Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Net premiums earned increased by 8.3% to $234.3 million.
- Expense ratio improved to 31.9% from 34.2% in the prior-year quarter.
- Investment income rose by 9% to $11.1 million.
- Personal lines net premiums written increased by 12.1%, driven by aggressive premium rate increases and strong policy retention.
- Successful execution of strategic non-renewals in Georgia and Alabama, leading to a 10.4% growth in commercial lines net premium written excluding these states.
Negative Points
- Combined ratio remained high at 103%, indicating ongoing underwriting challenges.
- Weather-related losses increased to $24.7 million, impacting the loss ratio significantly.
- Workers' compensation line experienced unfavorable reserve development, adding 17.4 percentage points to the current quarter loss ratio.
- Large fire losses contributed 5.3 percentage points to the loss ratio, indicating ongoing risk in this area.
- Higher technology costs related to systems modernization initiatives partially offset expense reductions.
Q & A Highlights
Q: How should we be thinking about growth by line in commercial? More specifically, what sort of trajectory would you like to see for commercial auto and workers' compensation moving forward?
A: Jeffery Hay, Senior Vice President and Chief Underwriting Officer, responded that Donegal Group expects similar growth rates across lines of business in commercial lines, driven by market rate dynamics. They anticipate challenges in workers' comp rates due to bureau-mandated reductions but expect positive rate trends for commercial multi-peril and commercial auto lines. The company is pushing for outsized growth in Small Commercial, particularly in BOP package policies.
Q: Can you quantify the increasing percentage of auto policies written on a six-month basis, compared to 12 months ago?
A: Jeffery Hay explained that Donegal Group now writes six-month policies for all new personal auto business, while renewing legacy business on the same terms. The mix of six-month policies has shifted from 28% to 40% over the past year. This shift allows for quicker rate changes to improve margins, although there are no long-term targets for this shift.
Q: Can you provide additional color on the moving pieces on reserve development this quarter?
A: Jeffrey Miller, Executive Vice President and Chief Financial Officer, detailed that the second quarter of 2024 saw favorable development of $3 million for commercial auto and $1.6 million for personal auto, offset by unfavorable development of $4.7 million for workers' compensation. The unfavorable development in workers' compensation was due to higher-than-expected severity for a small number of previously reported losses.
Q: Can you provide more details on the make-up of your mortgage-backed securities portfolio? Can you split it between Commercial versus Residential, or any details on geographical splits?
A: V. Anthony Viozzi, Senior Vice President and Chief Investment Officer, stated that Donegal Group's MBS portfolio consists almost exclusively of fixed-rate agency residential mortgages. They typically buy large major pools with diversified geographical exposure and avoid states such as New York, Florida, and California when possible.
Q: What are the key drivers behind the improvement in the expense ratio?
A: W. Daniel Delamater, Chief Operating Officer, highlighted multiple targeted initiatives across the organization, including the reduction of the regional footprint, changes to underwriting report strategies, use of analytics, implementation of a credit card surcharge, revisions to agency incentive programs, and targeted staff reductions. These initiatives have contributed to a significant improvement in the expense ratio.
Q: How is Donegal Group managing the impact of severe weather events on its financial results?
A: Kevin Burke, Chairman of the Board, President, and CEO, mentioned that strategic decisions made in recent years, along with ongoing management of geographic risk concentrations, have helped mitigate the impact of weather-related losses. The company continues to refine its strategies and action plans to address weather-related challenges.
Q: What are the expectations for small commercial growth in the coming years?
A: Kevin Burke indicated that small commercial growth will be a significant emphasis within Donegal Group's 2025 business plan. The company is prioritizing opportunities for profitable growth within updated state-specific action plans and expects to see further improvements in small commercial products and service offerings.
Q: How is the systems modernization project progressing?
A: Kevin Burke reported that development efforts are on track for major commercial lines and personal lines system releases. The project aims to modernize remaining products on legacy systems, with implementation dates beginning in 2025. The company is making solid progress towards these goals.
Q: What are the key factors driving the increase in net premiums written for personal lines?
A: Jeffery Hay noted that the 12.1% increase in net premiums written for personal lines was driven by aggressive premium rate increases and strong policy retention. Earned rate increases are now exceeding loss cost trends, resulting in margin expansion for the personal lines segment.
Q: How is Donegal Group addressing the challenges in the workers' compensation line of business?
A: Jeffery Hay explained that the company is closely monitoring reserving activity and analyzing underlying factors driving the increase in workers' compensation reserves. They are taking actions to address higher medical loss estimates and ensuring appropriate property valuations and risk selection.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
