Donegal Group Inc (DGICA) 2016 Q1 法說會逐字稿

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.

(Operator Instructions)

Jeff Miller, Chief Financial Officer, you may begin your conference.

Thank you. Good morning, everyone. And welcome to the Donegal Group conference on March 31, 2016. We are getting an echo on our end. I don't know if that is a technical difficulty that you can prevent. I am Jeff Miller, Chief Financial Officer, and I will begin today's conference call with commentary on our quarterly financial results.

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 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 investor section of our website under the SEC filings link, and reconciliation of non-GAAP information as required by SEC relation G is provided in our news release which is also available in the investor section of 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 per 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 quarter's 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 incoming casualty claims.

We were 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 new business growth, an increase in our personal lines policy count and modest premium rate increases in most of our business lines. As I indicated earlier our excellent underwriting results were primarily driven by a significant reduction in our loss ratio for the quarter.

I will 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. 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 last year's first-quarter. We sustained very few large commercial fire losses during the first quarter 2016, and we also noted a significant decline in the number of fire losses in our homeowners line.

We attribute the decrease to comparatively warmer temperatures in 2016. The combination of decreases in both weather and fire losses led to excellent combined ratios in our commercial multi-peril and homeowners lines 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.

We typically do not discuss first quarter loss reserve development details because it is too early to determine development trends with any degree of certainty. In total there was no adverse reserve development in 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 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 an increase in unrealized gains. Consistent with our historical practice we did not declare any dividends 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 will 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 in 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 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 line segment of our business performed very well in the first quarter. We are pleased with the new business growth we are seeing and the consistent flow of new commercial opportunities being presented to us. While we appreciate the increase in new business opportunities we remain focused on our strong underwriting philosophy 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 line segment of our business we are pleased to report an increase of 5.4% in net premiums written compared to the first quarter of 2015.

The steady increase in premium growth along with the improved loss ratio highlights our commitment to improving the profitability level of our personal line segments. We have implemented and 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 homeowners in 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's subsidiary. In commercial lines renewal premium increases during the first quarter generally ranged 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.

In 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 Donegal's commitment to the independent agency system and the value we bring to our agents and customers are 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 premiums within our group of companies. We continue to have additional agencies in the pipeline moving toward that objective. Our efforts to enhance our relationship with these agencies have resulted in an increase in new business submissions. We believe the leaders agents will 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 traveled throughout our regions and held group sales meetings with a large representation of our agents. The attendance at these meetings has been excellent with approximately 70 to 150 agency personnel attending each meeting. It is a great opportunity for our agents to learn more details about our 2016 initiatives, interact with Donegal's regional and home office staff, and it allows for 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 policy holders. We continued with the phase rollout for our new billing system which is now live for new business policies in several states. The new billing system will ultimately replace our legacy system and provides flexible billing and payment plan options along with a new format for our billing forms that are easier to understand.

The implementation of Donegal's new policy rating engine for personal lines is near completion. The new rating engine allows for greater speed to market for rate and coverage actions. We are starting to see the benefits of this new technology as we make refinements to our personal lines products. To continue to build upon our reputation as a strong regional carrier, it is 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 lines 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 am simply going to have some brief remarks.

Our significant increase in net income from the quarter clearly benefited 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 is extremely important. We have a strong focus on underwriting profitability. And in order to do that, what is involved in addition to the rate, you need to have a very good understanding of the risk that you are insuring.

We believe we have honed that process very well and that it's certainly an important part of why our frequencies are down and our severity is somewhat better than it has been. Second, rate adequacy, I think Kevin talk 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 product and the emphasis they place 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're second to any other company, 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 our extremely important. We believe that they play a key role and how your profitability over time 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 a 72.9% increase over the first quarter of 2015. 8.6% increase in net written premiums. 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 year-end 2015. So, that hopefully gives you a somewhat of a summary in addition to the very excellent comments of Jeff and Kevin, and I will turn it back to Jeff Miller so we can move on to questions.

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

(Operator Instructions)

Meyer Shields, KBW.

Am I coming through?

Good morning, Meyer. You are coming through now.

I am sorry. It's got a bit of an echo. Strong results right through. One quick question I had is there is almost a $3 million increase in underwriting -- 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 increased salaries expense related to employee incentive accruals as well, but it is all underwriting based increases.

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 favorable settlement of claims during the first quarter. Those are actual settlements that were at a lesser amount than the reserves 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 some a couple of our subsidiaries, and they happened to go the right direction as far as some of those were in litigation, others were just favorable settlements that we were able to reach with the claimant.

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?

As you know most rate changes are controlled by the rating bureau for the state for workers comp. And then we as a company have the right to change what is known as our loss cost multiplier. You have varying states that are maybe going in opposite directions. Some of the states there are minor decreases. Some of the states are increases.

But what we do is 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 is appropriate. And generally we could say that our increases in workers comp may be somewhere in the 2% to 3% range because there are some states where there is actually some modest decrease. And that's caused as I said the action of the rating bureau.

Fantastic. Thank you very much.

There are no further questions at this time.

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

Thank you, everybody. We appreciate it.

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