Donegal Group Inc. (DGICA) Earnings Call Transcript & Summary

Good morning. And welcome to the 2020 Annual Meeting of Stockholders of Donegal Group Inc. I'm Kevin Burke, President, Chief Executive Officer of Donegal Group, and our Board of Directors has appointed me to serve as the presiding officer of today's Annual Meeting of Stockholders. While we were disappointed that we could not host a physical meeting as originally planned, we are pleased to be able to host a virtual meeting to allow us to conduct matters of business and provide a brief presentation to our stockholders. Our Board has appointed 3 of our senior officers: Jeffrey Miller, Anthony Viozzi and Daniel Wagner to serve as inspectors of election of our annual meeting. Each of the inspectors of elections have executed a customary oath regarding the performance of his duties as an inspector of election. Sheri Smith, our Corporate Secretary, will act as secretary of this annual meeting. Richard Cohen, a partner of Duane Morris, our outside General Counsel, as well as Mike Ernst and Nicole Reilly of KPMG, our independent auditors, are with us today. We have appointed Broad ridge Financial Services to tabulate our proxies. Anna Hagberg is participating in the meeting as a representative of Broadridge and will provide a certified report of proxy voting to our inspectors of election. Later in the meeting, we will provide time for questions that are germane to this annual meeting. Only validated stockholders may ask questions using the designated field on the web portal. Please note that this meeting is being recorded but no one attending this meeting via webcast or telephone is permitted to use any audio recording device. I will now call our 2020 Annual Meeting of Stockholders to order. Delaware law and our bylaws govern the conduct of our annual meeting. In accordance with Delaware law and our bylaws, we will first introduce the 3 items of stockholder business we described in our proxy statement and then conduct the voting of each of those items of business. In accordance with our bylaws, the time has expired for any of our stockholders to present any other items of business for a vote of our stockholders at today's annual meeting. We called our 2020 Annual Meeting of Stockholders for the purposes of, number one, electing 4 Class A members of our Board of Directors; number two, approving on a nonbinding advisory basis the compensation of our named executive officers; and number three, ratifying our Audit Committee's appointment of KPMG as our independent registered public accounting firm for 2020. We will now proceed to consider and vote on the 3 items of business before this annual meeting. Our stockholders will vote separately on each of the 3 items of stockholder business. Donegal Mutual has advised us that it has voted its shares for the following items of business: election of our 4 nominees for Class A directors, approval on a nonbinding advisory basis of the compensation of our named executive officers and ratification of the appointment of KPMG as our independent auditors for 2020. Is there a motion to present for approval each of the 3 items of the business I just reviewed?

I so move.

Is there a second?

Second.

Motion is carried. We will now open the polls and vote separately on each of the 3 items of stockholder business. Any stockholders who has -- have not yet voted or wishes to change their vote may do so by clicking on the Voting button on the web portal and following the instructions there. Stockholders who have sent in proxies or voted via telephone or Internet do not need to take any further action, unless they want to change their vote. At this time, we'll pause for a moment to allow anyone that needs to vote time to do so. [Voting]

Now that everyone has had an opportunity to vote, I declare that the polls are closed for voting. We will report the results of our stockholders voting later in this meeting. At this time, Jeff Miller and I will review our financial results and significant developments during 2019 and our business plans and strategic plans for 2020. With that, I'll turn it over to Mr. Miller.

