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

Good morning, everyone, and welcome to the 2021 Annual Meeting of Stockholders of Donegal Group Inc. I'm Kevin Burke, President and Chief Executive Officer of Donegal Group, and our Board of Directors has appointed me to serve as presiding officer of today's Annual Meeting of Stockholders. We are pleased to be hosting 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; Christina Hoffman, Anthony Viozzi and Daniel Wagner to serve as Inspectors of Election for annual meeting. Each of the Inspectors of Election has executed a customary oath regarding the performance of his or her 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 Patrick Klinger of KPMG, our independent auditors, are with us today. We have appointed Broadridge 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 the meeting via webcast or telephone is permitted to use any audio recording device. I will now call our 2021 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 or a vote of our stockholders at today's Annual Meeting. We called our 2021 Annual Meeting of stockholders for the purposes of: number one, electing 4 Class B members of our Board of Directors; number two, approving the 2021 employee stock purchase plan; and number three, ratifying our audit committee's appointment of KPMG as our independent registered public accounting firm for 2021. 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 share for the following items of business: election of our 4 nominees for Class B Directors, approval of the 2021 employee stock purchase plan and ratification of the appointment of KPMG as our independent auditors for 2021. Is there a motion to present for approval for each of these 3 items of 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 stockholder who has 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 the Internet, do not need to make any further -- take any further action unless they want to change their vote. At this point, we're going to pause momentarily to ensure that everyone has an opportunity to vote. [Voting]

Now that everyone has had the 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 point, Jeff Miller, our Chief Financial Officer, and I will review our financial results and significant developments during 2020 and our business and strategic plans for 2021. With that, I'll turn the call over to Jeff.

Thank you, Kevin, and good morning, everyone. I'll briefly discuss our -- summary of our financial results for 2020 and go over a few key accomplishments from a financial perspective. Our total revenues were $777.8 million for 2020, that was a decline of 4.3% from the number in 2019, in large part due to lower equity investment gains. Our premiums earned declined 1.9% to $742 million, and our investment income was virtually unchanged at $29.5 million. Net income increased 11.3% to $52.8 million in 2020, and we had a combined ratio of 96% compared to 99.5% in 2019. So stronger underwriting results in 2020. Our total assets were $2.2 billion at the end of 2020. And we had stockholders' equity of $517.8 million with a 9.3% increase in book value per share to $17.13 at the end of the year. In terms of some key financial achievements in 2020, we enjoyed a continuation of improved underwriting results and stable investment income, again, leading to that increase I mentioned in book value per share in spite of a dividend yield that ranks highly among our peers. We experienced a continuing shift in our mix of business with commercial lines representing 55.6% of total net premiums earned for the year. We had commercial lines earned premium growth of 7.1% and a statutory combined ratio of 97.8% for that segment. Our personal lines premiums earned declined by 11.2%, but we saw a significant improvement in the profitability of that segment as reduced claim frequency resulted from a combination of factors including various underwriting measures we had implemented in recent years as well as lower driving activity and traffic density due to the COVID pandemic and related restrictions in place during much of the year. We are pleased to report net favorable reserve development of $12.9 million in 2020, which was similar to the level of favorable reserve development we reported in 2019. This morning, the Board of Directors of Donegal Group Bank declared a quarterly cash dividend of $0.16 per Class A Common Stock Share and $0.1425 per Class B Common Stock Share. Those dividends represent an increase of 6.7% for Class A Common Stock and 7.5% for Class B Common Stock. Those dividends are payable May 17 to stockholders of record as of May 3, 2021. That concludes my prepared remarks. I'll turn it back to Kevin.

