Good day and thank you for standing by. Welcome to the Donegal Group Inc. Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand the conference over to Karin Daly, Vice President at The Equity Group Inc. Please go ahead.

Good morning and thank you for joining us today. Yesterday afternoon, Donegal Group issued its fourth quarter 2021 earnings release outlining its quarterly and full year results. The release and a supplemental investor presentation are available in the Investor Relations section of Donegal's website at donegalgroup.com. Speaking today will be President and Chief Executive Officer, Kevin Burke and Chief Financial Officer, Jeffrey Miller. Please be aware that statements made during this call that are not historical facts are forward-looking statements and necessarily involves risks and uncertainties that could cause actual results to vary materially. These factors can be found in Donegal Group's filings with the Securities and Exchange Commission, including its annual report on Form 10-K and quarterly reports on Form 10-Q. The company disclaims any obligation to update or publicly announced the results of any revisions that they may make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. With that, I turn it over to Kevin Burke. Kevin?

Thanks Karin and welcome everyone. I will focus my remarks on our strong topline growth and discuss the progress we've made on several strategic initiatives. Jeff will then provide details on our financial results for the fourth quarter and full year, and I'll return for closing remarks before we open the lines for questions. Net premiums written increased 7.3% for the fourth quarter and 8.4% for the full year of 2021 compared to prior year period. We are pleased with the strong growth in our commercial lines, which was driven by strong retention and solid rate increases across most of our lines. Commercial lines net premiums written increased 14.6% for the fourth quarter of 2021 compared to the prior year quarter. Similar to the first three quarters of 2021, the growth reflected premiums from our Mountain States region. As a reminder, Mountain States premiums were excluded from our results in 2020 and prior to Donegal Mutual, began placing policies in our underwriting pool effective in the calendar year of 2021. As a result, all of our commercial lines of business achieved growth for the full year led by commercial multi-peril with a growth of 27%. We continue to view commercial market conditions as favorable for growth across our regions and we've targeted several well performing regions for our new business growth. However, given the recent inflationary trends we've seen across multiple industries, we are focused on pricing increases and retention of premium, while continuing to grow profitably. Personal lines net premiums written declined 2.8% and 4.3% for the fourth quarter and full year of 2021, primarily as a result of strategic underwriting measures we took over the past several years to improve the profitability of our personal lines business as we awaited the development of new products. We are pleased…

Thank you, Kevin. As Kevin mentioned, our fourth quarter underwriting results were impacted by several headwinds that I will describe in greater detail. The combined ratio was 101.6% for the fourth quarter compared to 96.2% in the prior year quarter. For the full year of 2021, the combined ratio was 101% versus 96% in 2020. While 2021 underwriting results reflected weather-related losses that are below our historical average and continued that favorable development of reserves for losses incurred in prior accident years, our fourth quarter and full year 2021 results reflected the combined impacts of an increase in large fire losses and the return to pre-pandemic driving activity and inflationary pressures on loss costs. These impacts increased the non-weather loss ratio by 7.5 percentage points over the prior year quarter to 65.4%. Commercial and personal auto losses increased substantially due to more active driving patterns and higher average claim severity. Additionally, large fire losses, which we defined as losses in excess of $50,000, were $10.9 million or 5.5 points on the loss ratio for the fourth quarter of 2021, that is more than double the impact in the prior year quarter with higher activity in both commercial and home property fires. We continue to closely review the details of all large fire losses, but have not identified any commonality among the causes. Donegal Group is also not immune to the ongoing inflationary pressures that continue to make headlines and we are seeing significantly higher costs related to property and automotive repairs and replacements. We are implementing premium rate increases across most lines of business to offset the loss trends and improve the performance of our book of business. Fourth quarter of 2021 weather-related losses were in line with historical averages for the fourth quarter at $8.7 million or 4.3 percentage…

Thanks Jeff. In 2021, we made significant progress in our ongoing systems modernization progress. Project in August, we successfully implemented the second major release including a primarily the delivery of a new agency portal and the rating, underwriting, and policy issuance capabilities necessary to support the launch of new personal lines products, with the full rollout to 10 state to be completed in 2022. As we close our 2021 and have begun a new year, our focus remains on several primary strategies, achieving sustained excellent financial performance, strategically modernizing operations and processes to transform our business, capitalizing on opportunities to grow profitably, and delivering superior experience to our agents and customers. Given the current macro-economic environment, we expect to see continuation of headwinds for the insurance industry as a whole. We will focus on measuring the emphasis of profitability over growth in the near-term and take deliberate and strategic steps in response to the increase in loss activity. While we remain conservative in our underwriting approach, we will continue to be selectively pursue new business accounts across segments of our business where we see the best potential for profitable growth. With a compounded annual growth rate of 6.5% since 2018, our book value per share was at $16.95 at December 31st, 2021 with a cumulative dividend payout of $2.35 over the past four years. Our Board of Directors declared a regularly quarterly cash dividend of $0.16 per share of our Class A common stock and 0.1425 per share of our Class B common stock that were paid on February 15th, 2022. In conclusion, the world has forever changed in the past two years, but we remain optimistic for the future. We've made significant progress in recent years and believe we have long-term strategy that will enable us to improve financial performance and increase shareholder value over time. At this time, I'll ask the operator to open the lines for any questions that you may have.

[Operator Instructions] Our first question will come from the line of Meyer Shields with KBW. Please go ahead.

