Donegal Group Inc. Q2 FY2024 earnings call

• Weather impact: Above-average severe convective storm activity continued in Q2 2024, but Donegal's state/regional strategies and geographic risk concentration management mitigated weather loss impact on Q2 results.
• Commercial lines: Completed exit from Georgia and Alabama commercial lines business; 66% of new commercial business was in highly targeted profitable classes; implemented profit improvement initiatives like Probable Maximum Loss underwriting tools and mandatory wind/hail deductibles.
• Personal lines: Strategy to implement renewal premium rate increases to improve margins; working on final major software releases in systems modernization project for commercial and personal lines.
• Expense reduction: Second quarter expense ratio was 31.9% vs. 34.2% in prior-year quarter; mid-year expense ratio through June 30th was 33.8% vs. 35.3% in prior-year first half; multiple initiatives driving expense reduction.
• Investments: Conservatively opportunistic investment approach; net investment income increased 9% in Q2 2024; shifted from tax-exempt municipal bonds to higher spread products; increased equity position 25% year-to-date.

For commercial lines, net premiums written increased 7.1% during the quarter. At June 30th, Donegal had essentially completed its exit of commercial lines business in Georgia and Alabama; excluding these two states, commercial lines net premium written growth was 10.4% for the second quarter. 66% of the new commercial business written during the quarter was within highly targeted classes. For personal lines, net premiums written increased 12.1% for the second quarter, primarily driven by aggressive premium rate increases and strong policy retention. Personal auto and homeowners rate and exposure increases were 13.4% and 16.3%, respectively, and earned rate increases now exceed loss cost trends, leading to margin expansion in this segment.

• Small commercial growth to be a significant emphasis in 2025 business plan with updated state-specific action plans.
• Expect further margin expansion in personal lines segment in future periods.
• Continue expense reduction efforts to reduce expense ratio by one full point in 2024 and two points by end of 2025.
• Expect to see upward pressure on liability severity trends but partial offset by favorable frequency trends in commercial multi-peril.

• Weather-related losses: Severe convective storms caused damages exceeding $20 billion, though Donegal's strategies mitigated impact in Q2, but ongoing weather events pose risk.
• Workers' compensation reserves: Adjustments in workers' compensation reserves in Pennsylvania due to longer treatments in individual cases, though other lines had favorable reserve development.
• Market rate dynamics: Challenges in workers' comp rates due to bureau-mandated reductions, and premium growth variance between lines driven by market rate dynamics.

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: We are an all-lines account writer and expect similar growth rates across lines from an exposure/policy count basis. Premium growth variance driven by market rate dynamics; expect challenges in workers' comp rates due to bureau-mandated reductions but positive rate trends for commercial multi-peril and commercial auto; expect outsized growth in Small Commercial with 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: Over the past year, mix of terms in auto book shifted from 28% six-month policies to 40% now; expect mix to continue shifting naturally, with higher six-month policies allowing quicker rate change to improve margins, but no long-term targets to shift book drastically.

Q: Can you provide additional color on the moving pieces on reserve development this quarter?

A: Specific line of business detail for Q2 2024 included favorable development of $3 million for commercial auto, $1.6 million for personal auto, offset by unfavorable development of $4.7 million for workers' compensation; unfavorable development in workers' comp due to higher-than-expected severity for previously reported losses in accident years 2022, 2023, and older years.

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: Our MBS portfolio consists almost exclusively of fixed rate agency residential mortgages; typically buy large major pools with diversified geographical exposure and avoid states like New York, Florida, and California when possible.