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Donegal (DGICA) - 2019 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Net income for Q3 2019 was $5.2 million or $0.18 per diluted Class A share, compared to $1.2 million or $0.04 per Class A share in Q3 2018 [39] - Overall net premiums written decreased by 0.4% to $183.9 million, while net premiums earned grew by 1.2% to $189.8 million for Q3 2019 [20] - The combined ratio for Q3 2019 was 100.6%, an improvement from 105.2% in the prior year quarter [36] Business Line Data and Key Metrics Changes - Commercial lines net premiums written increased by 13.2%, representing approximately 51% of total writings for the quarter, up from 45% in the prior year [20][21] - Personal lines net written premiums declined by 11.6% to approximately $89.4 million, with about 4% of that decline due to exiting unprofitable markets in 7 states [15][23] - The commercial lines segment generated a solid underwriting profit with a combined ratio of 97.9% for Q3 2019, significantly improved from 104.5% in the prior year [11] Market Data and Key Metrics Changes - Commercial renewal pricing increases averaged 1.8% for the quarter, with an 8.4% average rate increase in commercial auto, offset by a 5.1% average decrease in Workers' compensation rates [22] - Weather-related losses for Q3 2019 were $13.9 million, significantly lower than $21.2 million in Q3 2018 [24] Company Strategy and Development Direction - The company aims to develop a solid foundation for consistent underwriting profitability and book value growth over time, focusing on profitable growth in specific geographical markets [6][8] - A high-priority project is underway to design and implement new personal auto and homeowners products utilizing enhanced data analytics and modern technology tools, expected to launch in early 2021 [18] Management's Comments on Operating Environment and Future Outlook - Management expressed satisfaction with the incremental progress in Q3 results and emphasized the importance of executing key strategies to enhance operational efficiency and financial performance [40] - The company remains cautious about the impact of social inflation on claims and is taking conservative actions regarding reserves [44] Other Important Information - The expense ratio for Q3 2019 was 30.5%, up from 29.6% in Q3 2018, attributed to higher underwriting-based incentive costs [36] - Net investment income increased by 11.6% to $7.4 million, primarily due to an increase in average invested assets [37] Q&A Session Summary Question: How much did reserve releases contribute to this quarter's results versus last year's? - Reserve development contributed an 8-point reduction in the loss ratio for Q3 2019, compared to 9.8% in Q3 2018 [42] Question: Are you seeing any pressure from social inflation in auto casualty or commercial property? - Management noted elevation in average paid claims on both personal and commercial auto sides, reflecting actions taken in previous years [43][44] Question: Any unusual items driving the underwriting loss in homeowners? - Unusual claims not related to weather or fires, such as liability claims and water damage, contributed to the underwriting loss [45] Question: Update on Mountain States and plans for pooling arrangement? - Mountain States is making solid progress, but the company will not include it in the pooling arrangement for now, planning to revisit in 6 to 12 months [46] Question: Can you break out reserve development by line? - Favorable development of about $2.3 million in Workers' comp, with unfavorable development in CMP and commercial auto [49] Question: Are rate increases exceeding the loss trend in commercial auto? - Rate increases are significant, but ultimate losses are projected at levels reflecting high large loss activity [51] Question: How have retention rates been affected by rate increases? - Commercial lines retention is steady around 84%, while personal lines retention has dropped to about 79% due to exiting unprofitable states [57]