Thank you, Kevin. And good morning, everyone. Before we get started with our reports, you should be aware that our commentary today includes forward-looking statements that involve a number of risks and uncertainties. We described forward-looking statements in our fourth quarter earnings release, and we provided further information about risk factors that could cause actual results to differ materially from those we project in the forward-looking statements in the report on Form 10-K that we submitted to the SEC and mailed to our stockholders. With that, I'll provide a brief overview of our 2019 financial results. Our total revenues increased 5.3% to $812.5 million. Those total revenues included investment gains of $22 million in total, and those investment gains included $12.7 million from the sale of Donegal Financial Services Corporation, our former banking subsidiary. Premiums earned increased 2% to $756.1 million. Our commercial lines earned premiums increased 14%. They were offset by a decline in our personal lines earned premiums of 8%. Investment income increased 9.7% to $29.5 million as a result of an increase in invested assets compared to the prior year. Our net income was $47.2 million for 2019, which was a significant improvement over the net loss for 2018 of $32.8 million. The combined ratio, which was a measure of our underwriting profitability, was 99.5% for 2019, again a significant improvement over the 110.1% combined ratio for 2018. Although the combined ratio improved significantly, it is still not meeting our targeted range of 96% to 98%. We continue to have balance sheet strength as shown by our total assets that were $1.9 billion compared to $1.8 billion at the prior year-end. Our stockholders' equity increased to $451 million with book value per share increasing 11.5% to $15.67 at the end of 2019. I'll highlight just a few financial achievements in 2019. As I mentioned, our commercial lines earned premium growth was 14.1%, and the statutory combined ratio for that segment was 95%. We were pleased with our commercial lines performance during the year. We had net favorable reserve development of $12.9 million in 2019. That reflected a return to relative stability in our reserves after significant strengthening in 2018. Our exit from personal lines markets in 7 underperforming states proceeded throughout 2019 and was completed in February of 2020. And as a result of that exit, we have reduced weather exposures in several Midwest states. Weather-related losses for 2019 were just slightly above average, and they were much improved over 2017 and 2018. We restructured our reinsurance program for 2019, and that program increased our net premiums and generated net savings as we had expected. The timing of the sale of our Donegal Financial Services Corporation, former banking subsidiary, proved to be advantageous in terms of the favorable valuation we received, and we were able to deploy proceeds from the sale to support our insurance operations. Overall, we were pleased with the significant improvement in our financial results in 2019 compared to 2018 as many of the initiatives we implemented in 2018 and into 2019 began to show results. And finally, we announced yesterday afternoon that our Board of Directors declared regular quarterly cash dividends. For our Class A common stock, the dividends are $0.15 per share. And for the Class B common stock, $0.1325 per share. Those dividends do represent increases over the quarterly amounts that we paid in 2019. The dividends are payable May 15, 2020, to stockholders of record as of May 1, 2020. With that, I'll turn it back to Kevin for his remarks.

