Donegal Group Inc (DGICB) 2007 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth-quarter 2007 Donegal Group earnings conference call. My name is Karen and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Jeff Miller, Senior Vice President and Chief Financial Officer. Please proceed.

Good morning, everyone, and welcome to the Donegal Group earnings release conference call for the fourth quarter and year ended December 31, 2007. I am Jeff Miller, Senior Vice President and Chief Financial Officer, and I will begin the conference call with some financial highlights and discussion of the quarterly and full-year financial results. I will then turn the call over to Don Nikolaus, President and Chief Executive Officer, for his comments on our results and an update on the business trends that we are experiencing.

Certain statements made in our earnings release and in this conference call are forward-looking in nature and involve a number of risks and uncertainties. Please refer to our earnings 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 on the investors portion of our web site under the SEC filings link.

We're pleased to report a solid level of earnings for the fourth quarter of 2007, reflecting a continuation of favorable underwriting results in spite of a modest increase in weather-related claim activity and a moderation in favorable prior accident year claim settlements during the quarter versus the fourth quarter of 2006. Our net income for the fourth quarter of 2007 was $10.8 million, or $0.43 per share of Class A common stock on a diluted basis compared to $11 million, or $0.44 per (technical difficulty) quarter of 2006. Total revenues for the fourth quarter 2007 were 86.9 (technical difficulty)

Personal Lines increasing 4.8% and Commercial Lines decreasing 2.7%. Investment income increased 6.9% to $22.8 million for the year.

Our net income for the full-year 2007 was $38.3 million compared to net income of $40.2 million for 2006 with 2007 ranking as our second-highest year in terms of net income. Our combined ratio for the full year 2007 was 91.3% compared to 89% for the full year 2006.

Earnings per share for the year were $1.53 per share of Class A common stock on a diluted basis compared to $1.60 per share for 2006. Our book value per share increased [in] $13.92 as of year-end, representing a 9.6% increase over the $12.70 book value as of the end of 2006. In March of 2007, we initiated a share repurchase program authorizing the repurchase of up to 500,000 shares of Class A common stock. Pursuant to this plan, we repurchased approximately 100,000 shares during the fourth quarter, bringing the total number of shares repurchased to date to 266,000 shares.

On January 30, 2008, we announced that our Board of Directors and the Board of Donegal Mutual had each approved an amendment to the [tolling] agreement between Donegal Mutual and Atlantic States Insurance Company, our largest subsidiary. We received regulatory approval for this change on February 11, and therefore are pleased to report that effective March 1, the pooling percentage for Atlantic States will increase from 70% to 80%. Based upon current pooled premium levels, we expect Atlantic States to receive an additional allocation of written and earned premiums of approximately $30 million annually.

Also as of March 1, Donegal Mutual will transfer approximately $12 million of cash and net unearned premium reserves to Atlantic States which will result in a modest increase to Atlantic States' investment income from that day forward. We and Donegal Mutual have realized significant benefits from the pooling agreement since it was established 21 years ago and we believe this change will provide a continuation of those benefits in 2008 and future years.

At this point, I will turn the call over to our President, Don Nikolaus, for his comments on the quarterly results. Don?

Thank you, Jeff, and good morning everyone. Thank you for joining our call. As Jeff has reviewed with you, we have had a quite solid fourth quarter in what many of you know to be a challenging environment in the property-casualty insurance industry. We feel a sense of gratification and satisfaction that attaining a 90.5% combined with some weather and plus the competitive environment we think is confirmation of the very underwriting focused strategy that we have been operating under for quite some period of time.

What I would like to do is to cover a number of specifics that would have taken place during the fourth quarter and talk a little bit about the marketplace and what we have planned and how we are going to implement and execute in the first quarter and the balance of the year 2008.

Generally at these calls, we make an announcement with regard to the number of new agency appointments, and the number of new agency appointments in the fourth quarter was 42. It would bring to a total for the year of 2007 of 199 new agency appointments. It is certainly above what we would have projected. I think we were talking somewhere in the 165 to 170 range for the year. So we have exceeded that. It is certainly a major part of our initiative to expand our distribution system.

To give you a little bit of additional statistics on newly appointed agencies, those agencies that would have been appointed in 2005, 2006 and 2007 accounted for approximately 25% of the new policies written for the year 2007 -- that is Personal Lines policies -- and they would have accounted for about 22% of the Commercial Lines new policies written.

Now, needless to say, as you appoint agencies as we have indicated previously, it takes time to get them oriented, to get them understanding your product line and certainly time for them to become familiar with our people and for us to build relationships with them. So it's an ongoing process and just because you appoint an agency in 2007 does not say that they are firing on all cylinders by the middle of 2008. But it's certainly an area that we continue to work on aggressively.

