Donegal Group Inc (DGICB) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2006 Donegal Group Earnings Conference Call. My name is Stacy, and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Mr. Jeffrey Miller, Chief Financial Officer. Please proceed, sir.

Thank you, Stacy. Good morning to everyone, and thank you for participating in Donegal Group Earnings Release Conference Call for the First Quarter ended March 31st, 2006. I am Jeff Miller, Senior Vice President and Chief Financial Officer, and I will start the conference call by discussing some highlights and analysis of the quarterly financial results. Don Nikolaus, President and Chief Executive Officer, will then provide his perspective on our results and discuss the trends we are currently experiencing. Also present on today's call are Dan Wagner, Senior Vice President and Treasurer for the Company, and Matt Resch, Vice President of Investments and Investor Relations. '

All statements made in this conference call 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 could vary materially. Among 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 adjustment expenses, severe weather, business and economic conditions in the Company's primary operating areas, competition from various insurance and non-insurance businesses, terrorism, legal and judicial development, changes in regulatory requirements and other risks that are described from time to time in the periodic reports that the Company files with the Securities and Exchange Commission. In light of the significant uncertainties inherent in forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person. The Company disclaims any obligation to update such statements, or to announce publicly the results of any revision to any of the forward-looking statements included herein to reflect future events or developments. Undue reliance should not be placed on any such forward-looking statements.

We are pleased to report that Donegal Group enjoyed a continuation of excellent earnings performance in the first quarter of 2006, with the Company again experiencing very favorable underwriting results and increased investment income as compared to the first quarter of 2005. We previously announced the declaration for a four-for-three stock split to be effected in the form of a 33-1/3% stock dividend, payable on April 26 to stockholders of record as of April 17. Please note that all share and per share information presented in today's earnings release and discussed during today's conference call have been restated to reflect the effect of the stock split. It is our understanding for NASDAQ that the trading price of our stock will adjust for the split on April 27, the first business day after the payable date. Our net income for the first quarter of 2006 increased 8.5% to $9.1 million, or $0.36 per share, on a diluted basis compared to $8.4 million, or $0.34 per share, on a diluted basis for the first quarter of 2005. Total revenues for the first quarter of 2006 were $81.3 million, an increase of 4.1% over the total revenues of $78.1 million in the first quarter of 2005. Net premiums earned in the first quarter increased 3.8% to $74.5 million compared to $71.8 million in the first quarter of 2005.

Growth in net premiums earned from premium production increases was partially offset by increased reinsurance costs, primarily due to increases in reinsurance rates effective January 1, 2006 and the purchase of additional reinsurance coverages. We are encouraged by personal lines premium growth in the states where our WritePro automated underwriting and policy issuance system is fully implemented, and in those states where we acquired acquisition rights to policies previously written by Shelby Insurance Company. Our personal lines growth in those states was 8.6%on a direct basis, and we are optimistic for further personal lines growth as we continue to roll out our WritePro system to other states and subsidiary operations. Our investment income increased $5 million in the first quarter of 2006, an increase of 13.1% over the $4.4 million posted in the first quarter of 2005. As in the past year, our tax exempt interest income grew in the current quarter compared to the prior year quarter due to our shift in invested asset mix throughout 2005 to include a higher percentage of tax exempt municipal bonds in our portfolio. Tax exempt interest income, as a percentage of total investment income, was 53.7% in the first quarter of 2006 compared to 46% in the first quarter of 2005. As a result of this shift, our effective tax rate was reduced to 28.7% compared to 30.6% in the first quarter of 2005, despite an increase in pretax income.

Our recent history of favorable underwriting results continued during the quarter with our loss ratio showing a slight increase to 58.1% compared to the 57.9% we reported in the first quarter of 2005. The slight increase reflects additional weather-related claims activity in several of our regions in the first quarter of 2006 compared to the first quarter of 2005. Our expense ratio decreased slightly to 31.9% in the first quarter of 2006 compared to 32.2% in the year earlier period. Overall, we posted very excellent underwriting results, as reflected by our GAAP combined ratio, for the first quarter of 90.5% compared to 90.6% for the first quarter 2005. Our book value per post split share increased to $11.62 as of the end of the quarter, and our annualized return on average equity for the quarter was 12.9%. At this point I will turn the call over to our President, Don Nikolaus, for his comments on our results and the trends that we are currently experiencing. Don?

