Ladies and gentlemen, thank you for standing by, and welcome to the Donegal Group Inc. First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Jeff Miller, Chief Financial Officer. Thank you. Please go ahead, sir.

Thank you very much. Good morning, everyone. Welcome to the Donegal Group conference call for the first quarter ended March 31, 2020. Yesterday afternoon, we issued a news release outlining our quarterly results. For a copy of that release, please visit the Investor Relations section of our website at donegalgroup.com. In today's call, Kevin Burke, President and Chief Executive Officer, will provide an update on our business strategy and highlight recent developments. I'll follow Kevin's comments with an overview of our quarterly financial details. At the conclusion of our prepared comments, we will open the line for any questions you might have. Before we get started, you should be aware that our commentary today includes forward-looking statements that involve a number of risks and uncertainties. We described forward-looking statements in our news release. And we provided further information about risk factors that could cause actual results to differ materially from those we project in the forward-looking statements in the report on Form 10-K that we submitted to the SEC. You can access our Form 10-K through the Investors section of our website. We use certain non-GAAP financial measures to analyze our business results, and we refer you to the reconciliation of non-GAAP information included in the news release that we issued yesterday. With that, I'll turn it over to Kevin.

Thanks, Jeff, and welcome, everyone. I want to start by thanking our employees and independent agents for their dedication and commitment, as we navigate through these challenging times. Like many companies, Donegal has mobilized a remote workforce with the majority of our employees working from home to ensure the continuation of vital services to agents and policyholders. I'm extremely proud of our team for pulling together during this crisis and making the adjustments needed to enable us to maintain high standards of professionalism and exceptional customer service. Since it's on everyone's mind, let's start with the impact of COVID-19 and our response to date. As we have received advice from health officials and shelter-in-place mandates from government agencies, we implemented a business continuity plan to protect the health and safety of our employees and their families, while also continuing to provide services to agents and policyholders without disruption. Our core operations are functioning effectively, and we've been able to have regular communications with employees and agents to address challenges inherent with operational changes. COVID-19 had a minimal impact on our first quarter of 2020 results. And overall, we were pleased with those results, which we will discuss in a moment. We have now shifted our focus to the second quarter and the remainder of the year, as we attempt to assess the impact COVID-19 will have on our business. There are many more questions and answers at this point. However, in the coming weeks and months, we'll be able to gain a clear picture of the true economic impact, and we will make adjustments to our business plans as needed. For those of you that may be evaluating our long-term potential impact of the pandemic on our insurance operations, it's important to consider the types of risk Donegal insures. Our…

Thanks, Kevin. As usual, I'll highlight a few of the operational and financial metrics for the first quarter, and we'll be glad to address any questions later in the call. Overall, net premiums written decreased 0.8% to $198.2 million, and net premiums earned declined 0.4% to $187.3 million for the first quarter of 2020. Net premiums written for commercial lines increased 7.1%, while personal lines net premiums written declined by 11.2% during the quarter. We attribute the strong growth in commercial lines to market share gains by many of our insurance subsidiaries and a continuation of renewal premium increases. As Kevin mentioned, commercial renewal pricing increases averaged 2.9% for the quarter in total, as a 10.8% average rate increase in commercial auto was partially offset by a 3.8% average decrease in Workers' compensation rates. In terms of trends, we continue to obtain higher pricing in commercial auto with increases well into double digits for accounts with loss experience or located in areas, where a challenging legal environment is driving higher loss costs. As was the case throughout 2019, the reduction in net premiums written in our personal lines was largely due to lowered new business growth and the impact of our exit from the personal lines markets in 7 unprofitable states, that was partially offset by rate increases that averaged 2.2% for the quarter. We had planned to continue implementing modest personal lines rate increases in 2020 to maintain the level of rate adequacy, we worked diligently to restore over the past 18 months. But we will revisit those plans in light of the COVID-19 impact as the year progresses. Moving to underwriting results. We reported a 62.6% loss ratio for the first quarter of 2020, which compared favorably to the 65.5% loss ratio for the first quarter of 2019.…

Thanks, Jeff. I want to again thank everyone at Donegal for rising to the occasion, as we continue to work through this incredibly challenging time. We've been working hard in recent years to enhance underwriting profitability, improve operational efficiency, compete more effectively and ultimately, to further improve financial performance and enhance our book value growth. We were pleased to see positive momentum in the first quarter, and we look forward to continuing that progress as we persevere through and ultimately move past the current challenges. Our goal remains to successfully execute on strategies designed to generate consistent favorable returns for our stockholders over the long term. With that, we'll ask the operator to open the lines for any questions that you may have. Thank you.

[Operator Instructions] Your first question is from the line of Bob Farnam with Boenning and Scattergood.