As it relates to 2008, staying with the theme of the distribution system, it will certainly continue to be one of our major goals, is to continue to aggressively appoint quality agencies that fit the profile for the book of business that we like to underwrite, both from the type of insurance products, but also the quality of what we write. In 2008, we will continue to enhance our technology, which is primarily embedded in WritePro and WriteBiz and our interactive web site. We see more and more of our business coming through those enhanced electronic portals and we want to continue to make them as friendly and as expansive as possible.

Certainly I would want to point out that underwriting and the quality of our underwriting practices needs to be a constant area of focus because in a competitive marketplace, it is easy for insurance companies, hopefully not ours, to fall victim to the idea that you increase your premiums by making your requirements somewhat less restrictive. And although we certainly are always looking for sound, prudent opportunities to either expand a product line or to enhance the classes of business that we write, we always want to make sure that we continue to be focused on underwriting profitability because at the end of the day longer-term, the profitability of the book of business is certainly as equally important if not more than important than some extra additional percentage of premium growth.

We are also going to be looking in the year 2008 to continue to work on how to drive down expenses by increasing productivity, making sure that we have as many aspects of our operation automated as possible because as the environment remains competitive, we have to make sure that we are as productive and efficient as possible. Jeff has also referred to the pooling agreement change, which we think will, for the public company as well as for the mutual, will be a constructive process. And those of you who have followed us for some years know that that percentage of the pooling agreement has migrated over the 21 years that we have been a public company. We were pleased to see that the regulatory body, the Insurance Department of Pennsylvania, is the primary regulator for us, that they were receptive to that and that readily approved it.

One other area of importance is reinsurance. We are pleased to tell you that we had a productive 2008 reinsurance renewal. We have increased our per-occurrence retention from $400,000 to $600,000, and companies on an ongoing basis based upon their size, their capital structure, their financial numbers, look at what the retention should be. Over a period of time, we, like many other companies, have increased that and we have not done that for some years and we thought that was appropriate. We wanted to make sure that the market would be aware of that. It's always a balance between not wanting to see too much premium to a reinsurer, and at the same time not wanting to assume excessive amount of risk and we think we have struck a favorable balance.

In 2008, we will continue our, what I would describe, a very proactive outreach for doing acquisition. I think that many of you have been on our conference calls before know that we have a history of doing acquisitions. A lot of them have been the mutualizations of mutual companies. We would intend to continue as we have to pursue prudent acquisitions and we are receptive to it and we are always looking for opportunities.

One of the other areas that will be and continue to be, not that it's a new theme, but in the sort of difficult financial markets that we see many of our brethren in the banking industry in and some very large insurance companies, we think that it's a time for a strong focus on balance sheet strength. Profitability has always been extremely important to us as well as balance sheet strength, but we recognize that is certainly a time when one needs to be strongly focused on the balance sheet. Because going forward we believe there will be opportunities, whether they be in acquisitions, whether they be when the market turns that we want to have to make sure that we have a very strong capital position and be able to be opportunistic.

I know that there will be questions about what we're seeing in the competitive environment and certainly we will be willing to answer any questions in that regard. But to give you a little bit of a process to it, from our view of the world, the competitive environment, both Commercially and Personal Lines, we do not think has materially changed. It has been quite competitive all throughout 2007 and certainly going back into 2006 we have not seen anything to indicate that it's intensifying. We do read and hear that some companies have made claims that they are -- have made various rate increase filings in Personal Lines. If that be the case, we would view that as being constructive. We hope that is the case. We will be looking for market indicators to be able to confirm that, but we are of course reading some of the same information that many of you probably have heard.

We, ourselves, have selectively, and I would love to say that have selectively, filed for some rate increases in our homeowners' line of business in several states and we will be proactive in making additional filings with additional product lines if we deem that to be appropriate from the standpoint of rate adequacy and from profitability levels.

On the Commercial side, clearly, Commercial Lines continues to be more competitive for us and I believe for the industry as a whole than Personal Lines. And in general I think that we are seeing our renewals on Commercial Lines going out flat to down, low single digits in the 2 to 4%. But certainly on new business, we are -- for the right account, we're trying to certainly be competitive. But as we all know, in any business, there needs to be a point at which you're not willing to take on new business if it isn't properly priced, sort of a walk-away price. And that is a discipline and it requires a daily balance and it needs to be well-managed because you never want to miss opportunities. But at the same time, you don't want to have rose-colored glasses on.

