that's helpful. And as far as the share count, I understand the equity method so that is all it was increasing at almost half one million shares?

That's exactly what it was. It was for the year-to-date it wasn't quite the effect that we saw in the third quarter, but which was very gratifying to see the stocks start to reflect what we feel is the good value. But it did affect the outstanding shares, and Dave, just so you and the others understand, we've done some internal calculations, and up to a level of $20 a share that 9.9 million will continue to be a good number for fully diluted shares.

That's helpful. Don, can you comment any further on the acquisition outlook? I know you're continually looking.

We are continuing to look, and I can say to you that we continue to be presented with opportunities. And we are optimistic that we will be able to -- we will be able to secure an additional acquisition in the future, near future.

Okay, and final question. Ralph, can you comment on the guidance what you might anticipate from net revenue premium as we look to the fourth quarter next year, something in probably the 8 to 9 percent range realistic?

I think 8 to 9 is a good number at this point, Dave.

Including 2004?

Including 2004 at this point.

Okay, great. Thanks very much.

Beth Malone of Advest.

Congratulations on the quarter. Just a quick question. Could you give me any ideas in terms of hurricane Isabel, did that situation change at all your way, your underwriting or who you are writing or was that pretty much as you had modeled if you get a hurricane in your mid-Atlantic region?

We appreciate that question because we think the results of hurricane Isabel confirm the underwriting philosophy that we have and the catastrophe control provisions that we have in place. And we believe that the modeling that we have done over the years and the catastrophe control procedures that we have and underwriting policies that they work very well. And it was certainly a very severe hurricane, but it did not do the kind of, did not produce the kind of losses that we might otherwise have had if we had not over the last 10 to 12 years followed a very disciplined approach to how we write and where we write and in what concentrations in certain geographic areas. So we were given the severity of the storm, we were relatively pleased with the outcome.

Okay, thanks. And what has been your strategy in terms of building your agency force? Are you actively trying to recruit more agents in your existing business or what is the strategy there?

I would be happy to talk about that. It is multipronged in effect, we are soliciting agencies. We go through a very disciplined process whereby we go out and identify our market share in areas of geographic areas, and then determine what we would like to see in terms over time of market share in a particular area. And then go and identify who are the quality agents that could help us achieve that. So we have been actively doing that and have had a fair amount of success. We are growing our agency plan very nicely in the Southeast which is a targeted area. We are growing it very nicely in Ohio. We have a very strong agency plan in Pennsylvania, but we are continuing to grow that so that we have targeted the various states where we want to increase our market share. We are also finding, and that is one of the areas that I referred to earlier, some of the opportunities that we are seeing is that as the result of actions by other companies within the independent agency system, we have been getting a fair number of contacts by agents who would like us to come and talk to us or us come and talk to them, about a working relationship, about licensing them to represent us.

And there are other means by which we also increase our opportunities within the distribution system. We do book transfer from within a given agency of another company's book or part of a book upon the agent's request, and we see a fair amount of activity started to evolve in that area. So those are sort of the three approaches that we take in terms of growing the agency. Of course, the important part of that is that we are very active but we are also very careful. It is easy to appoint all of the agents that you want. But as we all know in our business, the agent is the first source of underwriting a piece of business, and if you don't have an agency relationship in terms of an agent that is going to do a good job of that and is going to have your company's interest at heart as well as the insureds, you can develop a problem. So you have to be disciplined about the appointment process, and you have to be selective.

Okay. Thank you.

Jerry Heffernan of Lord Abbott & Co.

Good morning. To follow along on the agency conversation, I believe last quarter we discussed 45 to 50 agencies added to the count. Can you tell us where you are countwise in regards to your agency growth efforts?

Yes, I can give you approximate numbers. We were looking to appoint somewhere in our entire system somewhere in the neighborhood of 50 to 60 agencies for this year, and agency appointments this is a little follow up to the earlier questions, agency appointments sort of get on a timeframe, a tracking from the point that you make contact until you gather all their figures and you do all the necessary other inquiries. So we would have already appointed a fair number of agents up this point, and we have a nice number of agencies in the process in which we are going through the various stages. So we are optimistic that for the full year that we will meet our targeted number of agency appointments. And in some territories we may actually even exceed what we would have anticipated.

Okay. I'm just reviewing the notes from the last quarter's conference call. I thought it was stated during the call that you were already up to 45 or 50 new appointments. Am I reading the notes wrong? Was that a target that you had or was that actually a --.

I believe, and I don't have those notes in front of me, but I believe that we were talking about that total agency new appointments growth in agency appointments would be somewhere in the neighborhood of 50. I believe that's what would have been stated and what we are currently saying is that we would expect it to be closer to 60.

Okay. The fact that you are pushing those numbers seemingly on a pretty good rate at or above expectations, would it be reasonable to assume that that is part of the explanation for the net written premium growth accelerating in the third quarter?

It is partially, but I would say only a small part because it does take time, even once you appoint an agency to get them oriented. We do orientation programs; we try to have all of our agencies that are newly appointed agencies either come to our home office or come to our regional offices. And we try to do an orientation in terms of them understanding our products and meeting our people. And to get lots of those implementation aspects in place, it takes time. And therefore new agents don't necessarily ramp their premium up as much in the first year as you would certainly see going into the second and third. But it would be accurate to say some of that growth is clearly represented by new agency appointments. But it is not a significant part of that.

Okay. One last thing on reserves. Were there any notable reserve releases in the period?

No. As I mentioned earlier, the total loss development net of releases was only $31,000 for the entire quarter.

Very good. Thank you very much.

(OPERATOR INSTRUCTIONS) It appears there are no further questions. Please proceed with your closing remarks.

We would like to thank everyone for participating. It is always a pleasure to have a conference call as we have had in successive quarters where the results are excellent, and we are able to present quality information with regard to our company. Ralph, do you have any other thoughts?

No, I just like to thank everyone for joining us once again and for the very good questions. Thank you all very much.

Ladies and gentlemen, this concludes your conference call. Thank you for your participation today. You may now disconnect.