Thank you, Jeff. When we think about 2020, it's probably best to start and reflect on the year and the many challenges that we had. We were very pleased with how well we successfully navigated through the COVID-19 pandemic. In March of 2020, we deployed 90% of our staff to work from home or in a remote work environment. Our employees and agents absolutely rose to the challenge, and we had a successful year, as Jeff just noted. Operationally, we didn't skip a beat. We provided excellent service to our policyholders and agents. And I'm very proud of the Donegal team and the way that we pull together to ensure we move forward and work through the adversity, and we were able to have a very solid operational year. Our goal has been to build upon the foundational changes we implemented throughout our organization over the past several years, and our improved underwriting performance demonstrates these changes are having an impact. In 2020, we continued our positive momentum in steadily growing our commercial lines book of business, which we believe is a great source of stability in the long-term aspects of our organization. Donegal remains committed to the independent agency system, and we believe this provides us with a great opportunity to build upon those relationships and continue the profitable growth in commercial lines. We believe Donegal is set up perfectly to continue to gain market share in this segment of the small- to medium-sized commercial space. We are very excited about the upcoming launch of our new personal lines products that will occur in the second half of this year. In 2020, we shifted our focus from corrective efforts to maintaining our core personal lines accounts as we prepare to launch our new personal lines products. With our new products, we will achieve significant pricing segmentation, sophisticated rating structures will allow precise rating based upon statistical characteristics and predictive modeling. The key is going to be able to deliver a product that's competitively priced, matched with a quality product with coverages, delivered in an easy fashion and backed with outstanding claims service. We will roll out the product to all 11 states in which we write personal lines, and we will do it in a transition that helps mitigate any issues as we roll the product out. Our first group of states will be Indiana, Pennsylvania and Ohio. This will allow us to closely monitor and roll out the new product in a very effective fashion. Systems modernization initiatives, we've been on a 5-year journey to migrate away from our current mainframe policy system to newer technology. We had a successful deployment of our first release, which is workers' comp, which occurred in February of 2020. Release 2A, which is our new personal lines products, is set for release in the second half of this year. And Release 2B, which includes 3 additional commercial lines of business that will complement the workers' compensation line, which is already in production. In preparation for Release 2B, we have performed a comprehensive review of our current workflows and developed a detailed road map for our future state end-to-end commercial underwriting process. We look forward to beginning to migrate those commercial policies to the new platform in 2022. We have expanded our enterprise analytics and product development capabilities. In March of 2019, we hired a Chief Analytics Officer. And since that time, we have added additional expertise and built out that department. We now have data scientists, business intelligence specialists, commercial lines large account pricing specialists, additional actuaries on staff, and we recognize the implementation of predictive models and deploying advanced analytics will help us grow commercial lines and personal lines, gain market share and do it in a profitable fashion. We've also had success with the expansion of our Southwest region. Back in 2017, Donegal Mutual Insurance company merged with Mountain States Mutual Casualty Company, which is a company that wrote 100% commercial business. We have rehabilitated that company. We have reunderwritten the book of business. We've taken aggressive reunderwriting actions, and the organization is turning in some very solid results. In January 1, 2021, we moved Mountain States into the intercompany pooling agreement with Donegal Mutual and Donegal Group Inc, with 80% of the new premiums written on January 1, 2021, will be ceded to the public company. It's been a successful venture for us, and we look forward to bringing them into the pooling arrangement. As we look forward in 2021 and beyond, we stay very focused on some key elements. Commercial lines growth for us is critically important that it's profitable that we move forward and we continue to gain market share. All indications are that everything that we're doing at this point is continuing that momentum. As I noted earlier, we're very excited about the new personal lines products that will be rolled out in the second half of this year and stabilizing the existing personal lines book of business has been accomplished. Project Nautilus, the modernization of our systems. As we move forward on this journey, it's critically important as it will set us up for future success in being able to embrace newer technologies. And the expanded use of data analytics, we will continue to add resources into this area. We believe that it is part of the future of our company in being able to gain market share and compete in the marketplace. Last, but not least, is operational excellence. Service being highly responsive, being a very, very strong regional company with outstanding claim service, we believe this gives us a competitive advantage over some of the very large national companies. Our size allows us to be nimble, be responsive and be decisive. Agents have direct access to any of the leadership members in this organization, and we believe that, that is also a competitive advantage in the marketplace. We're excited about what the future holds for our organization. We look forward to executing on the business plan in 2021 and building upon our 3-year strategic plan in the future. With that, we will now provide an opportunity for stockholder questions. Stockholders may ask any questions through the web portal, and we will address only questions that are germane to this meeting. It appears as though we do not have any questions. So we are going to close the question-and-answer period at this time. Ms. Smith, may we please have the report of the Inspectors of Election.

The Inspectors of Election report that our stockholders have, one, elected Dennis J. Bixenman; Kevin M. Kraft, Sr.; Jon M. Mahan; and Richard D. Wampler, II as Class B directors to serve until our 2024 Annual Meeting of Stockholders and the taking of office by their successors. Two, approved the 2021 employee stock purchase plan. And three, ratified our audit committee's appointment of KPMG LLP as our independent registered public accounting firm for 2021.

Thank you, Sheri. That concludes the business of this 2021 Annual Meeting. I want to thank you for your attendance today and for your continuing support. Is there a motion to adjourn?

I so move.

I second the motion.

All in favor? [Voting]

Opposed? The motion is carried. Our 2021 Annual Meeting of Stockholders is adjourned. Thank you.