Thank you, Jeff. Good morning, everyone. And thank you for joining our first quarter earnings call. As Jeff has reviewed with you, we have had another very fine quarter and we're certainly very pleased with the accomplishment. Also I would want to point out that yesterday -- It's in the press release. Yesterday the Board of Directors approved the increase in dividend for both the A and the B. The Class A dividend will now be $0.0825 per share which represents about 11% increase over the dividend currently paid. And the B shares, it will now be a dividend of $0.07 per share and -- which represents about a 9.8% increase in the dividend on the Class B share. Some of the operating issues that I would like to talk about as they affect and relate to our overall results.

We have been talking, in the last number of quarterly conference calls, about our technology and two systems, one called WritePro and the other WriteBiz. WritePro is the automated underwriting and rating technology and system that we have been rolling out in our various states for personal lines. And this, of course, is technology that our agents have available to them. And we have recently enhanced it with a web-based technology which has been perceived and received very well by our agency forces, and our usage of WritePro in terms of the number of quote has substantially increased. We have rolled that system live in the states of Pennsylvania, Virginia, Georgia, Tennessee, Alabama, and Ohio, some of those only in the last 30 days. And we anticipate rolling it out to other states in the midwest, in the southeast and in the mid-Atlantic states. We believe that there is a significant direct connection between the ease of doing business that this type of technology brings to the table, and we have high expectations of what it can do for us going forward. WriteBiz is similar technology, but on the commercial side, and primarily to be used with small to moderate sized commercial business. And we are in the process of rolling that out in a similar number of states, and we also are favorably impressed by the very positive reaction that we have received from our agency force concerning that technology.

On the issue of underwriting and pricing and rate adequacy, we're pleased to say to you that our very favorable results are based upon continuing commitment to underwriting discipline. Also to pricing discipline because, as we have stated previously, we think that success going forward has a lot to do with rate adequacy. I think we all realize that the property and casualty business has become more competitive, but we would state to you that we are achieving our results based upon sticking with how we do business, including our pricing structure. Also, we would want to talk a little bit about the Shelby acquisition rights book roll that we have been working on since the beginning of the year. And we have promised that we would give you statistics over time. We're pleased to tell you that we are having acceptance of approximately 64% of the renewals that we are offering to the insureds that previously would have been insured by Shelby. Refreshing your recollection that this is in the states of Pennsylvania, Alabama, and Tennessee. The largest book of business is in Pennsylvania, next followed by Tennessee.

We are pleased with the results to date, keeping in mind that every one of those policies has been underwritten, all property business has been inspected, and it meets our current new business guidelines, which is how we have been stating from the very beginning that we would underwrite and process that business. So we have added a -- In addition to being able to do acquisition of companies, we think that we have, through this process, have honed our skills in how to do a book acquisition and still utilize our underwriting process. In the first three months of the year, we have also continued to work on the branding of our company, both through corporate advertising in regional areas as well as a very active co-op advertising program with our agencies whereby, based upon their commitment to work with us, we co-brand both our company and its products and their agencies. One of the areas that I would also want to point out is with regard to the various growth of premiums, both on a net written and a direct written basis.

Jeff mentioned to you with regard to the states in which we are doing both a Shelby book acquisition rights transfer as well as the same states in which we would have WritePro live, we have experienced some very nice growth in direct written premiums in those respective states. As an example, in the state of Pennsylvania, that direct written premium for personal lines now during the quarter would have increased by 11.7%. In the state of Tennessee, it would have increased by 40%. And therefore we're pleased with both the WritePro results and the Shelby results in those respective states. We did not previously have a large book of business in Alabama, and continue not to have a large book of business in Alabama. But our Shelby book transfer there has increased our direct written premium in the first quarter in that state by -- in excess of 90%.

When we compare our own net written premium increases to several of our very large competitors in the personal lines arena. We have identified through some press releases that both Progressive and All State have released in which All State has indicated that their net written premium for property and casualty grew by 2.2% and Progressive by 2%. We are pleased that we are outpacing those very large personal lines competitors, and that our net written premium for personal lines has increased by 3.8%. So we believe that, going forward, that with WritePro and rolling that into additional states, that we would anticipate that we will have improved net written premiums as well as direct written premiums. And certainly as it compares to what we believe are many of the competitors against whom we compete.

All in all, we have felt that this has been a quite good first quarter for us, as the press release indicates. It even -- returning a 90 combined. Even though we had in excess of $1.1 million of weather-related claims, we think that it is an excellent start for the year 2006. And I'll turn it back to Jeff, and we'll move forward with questions.