So I have a question on Workers' comp exposure. So obviously, you've had a few states that have put out some presumption of compensability for first-line -- for first -- front line workers and first responders. How much of your book is potentially exposed to something like that?

Bob, this is Jeff. Thanks for that question. We have looked at our Workers' comp exposures, particularly in light of a medical type of exposure. And we do ensure a modest amount of medical facilities, such as urgent care centers, family practices in rural areas. Most of those are smaller in comparison with some of what you might think of in larger cities. We have not, to this point, received any Workers' compensation claims related to anyone who is positively tested for the COVID-19 virus. So we do not currently expect to have a significant amount of exposure to Workers' compensation claims. But as you have mentioned, there are some legislative attempts to expand the presumption of the Workers' compensation, the contracting of the disease relative to the occupational involvement of workers that are not necessarily just health care workers, but also workers that are working in essentials businesses. So we're monitoring all that. That could have an impact if those presumptions were to stand. We've noted that a number of those efforts have now been withdrawn. So we currently do not think we have a significant exposure to it.

Okay. And in regards to your agents, probably two questions about your agents. So what is their ability to write new business if they're predominantly working from home? And two, have they given you an idea, even just the beginnings of an idea of how their customers are faring? Like are they seeing a lot of the customers shut down completely? Or are they just reduced operations? Or are they unimpacted -- not impacted?

Bob, this is Kevin. On the first question, the agent's ability to write new business in working in this remote setting, I think that the majority of our agents, if not all of them, at this point, are well prepared to write new business and are really looking for the opportunity to do that. The bigger question is the second part of that, and that is a -- really a big to be determined. What we're seeing is that we've had new business opportunities in commercial lines, is in the pipeline, one of the reasons why we had a really good first quarter. We're seeing second quarter -- again, there's good business that's in the pipeline. We are hearing rumblings, as you would expect, that the opportunities for new businesses are starting to dwindle. And what does that mean statistically, I don't know. But the agents are prepared and have fully embraced the remote working opportunity, the ray to write new business, and it really comes down to the macro issue of what does the economy look like in 90 days? What does it look like in 6 months? And as we all know, there's a big question mark about that.

How has your kind of the policy retention been in the commercial lines? I'm assuming you have a lot of these main street businesses and stuff. Have they been pretty quick to renew? Is that fair statement?

Policy retention right now is very good, on both personal lines and commercial lines. And again, what does that look like in 3 to 6 months from now, Bob, I don't know. But currently, we've got -- the majority of our businesses are renewing their policies. Majority are paying their premiums. And it really comes down to if the current economic shutdown, if you will, continues for another 30 days, you're going to have a certain percentage that are going to be able to rebound back in the businesses, will be able to move forward. If it continues, and again, this is just my perspective on it. If it continues for 60 or 90 days, that really changes the landscape. And I don't know and couldn't really speculate the amount of businesses that would not be able to recover if it's prolonged past another 30 days.

Our next question is from the line of Douglas Eden with ECM.

Congratulations on a solid quarter, especially given what is going on in the world currently. I have two questions also. First, now that there have been 4 quarters of nonrenewals of personal lines in the 7 states that we've been talking about, are you envisioning the rate of premium declines in that segment to improve going forward? And second, with regard to Work comp and the softness in the pricing that you articulated in that line of business, are you continuing to add reserves at a faster clip than the overall premium growth in order to protect ourselves against some unexpected higher claims development in the future?

Well, Doug, let me talk briefly about the personal lines piece, and I'll ask Jeff also to comment, particularly on the Workers' comp side. For personal lines, that is the plan, as you have noted. With the 7 states now, that is completed, we have taken over the past year some modest rate increases as it relates to personal lines as compared to the prior 18 months where we were very aggressive. And so the business plan calls for more moderation in terms of the personal lines numbers. And so our business plan really calls for a very low single-digit decrease through the remainder of this year. And that was the plan, obviously, prior to COVID 19. But that is the plan, and I think that we will start to see that.

Doug, this is Jeff. On the Workers' compensation front, yes, we are, as you stated, we are seeing some moderation and some reductions in the overall premium rates. Just to give you a sense of that, in the first quarter, the premium rate impact was, I think I mentioned in my prepared remarks, a 3.8% decline. Over the past 2 years, the average decrease has been about 2.7%. That's the average quarterly decline. So the premium rate reduction has been somewhat modest. We are taking a more conservative view of the loss ratio for 2020. Our pick was higher than it would have been in the past several years. The core Workers' compensation loss ratio that we recorded was 62.7%. That is just modestly higher than what it has been over the past 2 years. But it is a couple of points higher than it would have been a year ago in the first quarter. So we are expecting some modest increase in the overall loss ratio. But as you saw in the combined ratio for Workers' comp, it's still quite profitable, and we expect that to continue. So with a 90% combined ratio in Workers' comp, there is some room there for some modest deterioration in that loss ratio.

