Donegal Group, Inc. · NASDAQ:DGICA
Donegal — KBW 2015 Insurance Conference
31 slides from Donegal's conference presentation, September 2015
Slide 1: Pursuing Effective Business Strategy in Regional Insurance Markets
Pursuing Effective Business Strategy in Regional Insurance Markets Investor Presentation September 2015
Slide 2: Forward-Looking Statements
Forward-Looking Statements The Company bases all statements made in this presentation that are not historic facts on its current expectations. These statements are forward-looking in nature (as defined in the Private Securities Litigation Reform Act of 1995) and involve a number of risks and uncerta
Slide 3: Insurance Holding Company With Mutual Affiliate
Insurance Holding Company With Mutual Affiliate • Regional property and casualty insurance group – 21 Mid-Atlantic, Midwestern, New England and Southern states – Distribution force of approximately 2,400 independent agencies – Completed 10 M&A transactions between 1988 and 2010 • Interrelated operat
Slide 4: Structure Provides Stability to Pursue Successful Long-Term Business Strategy
Structure Provides Stability to Pursue Successful Long-Term Business Strategy • Outperform industry in service, profitability and book value growth • Drive revenues with organic growth and opportunistic transactions • Focus on margin enhancements and investment contributions 4 (Detailed organization
Slide 5: Objective: Outperform Industry Service, Profitability and Book Value Growth
Objective: Outperform Industry Service, Profitability and Book Value Growth Change in Net Written Premiums GAAP Combined Ratio Change in Book Value DGI CAGR: 7% Peer CAGR: 4% DGI Avg: 99% Peer Avg: 100% DGI CAGR: 6% Peer CAGR: 4% 20% 115% 20% 110% 15% 15% 105% 10% 10% 5% 100% 0% 95% 5% -5% 90% -10%
Slide 6: 1st Half 2015: Improved Underwriting Results Led to Operating EPS of 45¢
1st Half 2015: Improved Underwriting Results Led to Operating EPS* of 45¢ vs. None in 1st Half 2014 • 8.8% increase in net written premiums – Driven by Michigan Insurance Company reinsurance change, rate increases and new commercial lines accounts • 96.6% statutory combined ratio* – Lower catastroph
Slide 7: Drive Revenues with Organic Growth and Opportunistic Transactions
Drive Revenues with Organic Growth and Opportunistic Transactions Net Written Premiums Michigan (dollars in millions) Sheboygan Peninsula $579 Le Mars $533 Southern $496 Atlantic States $454 $392 $365 $363 $302 $307 $314 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 December 2008 December 2010 A
Slide 8: Focus on Underwriting Profitability to Enhance Margins
Focus on Underwriting Profitability to Enhance Margins Personal Lines Loss Ratio Commercial Lines Loss Ratio 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 YTD YTD 8 Donegal Insurance Group (SNL P&C Group) SNL P&C Indus
Slide 9: Achieve Book Value Growth By Implementing Plan
Achieve Book Value Growth By Implementing Plan Pursue quality premium growth and enhance underwriting profitability Support insurance operations with conservative investment strategy 9
Slide 10: Maintain Multi-faceted Regional Growth Strategy
Maintain Multi-faceted Regional Growth Strategy • $579 million in 2014 net written premiums across 21 states in four operating regions – $768 million in direct written premiums for insurance group* • 10 M&A transactions since 1988 • Acquisition criteria: – Serving attractive geography – Favorable re
Slide 11: Example: Michigan Insurance Company
Example: Michigan Insurance Company • Attractive franchise (Dollars in millions) 2015 2014 2013 2012 2011 2010 (under acquired in 2010 prior owner) • Fully integrated into Direct written premiums $115** $111 $112 $111 $108 $105 Donegal systems in External quota 0% 20% 30% 40% 50% 75% 2013 share • St
Slide 12: Continue Strategic Efforts to Balance Business Mix
Continue Strategic Efforts to Balance Business Mix Net Written Premiums • Commercial lines = by Line of Business 42% of NWP in 2014 (2014) – Commercial lines renewal premiums increases in 5- Workers' Comp Homeowners 20% 7% range 15% Other Personal – Ongoing emphasis on new 3% business growth in all
Slide 13: Emphasize Growth in Commercial Lines
Emphasize Growth in Commercial Lines • 93.7% statutory combined In-Force Policy Count Retention Levels ratio for 1H 2015 100.0% • Introduce core Donegal 95.0% products in new regions • Growth focus on accounts 90.0% with premiums in $10,000 to 85.0% $75,000 range 80.0% • Expand appetite within class
Slide 14: Focus on Personal Lines Profitability
Focus on Personal Lines Profitability • 98.9% statutory combined ratio for 1H 2015 • Focus on the preferred and superior risk markets • Underwriting initiatives: – Rate increases in virtually every jurisdiction – Expanding use of predictive modeling – New and renewal inspections – Seek geographic sp
Slide 15: Organic Growth Centered on Relationships with ~2,400 Independent Agencies
Organic Growth Centered on Relationships with ~2,400 Independent Agencies • Ongoing objectives: – Achieve top three ranking within appointed agencies in lines of business we write – Cultivate relationships with existing agencies to move writings to next premium tier – Leverage “regional” advantages