Great. Thanks. Good morning. I apologize if I missed this, I don't think I did. I was hoping you could clarify your comfort with the personal lines rate levels in the first states where the product -- the new product is being rolled out?

Good morning, Meyer, this is Kevin. Yes, I'll response to that. We feel very comfortable and confident with the new product that we rolled out from a rate perspective in Indiana, Ohio, and Pennsylvania. Unlike our legacy book of business where we really didn't have the opportunity to have an analytics department in place, this new product, the pricing is very, very refined. We're getting external data as well to make sure that when we look at where we're priced at, we're looking in and doing a comparative analysis. And so we've got that data available to us and as we roll this product out, I feel very, very comfortable that the pricing is dialed in and it's something that we are constantly monitoring. And more importantly, we now have the tools and the ability to monitor that at a time that we'd never had before. So, I feel very confident with where we're going with that.

Okay. Thanks. That's good news. That's very helpful. On a related note, how should we think about agency count growth, maybe focus on personal lines as the products rolled out as a complement to the product itself?

Well, first off in terms of the agency plan that we currently have and when we went through and decided how we were going to phase-in the new product, we did it in three different phases and by design, it was Indiana, Ohio, and Pennsylvania. Pennsylvania, obviously, being our home state, a key state for us that has many agents with long standing relationships that have substantial personal lines books with us. Indiana and Ohio, particularly Indiana is more what I'll categorize a new state and we started there, the agency response has been very good. We have not had to appoint new agents in those three particular states. As it relates to the personal lines, rollout, we think that we've got a very solid agency plan in place and right now, it's really about gaining market share. The only place where we've really added agents to any level this year has been in a state like Texas, Utah, where we're continuing to grow our presence in those new states. The existing states, we already have a good agency plan in place and it's really about making sure that we keep that franchise value in place. And so we think that we've got the right agency plan to continue to grow this new personal lines product. It's also about reengagement. As you're well aware a couple years ago, when we started taking a fairly aggressive rate action to bring the book of business back into profitability, we did not have the analytical tools that we have today. And so it's also part of the reengagement with those agents. And so far, the results have been very positive. So, I'm optimistic as the rest of these states come online for personal lines in 2022.

Okay. Fantastic. Thank you very much.

[Operator Instructions] Your next question comes from the line of Bob Farnam with Boenning & Scattergood. Please go ahead.

Yes. Thanks. Good morning. I have a question on personal lines and a question about commercial lines, and both related to pricing versus the loss trends. So, it sounds like from your commentary, that the loss trends are exceeding your pricing ability right now and it's going to have to -- you're going to have to catch-up over time. Are we taking that to assume that in 2022, you may have some deterioration in the core loss ratio just because pricing is falling short of where the loss trends are?

Sure, Bob, this is Jeff. Thank you for that question. It is a bit of a different story between commercial lines and personal lines. Let's talk about personal lines first since that's where the situation is I think most impacted by inflation. Personal auto, our indications -- rate indications jumped significantly from the second half to the latter half of 2021. So, we were in a position around the first half of the year, we felt really good about our ability to stay ahead of the loss trends in our rate increases for what we were planning from that point forward. That changed dramatically in the second half of the year. So, we do find ourselves now with indications that are in excess of what we believe we can address with rate increases in the near-term. So, we believe we can achieve rate increases that are keeping pace with loss trend, but it's not going to be a situation where we're able to make significant progress in reducing those indications for some period of time. There will probably be into some time 2023 before our rate increases are catching up and making significant progress in reducing those overall indications. So, the direct answer to your question is, I do believe in personal auto, it's going to be a challenge to maintain the core loss ratio that we would have seen in the early part of 2021. Our hope would be that we'd start to make progress toward the second half of the year in terms of rate increases, but the earned premium impact of that will take some time into 2023 and beyond. On the commercial line side, the commercial auto indications we were in really good shape with the exception of the state of Georgia, which we've talked about…

Yes. No, that's a good summary. I think for the personal lines -- personal auto rate increases, are you coming across any pressure from the regulators to kind of limit how much you're asking for?

That's a great question. We, at this point, are going to the regulators with rate increases that are not significantly above what we believe we can achieve. It'll take probably several rounds of rate increases to get to the rate level we need to be. So, we understand there are certain limitations in terms of what we can achieve and what will get approved. And so we're going to file rate increases in the first half of the year that we believe are as basically as high as will be allowed to be enacted and then I'm back with another round of rate increases later in the year.

Okay, all right. And second question, Jeff, while you're here, is the -- so the expense ratio, it sounds like in the press release, you had a few moving parts in the expense ratio for the quarter. Just curious if you back that stuff, I'm looking for more for like a run rate, what should we use going forward because it sounds like the 30%, 31% is kind of low?

It is low. And it's really the impact of the reduction in some of the incentives in the fourth quarter as the loss ratio ticked up, the expenses come down. And that's typically what you see. When we have a very profitable quarter in terms of loss ratio, you'll see a higher expense ratio. For the full year, we came in around 33% and with some additional technology expenses next year and assuming that we have a higher level of profitability, I think a run rate that we would be landing on is somewhere 34% to 34.5% for 2022.

Okay. And that's not including the policyholder dividends?

Correct. That's just the expense ratio.

Right. Right. Okay. Thank you.

We have no further questions at this time. I'll turn the conference back over to management.

All right. Well, we thank everyone for your participation and have a good day.

Thank you.

Ladies and gentlemen, that will conclude today's call. Thank you all for joining and you may now disconnect.