Okay. Stacy, I believe we're ready to open the lines for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of David Lewis with SunTrust Robinson. Please proceed, sir.

Thank you, and good morning.

Good morning, David.

I've got a number of questions. I'm going to hit a few of them and then I'll going to come back to the others that aren't answered. First were there any redundant reserve releases in the quarter?

There were none. Our loss reserve developments would continue to have some light redundancies, but there were no reserve releases so to speak in the quarter. We continue to follow a very conservative reserving approach.

I think you said after the fourth quart results that it was redundant by about 5.5%.

That is correct for 2005. It's a little early to make any projections for 2006 because we're only three months into the year, but all the trends would seem to indicate that we're in a current -- a similar pattern as we would have been in 2005.

Okay. And next can we talk a little bit about the reinsurance rate increases and what impact that had on the quarter's earned and written premium?

Okay. Basically we've had a couple of things that impacted those reinsurance rates. As I indicated, we had an increase in the rates themselves and we also added some coverages. And we're seeing about a 20% increase in the overall seated premiums written as compared to the prior year. And some of that is related to the direct growth, but a lot of it is related to the additional coverage, as well as the increased rates. The number, as far as the impact of the current quarter, would have been somewhere around $1 million. Very close to $1 million of additional seated premiums, and that would be on a written and earned basis.

Okay. What's your current coverage? If you can update us there, please.

Sure. We have -- The basic change was in our multiline, the working layer excess program, whereas in 2004 and 2005 we had decreased the participation of reinsures on that treaty to 90%, which meant we were basically 10% self-insured for losses from 400,000 to 1 million. And so any loss that would have gone into that range we would have retained 10% of that risk. And for 2006 that has been fully placed to 100% so that we will have no part of any losses in excess of 400,000 through the million dollar limit on that treaty. So we would expect to get a majority of the additional premium rate increase related to that 10% participation back in the foremost seated losses over the course of the year. And that would all depend on the number of severe losses that would be incurred by our companies.

In addition to that, we made a change on our casualty excess to include a higher -- what they call an MAOL limit for workers' compensation, and that stands for maximum any one life. So for any one injury, that we are now covered all the way up to $10 million on that one injury, where in the past we would have had a lesser amount of coverage and would have self-insured a portion of that coverage as well. So we implemented some changes in our workers' comp program on the reinsurance so that we now have coverage that would start right where the multiline excess layer leaves off and goes right up to $10 million. So there's no longer any participation under that circumstance for a workers' comp loss. We also add some catastrophe protection to our Midwest Company and added another excess layer on their casualty. So we're just making sure that our reinsurance is covering us adequately, and that we're not taking any undue risk in any of those areas.

So a 20% percent increase through the premium on seated side only.

That's correct.

Okay. One last question, and I'll let others ask a few. What was the net written premiums in the quarter?

Net written premiums in the quarter were 76,178,000.

Great. Thanks very much.

You're welcome.

The next question comes from the line of Meyer Shields with Stifel Nicolaus. Please proceed.

Good morning, everyone. It's actually Mike Phillips this morning with Stifel Nicolaus. A couple quick questions for you. Any chance you could break out your total net written premium of 76 million? How much of that was from Shelby in total?

From Shelby in total, it was about $1.9 million.

Okay. Great. And then kind of another numbers question on -- On the direct written premium, could you give us the consolidated direct written premium for the quarter?

Well that's a number that's kind of hard to give you because the Atlantic states participating in the pooling with Donegal Mutual, the actual direct premiums for our public subsidiaries really isn't a meaningful number.

I guess maybe what I'm trying to get a sense of, and it kind of relates to the reinsurance --

Sure. I have a number that would be the direct premiums that would have come into the public company, including what is pooled from Donegal Mutual and that's 85,187,000. So the difference between that number and the net written premium would be the reinsurance

Okay. And then how would that 85 compare to last year's quarter?

Last year's quarter would have been 82.5 million.

Okay. Perfect. And that is all I have for now. I appreciate it. Thanks.

Thanks.

At this time, sir, there are no further questions in queue.

We'll wait. I don't know if David Lewis had a follow up question. If there are no other questions we'll --

Okay. We do have a follow up question from David Lewis. Please proceed, sir.

Thank you. In the fourth quarter you had higher than anticipated fire losses. Did that normalize during here in the first quarter?

It did, David. We had some storm activity, but the fires seemed to settle down. The storm losses came both from our Midwest Company, as well as the down south there were some hail storms in Georgia. And we had some wind and winter storms up here in the mid Atlantic region, so the $1.1 million would represent an increase over the prior quarter -- prior year quarter. But from a fire standpoint, that has settled down and we did not see a continuation of what we saw in the fourth quarter.