Slide 16: Support Agents with Best-In-Class Technology
Support Agents with Best-In-Class Technology Coming Soon – BillingCenter, Mobile App Phase II Call Service Center Center ClaimCenter ImageRight Mobile App 16
Slide 17: Drive Increased Efficiency with Automation
Drive Increased Efficiency with Automation Direct Premiums per Employee • Current infrastructure can $1,000 support premium growth $900 (Dollars in thousands) • Premiums per employee rising due to underwriting $800 systems • Claims system allows $700 more rapid and efficient $600 claims handling • M
Slide 18: Enhance Underwriting Profitability to Improve Operating Margins
Enhance Underwriting Profitability to Improve Operating Margins • Sustain pricing discipline and conservative underwriting • Manage exposure to catastrophe/unusual weather events – Reinsurance coverage in excess of a 200-year event • Link employee incentive compensation directly to underwriting perf
Slide 19: Employ Sophisticated Pricing and Actuarial Tools
Employ Sophisticated Pricing and Actuarial Tools • Predictive modeling tools • Formal schedule of enhance our ability to regular rate adequacy appropriately price our reviews for all lines of products business, including GLM – Sophisticated predictive analysis on claim costs modeling algorithms for
Slide 20: Maintain Emphasis on Reserve Adequacy
Maintain Emphasis on Reserve Adequacy • Reserves at $292 million Established Reserves at Year-end at year-end 2014 Reserve Range at 12/31/2014 – Midpoint of actuarial Low $266,300 range High $310,400 Selected at midpoint – Conservative reinsurance (dollars in thousands, net of reinsurance) $292,301
Slide 21: Achieve Book Value Growth By Implementing Plan
Achieve Book Value Growth By Implementing Plan Pursue quality premium growth and enhance underwriting profitability Support insurance operations with conservative investment strategy 21
Slide 22: Maintain Conservative Investment Mix
Maintain Conservative Investment Mix $823.5 Million in Invested Assets* (as of June 30, 2015) • 89% of portfolio invested Short-Term in fixed maturities Securities Treasury Equity 2% 3% Agency 8% – Effective duration = 4% Corporate 4.5 years 13% – Tax equivalent yield = Tax-Exempt 3.2% Municipals 43
Slide 23: Donegal Financial Services Corporation Bank Investment = 5% of Invested Assets
Donegal Financial Services Corporation Bank Investment = 5% of Invested Assets • DFSC owns 100% of Union Community Bank – Serves Lancaster County (location of Donegal headquarters) with 14 branch offices • Expanded via acquisition in 2011 – Added scale to banking operation – Enhanced value of histor
Slide 24: Union Community Bank (48% owned by Donegal Group Inc.)
Union Community Bank (48% owned by Donegal Group Inc.) • 2014 financial results: – $506 million in assets at year-end 2014 – $2.9 million in 2014 net income • Excellent capital ratios at June 30, 2015: Tier 1 capital to average total assets 17.38% Tier 1 capital to risk-weighted assets 23.69% Risk-b
Slide 25: Review: Long-Term Business Strategy for Growth and Success
Review: Long-Term Business Strategy for Growth and Success • Maximize benefits of regional business approach • Outperform industry in service, profitability and book value growth • Drive revenues with organic growth and opportunistic transactions • Focus on margin enhancements and investment contrib
Slide 26: Strong Capital + Solid Plan to Drive Results
Strong Capital + Solid Plan to Drive Results Book Value Plus Cumulative Dividends • Rated A (Excellent) by $20.00 A.M. Best – Debt-to-capital of approximately 14% $15.00 – Premium-to-surplus of approximately 1.5-to-1 $10.00 • Dividend yield of 3.7% for Class A shares $5.00 • Authorization for repurc
Slide 27: Supplemental Information
Supplemental Information 27
Slide 28: Structure Provides Flexibility and Capacity
Structure Provides Flexibility and Capacity Public 56%(1) 44%(1) Donegal Mutual Stockholders Insurance Company Donegal Group Inc. 52% 20% 48% Donegal Financial Services POOLING 100% Corporation AGREEMENT Reinsurance (Union Community Bank) 80% 100% 100% 100% 100% 100% 100% Southern Sheboygan Falls Mi
Slide 29: History of Contributing Transactions
History of Contributing Transactions Southern Company Le Mars Peninsula Sheboygan Michigan Mutual Year Acquired 2004 2004 2008 2009 2010 Company Type Mutual Stock Mutual Mutual Stock Primary Product Line Personal Niche Personal Personal Pers./Comm. Georgia/ Geographic Focus Midwest Mid-Atlantic Wisc
Slide 30: Net Premiums Written by Line of Business
Net Premiums Written by Line of Business (in millions) Q2 15 Q1 15 Q4 14 Q3 14 Q2 14 Q1 14 Q4 13 Q3 13 Personal lines: Automobile $55.6 $52.3 $48.5 $53.2 $52.0 $50.5 $46.7 $50.9 Homeowners 33.4 24.4 27.4 32.0 31.1 22.9 25.7 29.8 Other 4.9 4.2 4.1 4.5 4.6 3.8 4.0 4.2 Total personal lines 93.9 80.9 80
Slide 31: Combined Ratio Analyses
Combined Ratio Analyses (percent) Q2 15 Q1 15 Q4 14 Q3 14 Q2 14 Q1 14 Q4 13 Q3 13 Stat combined ratios: Personal lines 99.4 98.4 106.5 95.2 99.5 102.7 99.3 97.9 Commercial lines 92.4 95.1 95.1 94.4 105.8 104.3 89.4 93.0 Total lines 96.4 96.9 101.8 95.0 102.1 103.2 95.4 96.0 GAAP combined ratios (tot