Thank you, Jeff. As we were preparing for this important meeting today and we had spent a fair amount of time looking at our business plans, areas of focus for 2020, Jeff has done a very nice job of highlighting the results from 2019. And as we were planning this meeting, we were trying to anticipate how we would change these plans given the current pandemic and the impact that COVID-19 has had on our business. And currently, there are many more questions than there are answers. And so my approach this morning would be to give you our 2020 corporate goals as they were planned going into this year as well as certain areas of focus. But rest assured that in the coming weeks and coming months, these plans that I will be outlining to you today will clearly go through some changes, and we will need to pivot and adjust accordingly. And again, I would love to be able to sit here and share with you what those specific corporate goals will be, but there are many more questions than there are answers. And I think that over the next coming weeks and months, the economic impact of COVID-19 will start to show itself, and this senior management team with Donegal will adjust accordingly. So with that introduction, let me give you our 2020 corporate goals, and we'll start with direct premium growth. As we ended 2019, we had very, very strong momentum in commercial lines. We exceeded our business plan, and we felt going into 2020 that, that momentum would carry forward. And so we are anticipating a 7.5 to 8.5 percentage premium growth for 2020. Personal lines, as you are aware, we have made some adjustments in personal lines to bring that line back into profitability. However, the new product that is being developed will not be rolled out until the first quarter of 2021. And as a result, we are going to continue to be very profit-focused to ensure that we've got line of business that we can bring back to profitability. And for personal lines, we are planning a modest decrease in that line. So direct premiums growth for 2020 will be in the low single digits, that is what the plan is. From a statutory combined ratio standpoint, a 96% to 98% is what our budget is. It's what we're planning for. And as an organization, that is very much what we're focused on to ensure that we have financial sustainability. And in order to do that, you have to have the appropriate combined ratio, and that 96% to 98% is where we are primarily focused on. Statutory expense ratio is in the 31.5% to 32%. And again, that is also incorporating the modernization of our technology and taking that into account. Return on GAAP equity is 7.5% to 8.5% is what we had planned for 2020. And if these other numbers come in line, that is where we need to be at 7.5% to 8.5%. And we think that, that is achievable. Retention rates. Critically important as we grow commercial lines, and we've got good momentum there, most importantly is also that we're retaining the appropriate business. We have 88% to 89% is the retention goal for commercial lines. We were able to achieve that number in 2019. Personal lines needs to improve on the retention piece, and we're going to talk momentarily about stabilizing -- personal lines is a real area of focus for us in 2020. The personal lines retention number is in the mid-80s is what our goal is for 2020. We put these plans together knowing that, in some cases, these were a stretched goal, but this was the focus as we walked into 2020, and our business plan is built around those numbers. Areas of focus for 2020. We wanted to make sure that we had complete clarity on where we were focused, what we needed to achieve. And maintaining commercial lines momentum in 2020 is critically important for us, the relationships that we have with our key agency partners. We felt that, that was an achievable goal that we could duplicate what we did in 2019. And of course, it has to be profitable growth. Stabilization of personal lines will continue throughout 2020. We took very, very modest rate increases where required in 2019 and 2020. That's the plan. Again, as we build the new personal lines products for 2021, we are very much looking forward to rolling out that new product. But in the interim, we're going to ensure that all the work that we have done for the last 2 years to start to bring that line of business back into some level of sustainability is very much a focal point for us for 2020. Project knowledge. For those of you that have been on our earnings calls, you know that project knowledge for us is a major undertaking. It's a 4.5-year journey to modernize the last remaining legacy system within our organization. We are happy to announce that release 1 was very successful. It was a single line of business with workers' comp that took place in the first quarter of 2020. Release 2 is planned for the next 18 months. It includes personal lines and commercial lines, and it is a focal point for us because that will allow us to have a very stable operating platform and also be able to embrace newer technology. Item #4 is expanded use of data analytics. It was last March where we hired a Chief Analytics Officer. And in the time since then, we have built a analytics division, and they are behind the scenes providing business intelligence, reports, allowing us to better forecast our business. They are behind the scenes in terms of helping us with the new personal lines product and also the development of several models. So the use of data and analytics, I'm very pleased with the progress that we have made in a very short period of time. And last but not least is operational excellence. And for us, this is about ensuring that we not only have good service but we have exceptional service. And operational excellence for us is a cultural item that's driven down through the organization to make sure that employees feel empowered and that they are accountable and that we're providing the best service to not only our policyholders but to our agents. So those are the areas of focus for 2020, the corporate goals, the numerical goals. Those were the items that we had thoroughly thought through and planned for 2020. And as I initially stated, I felt it important that all of our stockholders know where our focus was and what our plans are. And as COVID-19 has an impact, we will be planning accordingly, adjusting as we need to, to ensure that when the dust settles, that Donegal is financially in a very good position to take advantage of when the market does rebound and we do return to some sense of normalcy. And we will be watching the developments over the next couple of weeks and months as I'm sure we will all be doing. With that, we will open the line and provide an opportunity for stockholders to ask any questions that they have. Stockholders may ask a question through the web portal, and we will address only questions that are germane to the meeting. Currently, we are not seeing any questions through the web portal. So with that, we are going to close the question-and-answer period at this time. And I would ask Ms. Smith, may we please have the report of the inspectors of election?

The inspectors of election report that our stockholders have: one, elected Kevin G. Burke, Jack L. Hess, David C. King and Annette B. Szady as Class A directors to serve until our 2023 Annual Meeting of Stockholders and the taking of their -- of office by their successors; two, approved on a nonbinding basis -- nonbinding advisory basis the compensation of our named executive officers; and three, ratified our Audit Committee's appointment of KPMG LLP as our independent registered public accounting firm for 2020.

Thank you, Sheri. That concludes the business of this 2020 Annual Meeting. I want to thank you for your attendance today and for your continued support. Is there a motion to adjourn?

I so move.

I second the motion.

All those in favor?

Aye.

Aye.

Opposed? The motion is carried. Our 2020 Annual Meeting of Stockholders is officially adjourned. Everyone, be safe, be healthy, and we look forward to future communications. Thank you.