So that gives you sort of an overview of the fourth quarter and some of the strategies that we will continue to implement in 2008. Much of it is a continuation of what we have been doing and we are a company that does not like to have sort of a goal or project of the week. We like to have a longer-term developed strategy and make sure that we keep it current, but that we stay focused and we execute on it.

So, I will turn it back to Jeff at this point and we will move forward with the question and answer process.

Thank you, Don. Karen, if we could open the line for questions please?

(OPERATOR INSTRUCTIONS) Joseph [DiMarino], Piper Jaffray.

You gave some detail on your thoughts on acquisitions, but just looking for a little bit more color in terms of the size of the acquisitions you might be looking at and how it might be financed.

I would be happy to answer that. We look at acquisitions of various sizes. We are sometimes willing to look at a smaller acquisition if it will give us access to a new state, because generally we like to enter into new jurisdictions with some reasonably credible book of business. So we might be willing to take a look at an acquisition where the premiums are 10, 15, $20 million. The ideal acquisition would certainly be above that. And in terms of the maximum size, we certainly would not rule out and would certainly look for opportunities for acquisitions where the premium would be 75 or $100 million. In terms of financing them, many of the acquisitions that we have done to this point have been on the mutual side where we have infused surplus notes and have gained management control through our mutual and then eventually demutualizing it. So there is initially less capital required.

From the standpoint if it were a stock acquisition, we believe we are well capitalized. We have access to lines of credit if we need to have that, so that we think we would have the necessary resources to do acquisitions within the ranges that we would think would make sense for us.

Okay, thanks. Also, I apologize if you already answered this, but what was the favorable development in the fourth quarter, and then what is your statutory capital?

The favorable development in the fourth quarter, what I quoted is $2 million, and the statutory surplus was $318.9 million. That is a bit lower than what we would have told you at September and that's the result of some intercompany dividends that were paid up to Donegal Group, the holding company, in December in the amount of $18 million.

Thanks. One last question. What caused the change in your reinsurance recoverable? I think it went from 90.6 to 78.9 in the quarter.

The change in the reinsurance recoverable is largely related to the reduction of reserves. If you look at the corresponding change in the liability for losses and loss expenses, you will see a comparable reduction and that relates to the settlement of larger claims for which we have collected the reinsurance.

(OPERATOR INSTRUCTIONS) [Scott Laurent].

I am a private investor. Jeff, a year ago, we bought 78,000 shares, Donegal did, at $19.90. Today the share price is 20% lower, $16. Why is Donegal not, I repeat not, aggressively buying back shares?

As I told you in my comments there, Scott, we did buy back 100,000 shares during the fourth quarter and have not been active in the market since the end of the year because that's a quiet period and we do not buy shares during that quiet period.

Well, we have a 500,000 share repurchase -- you have a total of 266,000. That tells me you have 45% more to go. Why are you holding back at these levels? I cannot understand. You have $1 million net income per week and you would think it's time to reward the shareholder.

As you know, companies review their capital management on an ongoing basis and it's a judgment factor in terms of whether it's an appropriate circumstance time to be using capital to repurchase shares. In the fourth quarter, we repurchased 100,000 shares, which we think is a substantial number of shares. When we announced the buyback, we indicated that it would be a buyback over a period of time and that we have we think handled that appropriately and prudently. There is not necessarily any silver bullet to concluding that buying back your shares is somehow or another going to magically increase the stock price because there are many companies, very large ones, that have spent billions of dollars in the last year buying back shares and the price of their stock is down. So there is a lot of dynamics that go into where the price of your stock is, the most of which we absolutely have no control over other than making sure that we try to run this business on a day-to-day basis to create shareholder value and to generate the maximum profitability.

I understand, but there is 72% of the float of Donegal Insurance, Donegal Group, held by four institutions, four. I cannot believe they are happy, including the mutual, with the performance of the stock down 20% in the year. And then the Company having more gas, 245,000 more shares to buy, and they're not buying it.

Well, Scott, I'm going to answer one more answer, and then I think we have to move on to the next question. But one of the issues of course is that we have always been concerned over a 20-year period of time with the amount of the daily float in our stock. And, therefore, buying it back and depending on how much you buy back does not help the amount of float that's out there. And we have heard over the years different opinions, but certainly some vocal opinions, that you don't want to be doing things that are going to reduce the amount of float because there are many institutions that want to see a larger float if they are to consider your particular company in their investment strategy. So there are lots of issues, but we understand your input and we appreciate it.

There are no additional questions at this time. I would now like to turn the call over to Mr. Jeff Miller for closing remarks.

We appreciate everyone's participation this morning on the conference call and wish everyone a good day. Thank you very much.

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