David, Don Nikolaus. As you probably are well aware, the fourth quarter of the year -- It seems when people are starting up heating system, there seems to be historically a higher incidence of fire losses. So we weren't particularly surprised by that when that occurred in the fourth quarter, but as Jeff is saying, we have not necessarily -- We have certainly had fire losses, but not that would have stood out as it would have in the December quarter.

Okay. April weather trends have been pretty heavy with storms, here in the southeast anyway. Do you have any early indications that that's running a any higher than normal?

We haven't seen a whole lot of activity from the southeast. We have some claims coming in that we're tracking, but nothing that I would categorize as significant. We did have some weather-related claims in the Midwest. I'm sure you've seen in the news some of the tornadoes and things that have gone through Iowa and some of the other states out there. We did have some claims from that. Somewhere around $350,000 worth of claims have been reported out there in the Midwest. So there is some small amount of claims activity that we are receiving related to storms in April, but not that I would consider a material number.

Okay. Don, do you want to talk a little bit about competition, recruiting? Some of the opportunities out there? I mean, are people's pricing still pretty modest? Or are you seeing regionals come into your mark -- excuse me. The nationals come into your market and try to put in any kind of rate increases?

Well so far I don't know that we have seen a lot of rate increases. But we have heard rumors of that by -- that some of the large national companies might be doing that, particularly in homeowners. But we have not seen it. But I would say that we have not seen evidence of furtherer deterioration in pricing. It has certainly gotten more competitive, but I don't know that we can say that it's more competitive than it would have been in the fourth quarter. But so I guess we're somewhat encouraged that there isn't a significant further deterioration in the standpoint of what our competitors are doing. So it's competitive, but we don't see it being irrational.

It's hard to quantify and maybe you're hearing more things in the marketplace because you talk to a lot of people. But I think, clearly, the -- Katrina and the other hurricanes certainly on the property side have, I think, made many companies stop and take a look at both the reinsurance costs and their primary insurance rates. And there presumably is some connection between the fact that we have not seen it get extremely competitive. So hopefully there's some good news coming out of those storms that maybe the industry is taking a more cautious look at how competitive it wants to become.

Don, do you want to make comment just on the number of recruits in the quarter? Agency recruits?

Yes. Thank you. We continue to do several things. The Shelby rights acquisition. What we did there is that we licensed many of their agencies, most of their agencies at the time, only to write new business -- or only to write the rollover business. And then what we have done from last November through even to the current time is take a look and -- to determine whether it was a good fit for us to license those agencies for new business, whether it worked for the agency and whether it worked for the Company. So we have been actively licensing those agencies that we think qualify under our criteria.

And secondly, in all of our jurisdictions we have set down certain goals that we would like to achieve in terms of agency appointment. So I would say that for the first quarter so far, we have probably appointed for new business about 40 agencies. And now that -- If you annualize that, that's going to be significantly higher than what we've traditionally done and it will probably trail off a bit because we had a fairly active first quarter in terms of licensing for new business the Shelby agency. So I would think that we will be on track for appointing somewhere in the 90 to 110 new agencies for the year 2006. But thank you for that question, because part of our gross strategy is tied to the appointment of new agencies, particularly in those states where we're actively trying to grow our premium. And that would be the midwest and the southeast, where we don't have quite as long of a history of being an active player. And they also are states in which we continue to have dialog with other companies, other modest sized companies, because we all know that we continue to have an active appetite for doing appropriate acquisitions.

Thank you for that answer. If I look at the 2006 earned premium, wouldn't that probably pick up and accelerate as we go through the 2006 quarters just because of the recruiting and the fact that you're rolling out the WritePro and then getting the WriteBiz in more markets?

We would certainly hope that it would pick up. Now of course the earned premium will lag the written by some measure, but certainly as the growth -- As we are projecting an optimistic for growth from the WritePro and WriteBiz systems. We would hope to see that pick up.

And finally, Jeff, how about the expense ratio? Is the 31.9% as good a guess right now for the balance of the year?

Certainly we expect it to be in that range.

Okay. Thanks very much. Congratulations on a good quarter.

Thank you.

There are no further questions in queue, sir.

Okay. At this point, we'd like to thank everyone for participating in the call. And the conference call replay instructions are in the press release if anyone would care to listen to the replay. So thank you, everyone.

Yes, thank you. We appreciate it.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.