Donegal Group Inc. (NASDAQ:DGICA) Q4 2023 Earnings Call Transcript

Donegal Group Inc. (NASDAQ:DGICA) Q4 2023 Earnings Call Transcript February 22, 2024

Donegal Group Inc. misses on earnings expectations. Reported EPS is $-0.11 EPS, expectations were $0.23. DGICA isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Karin Daly: Yes, good morning and thank you for joining us today. This morning, Donegal Group issued its fourth quarter and full year 2023 earnings release outlining its results. The release and the supplemental investor presentation are available in the Investor Relations section of Donegal website at www.donegalgroup.com. Please be advised that today’s conference was recorded and all participants are in listen only mode. After management’s prepared remarks, there will be a prerecorded question and answer session for responses to several questions. Submitted ahead of the call know that we have incorporated responses for many of the questions we received directly into management’s prepared remarks. Speaking today will be President and Chief Executive Officer, Kevin Burke, Chief Financial Officer, Jeff Miller, Chief Underwriting Officer, Jeff Hay, Chief Operating Officer, Dan diameter, and Chief Investment Officer, Tony VRG.

Please be aware that statements made during this call that are not historical facts are forward-looking statements and necessarily involve risks and uncertainties that could cause actual results to vary materially. These factors can be found in Dynepo Group’s filings with the Securities and Exchange Commission, including its annual report on Form 10 K and quarterly reports on Form 10-Q. The Company disclaims any obligation to update or publicly announce the results of any revisions that they may make to any forward-looking statement to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. With that, it’s my pleasure to turn it over to Mr. Kevin Burke. Kevin?

Kevin Burke: Thank you, Jeremy, and welcome, everyone. We’re pleased to provide an update today and a number of accomplishments in 2023 as well as our areas of focus for 2024. Our primary objective is to improve our underwriting profitability, and we believe the action plans and rate increases we implemented during 2023 will lead to incremental improvements in our results for 2024 and beyond. Donlin Gold’s fourth quarter 2023 results did not meet our expectations, nor did they reflect the efforts of our team during the year and executing many initiatives that will lead to better financial performance over the long term. While our commercial lines segment results improved from the prior year quarter, primarily as a result of lower weather-related and large fire losses.

Our personal lines segment results came in well below expectations despite the significant premium rate increases we implemented over the past two years, you’ll hear more details about our results and the actions we have taken to generate improved performance going forward. As discussed in our third quarter earnings commentary we began non-renewing all commercial policies in the state of Georgia and Alabama during the second half of 2023 due to sustained profit challenges in those states. That process continued during the fourth quarter and contributed to a modest net decrease in commercial lines net premiums compared to the prior year quarter. We will not have any commercial exposures in those two states after we complete the run-off initiative in the third quarter of 2024.

In early 2024, we kicked off inception activities for our last two major software releases within our systems modernization project. The planning development testing and rollout of these releases will run in parallel over the next two years. And major commercial systems release will include a new commercial package policy and modernize the other commercial products remaining on our legacy systems. These products serve middle market and larger commercial accounts for which we already compete effectively. While we are actively writing new personal lines policies on the new platform at a controlled pace that is essentially offsetting natural policy attrition. The majority of our Personal Lines renewal policies still reside on the mainframe based legacy system.

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Q&A Session

Our last major personal line software release will facilitate the conversion of those remaining legacy policy renewals to the new operating platform. Both of these releases will require significant effort and represent critical initiatives that will allow us to decommission all of our legacy systems when their implementation is complete. We are looking forward to the time in the not-too-distant future. When we are fully operating on a single modern technology platform, I want to recognize the ongoing dedicated efforts of our technology and business teams over the past five years that delivered the agency and customer facing capabilities that we needed to compete effectively for profitable accounts. The remaining project activities will provide additional benefits that largely relate to the operational efficiencies we will gain and the risks we will mitigate by eliminating our legacy systems.

