DONEGAL GROUP INC Q4 FY2023 earnings call

• Underwriting Focus: Actively non-renewing commercial policies in Georgia and Alabama due to profit challenges. Making data-driven underwriting decisions using analytics, increasing deductibles and property values in response to economic trends. - Systems Modernization: Kicked off inception activities for last two major software releases in systems modernization project. Commercial releases include new package policy and modernizing legacy commercial products. Personal lines release will convert remaining legacy policy renewals. Aim to decommission legacy systems. - Operational Initiatives: Realigned regional structure from 6 to 4 operating regions for efficiency. Launched expense reduction effort to address expense ratio impact from systems modernization. Focus on national accounts for new business growth in small commercial market. - Investment: Achieved strong net investment income in 2023 due to high market rates, with net investment income for full year at $40.9 million, up 20% year-over-year. Conservative investment approach maintained.

Commercial Lines: In the fourth quarter, commercial lines net premiums decreased 1% due to non-renewing commercial policies in Georgia and Alabama. However, commercial premium retention remained strong with overall rate and exposure increases of 12.7% for the quarter and 11% for the full year (excluding workers' compensation). The core loss ratio improved, but was offset by higher personal lines core loss ratio. Personal Lines: Results were well below expectations despite significant premium rate increases over the past two years. Weather-related losses and large fire losses were factors. Net premiums written for personal lines increased due to rate increases, but profitability needed improvement. Revenue contribution details: Specific percentages weren't explicitly stated in absolute terms but discussed in context of premium changes and loss ratios.

• Expect incremental improvement in financial results for 2024 from 2023 underwriting actions and rate increases. - Commercial lines growth expected to accelerate after completing exit from Georgia and Alabama commercial exposures in third quarter 2024. - Personal lines to remain conservative in new business growth, relying on strong rate increases to return to profitability. - Systems modernization projects for commercial and personal lines to continue over next two years with planning, development, testing, and rollout of releases.

• Elevated loss costs due to weather events, labor shortages, and social inflation affecting liability loss settlements. - Impact of reinsurance market changes on reinsurance premiums spend, with expected increase in 2024. - Uncertainty in reserve adequacy and loss trends, requiring close monitoring of claim costs and loss developments.

Q: Can you provide a summary of the renewal of your reinsurance program for 2024 and highlight any changes to the structure or reinsurance coverage?

A: As a reminder, Donegal Mutual and the insurance subsidiaries purchased reinsurance together. Renewed program for 2024 with generally the same structure. Increased retention amounts for several per-risk programs to limit pricing increases. Reinsurance premiums spend expected to increase ~$5 million compared to 2023.

Q: Can you comment on the trajectory of rate increases for commercial auto and commercial property in the fourth quarter of 2023 compared to past quarters?

A: Commercial auto had a fourth quarter rate increase of 12.7% consistent with recent trend. Commercial property had average written rate and exposure change entering double digits in 2023 and growing to 13.9% in the fourth quarter.

Q: Can you provide line-of-business details for the fourth quarter and full year of 2023 regarding prior period reserve development?

A: Fourth quarter specific line-of-business detail included favorable development for personal auto, workers' comp, but unfavorable for commercial multi-peril and other commercial. Full year had favorable development in commercial auto, personal auto, workers' comp, and homeowners, partially offset by modest unfavorable development. Reserve adequacy remains strong, with close monitoring of loss trends.

Q: Can you provide an update on the Workers' Compensation line from the competitive perspective and growth plans?

A: Workers' comp is the most profitable line. Downward pressure on pricing due to rating bureau actions, but continued downward claim frequency, moderate medical severity, and premium trend from higher wages expected to deliver returns meeting targets. Plan to pursue growth in small commercial segment with workers' comp.

Q: Can you provide an update on the company's approach to capital management and priorities for 2024?

A: Approach remains consistent. Focus on improving underwriting profit margin to grow surplus for future growth and return capital to stockholders via quarterly dividends. Capitalize on profitable commercial lines growth opportunities.