Okay. And you think you're reserving for it. I know in the past, Jeff, you've mentioned adding more, a higher level of reserves to the line relative to the premium growth, just to protect the company for the future because that line, in particular, can have some unwelcome surprises. And it sounds like you continue to do that in 1Q?

We did. And as you can imagine, with our smaller businesses, many of them not being up and running in operations, currently, we have to take a look at what we do for the second quarter in terms of reserving. But certainly, we are expecting that we will see the reserves increase at a higher rate of, than premiums in this current environment.

Okay. And one final, if I may. Regarding the technology initiatives, how was COVID-19 and people working from home, has that delayed or it made any change to the plans with regard to the rollout and the phases that you all put together such a detailed plan around? So what's been the impact on that that you're envisioning?

Well, we did have to take a 30-day pause, if you will, when travel restrictions started to be implemented, of course, with some of the external vendors that we use and rely on as well. And so it did create about a 30-day pause on what we call Project Nautilus, which is that modernization of our legacy systems. Happy to report, two weeks ago, we started the next phase of that. So as everyone settled in to working from home and working efficiently with our external vendors, we have now started the next phase of that project. And we did, we completed release 1. And so the timing of it, the timing is never good with the current situation that we're dealing with. However, we did complete release 1. It was fully deployed. Things went very well, and then COVID-19 showed up. And so we were thankful that we were not midstream in terms of one of these major releases. We had just completed the first release that went well. We paused for 30 days, Doug. And two weeks ago, we started back in. And so we're watching the progress that we make on that.

[Operator Instructions]. Your next question is from the line of Meyer Shields with KBW.

I have one big picture question for Kevin. I'm trying to get a handle on what insurance agents are actually looking for as we go through the crisis?

What insurance agents are looking for? Well, first and foremost, they're anxiously awaiting to see, from an economic standpoint, when the various states, because it varies state-by-state in terms of opens up the economy. Georgia is a good example. As we know, Georgia has been opened up somewhat in the last week. And so we'll be monitoring what actually occurs within that state. In the 24 states in which we operate, that's going to vary. So the agents are anxiously awaiting to see that part start to open up. Secondly is they have gotten very efficient in terms of being able to work remotely. There, we've put together some aggressive plans to help them grow on the commercial lines side of it. So the agents are in a position where they're ready to move forward, but at the same time the macro issues at hand are limiting their ability to grow. And we work very closely with our agents. We've got great relationship with our agency partners. But, Meyer, I wish I had a clearer picture from an economic standpoint, what they might be looking for. And I also ask Jeff, if he's got any additional comments as it relates to that?

Yes. Certainly, the communications -- we've been in constant communications with our agents and through our marketing group. They're also looking for flexibility. We are trying to be as flexible as we can be with our customers. On the commercial side, we're endorsing policies to reduce payroll exposures. For example, we're providing a commercial auto layup availability, so that if there are commercial autos that are not being used, they can basically kind of set those aside and not pay premiums for commercial vehicles that are not being used. On the premium receivable side, we've, of course, as I think all other insurance companies probably have done at this point, suspended any cancellation activity for at least 60 days and not charging any late fees on those -- for those customers who can't afford to make their premium payments currently. So that flexibility, I think, is important, and we are stressing that with our agents that we will do whatever we can to assist our customers during this challenging time.

Okay. No, that's very helpful. I think that will pay off in the long term. Are you changing the -- your new money investment allocation to maybe reduce investment risk even more because of all the other risks that are emerging currently?

Well, as you know, Meyer, we have a very conservative approach to our investment portfolio with a very modest allocation to equity securities, which, of course, served us well in the past 30 days or so. We are not making any significant changes, although we have been building liquidity. And if you looked at our balance sheet, we had, I think, $125 million of cash and short-term investments at the end of March, which included the $50 million that we borrowed from the Federal Home Loan Bank. So we've been building kind of a war chest of potential money if we need it now. To this point, as I said earlier, we really haven't seen a significant decrease in our incoming cash flows. And with loss activity down somewhat from the lower business activity and driving activity, we're in really good shape. But we're not really investing as aggressively as we may have in the bond portfolio, although there have been some opportunities that we've taken advantage of to put some money to work. But at this point, we're taking a very conservative approach, not necessarily investing in more equities or any other risky classes of investments, but trying to make sure that we maintain some level of investment yield, especially as the interest rates have dropped significantly. So far, in the second quarter, we've been able to maintain the investment yield in terms of what's been maturing and what we've put back into the portfolio. So we're kind of holding our own at this point.

There are no further questions.

We appreciate everyone's participation and the good questions. And we look forward to speaking with you again after we release our second quarter results. So thank you, everyone.

Thank you.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.