From a strategic perspective, we continue to view commercial lines as the segment of the market to focus on for profitable growth. This strategy aligns well with our commitment to the independent agency distribution system, and we are actively promoting our new products designed to meet the insurance needs of small businesses in all of the 22 states where we offer commercial lines. We have action plans in place to target specific geographies, industries, market segments and classes. We expect will be the primary growth driver for us in the years to come. Conversely, we plan to remain conservative as we manage our personal lines book of business continuing to limit new business growth until we see our profitability improve. While there are encouraging signs of moderation in loss cost inflation, the cost of labor and prices of repairs and replacement parts remain elevated, virtually all of our personal lines, premium growth in 2023 represents the impact of rate increases and our 2024 business plan calls for a modest net decrease in Personal Lines exposures with a continuation of strong rate increases to return that segment to sustained profitability.

I want to welcome Dan dealmakers to speaker on today’s call. Dan has served in various Donegal leadership positions over the past two decades, most recently overseeing field operations and national accounts. We recently promoted Dan to the position of Executive Vice President and Chief Operating Officer in this elevated role, Dan will oversee key divisions within the Dynepo organization, including marketing and field operations, claims, enterprise analytics and other supporting departments. Dan will highlight a few of his current focus areas later in the call. At this point, I’m going to turn the call over to Jeff Miller for a review of our financial results.

Jeffrey Miller: Thanks, Kevin. I’ll start with a summary of our fourth quarter results and then provide a few comments about the full year results. For the fourth quarter of 2023, net premiums earned increased 6.2% to $226.2 million. Net premiums written increased by 6.1% following the consistent pattern we experienced throughout 2023 as accelerating premium rate increases and strong retention for offset partially by lower new business volume and planned attrition in states we are exiting or have targeted for profit improvement rate increases achieved during the fourth quarter were in double digit percentages for all major lines of business, except Workers’ Compensation averaging 12% in total and 14% when excluding workers’ comp combined ratio was 106.8% for the fourth quarter of 2023 compared to one or 2.8% for the prior year quarter, with a lower impact of net favorable prior year reserve development driving the increase.

The core loss ratio decreased modestly from the prior year quarter, with improvement in our Commercial Lines core loss ratio largely offset by higher personal lines, core loss ratio compared to the prior year quarter weather related losses of $13.4 million or 5.9 percentage points of the loss ratio for the fourth quarter of 2023 were down from $16.5 million or 7.7 percentage points for the fourth quarter of 2022. The lower impact was primarily due to lower commercial property losses with $3.5 million of losses contributing seven percentage points to the quarterly commercial multi-peril loss ratio that compared to 14.6 percentage points of the CMP loss ratio for the fourth quarter of 2022 when we incurred losses from winter storm Elliot in the last week of the year, the fourth quarter of 2023.

Weather impact to the homeowners line was $8.3 million or 24.5 percentage points of the homeowners loss ratio, which was comparable to 24 points in the prior year quarter. In total, the quarterly weather claim impact was slightly higher than the previous 5-year average for the fourth quarter of 5.3 percentage points. Our insurance subsidiaries did not incur losses from any single event during the fourth quarter of 2023 that exceeded their individual $3 million catastrophe reinsurance retention with Donegal Mutual large fire losses, which we define as over $50,000 in damages, contributed 4.8 percentage points to the loss ratio for the fourth quarter of 2023, which was lower than 6.2 percentage points for the prior year quarter. A decline in the frequency and severity of commercial fire losses was the primary driver of the decrease.

Our insurance subsidiaries experienced a nominal level of net favorable development of reserves for losses incurred in prior accident years with minimal impact to the loss ratio for the fourth quarter of 2023 compared to $14.2 million or a 6.7 point reduction in loss ratio for the prior year quarter. The expense ratio of 34.1% for the fourth quarter of 2023 was in line sequentially with the third quarter of 2023, but increased modestly compared to 32.3% for the prior year quarter. The increase primarily reflected higher technology costs related to our ongoing systems modernization initiatives. Turning briefly to the full year of 2023 results, the loss ratio of 69.1% was generally in line with 68.6% for 2022. Weather-related losses contributed 8.3 percentage points of the loss ratio elevated slightly compared to 7.7 percentage points for 2022 and higher than 7.1 percentage points for the previous five year.