Donegal Group Inc 2026 Q3 Earnings Call

Kevin? Thank you, and welcome everyone.

We are pleased to provide an update today on our third quarter results and ongoing business strategies and initiatives. Similar to the first half of 2026, we had favorable underwriting results for the third quarter of 2026. Compared to prior year third quarter, we experienced higher weather-related losses, less impact from large fire losses, and more favorable prior year reserve development. Weather-related losses were modestly lower than our previous five-year average for the third quarter. The core loss ratio was below our target, with a modest increase in the commercial line's core loss ratio due to an uptick in severe casualty losses, largely offset by a lower personal lines core loss ratio. A solid increase in investment income augmented the underwriting profit, contributing $18.2 million after-tax net income, equating to an annualized return on equity of 10.9% for the third quarter.

Soft market conditions continue to create headwinds in our pursuit of profitable growth. We are engaging with our independent agents to drive opportunities for new business, and positive momentum continues to build across our regions and business segments, despite the market challenges. Our technology and business teams are making steady progress on the migration of our on-premises Guidewire claims and billing systems to the new Guidewire Cloud platform, with planned deployment on track for the first half of 2027. We have also begun to prepare for the migration of our on-premises policy administration system to the cloud, which we expect to complete in 2028. The policy administration migration was intentionally planned as a second phase of our cloud migration project to ensure the successful conversion of all remaining legacy mainframe policies to the Guidewire application, which remains on track for completion in May of 2027.

We are following an intentional approach to the integration of artificial intelligence capabilities within our organization. Our technology team has embraced the utilization of AI development tools and AI agents to increase efficiency in our IT and data operations. We have taken a cautious but intentional approach towards the integration of AI into our core operations. After evaluating multiple vendors and product offerings, we narrowed our strategy to developing and deploying AI solutions that are embedded within our core system platforms already in use within our operations. We have partnered with vendors such as Guidewire, Snowflake, and others with whom we've developed deep relationships and mutual commitments.

We're in the final stages of completing an AI-ready technology foundation that includes a single source of truth cloud data infrastructure, supporting integrated cloud-based core operating applications that will allow us to deploy AI solutions at scale in order to generate powerful insights as we drive operational consistency and efficiency. We believe this approach will allow us to maintain a pace of technology innovation that will allow us to compete effectively. Considering the rapid pace of development of AI-powered innovations across the insurance ecosystem, we're also creating opportunities to engage directly with our independent agents to understand how the emergence of these innovations is impacting their operations and interactions with their customers, so that we can identify any potential opportunities for us to support and enhance those interactions. At this point, I'll turn the call over to Jeff Miller for a review of our financial results for the quarter.

Thank you, Kevin. For the third quarter of 2026, net premiums earned decreased 3% to $222.9 million. Net premiums written decreased by 4.5% as lower premium rate increases and retention levels were offset partially by an increase in new business volume. We saw a 5.6% decrease in personal lines net premiums written and a 3.7% decrease in commercial lines. Rate increases achieved during the third quarter of 2026 averaged 4.3% in total and 4.9% when excluding workers' compensation. The combined ratio was 96.5% for the third quarter of 2026, up slightly from 95.9% for the prior year quarter, primarily due to higher weather impact and a higher expense ratio offset partially by lower large fire losses and more favorable development of reserves for losses incurred in prior accident years. The core loss ratio remained fairly stable at 51.8% compared to 51.1% for the prior year quarter.

Weather-related losses were $19.1 million, or 8.6 percentage points of the loss ratio for the third quarter of 2026, which were higher than the $14.3 million or 6.2 percentage points for the third quarter of 2025, when weather conditions were unusually favorable. The quarterly weather claim impact was modestly below the previous five-year average for the third quarter of 9.3 percentage points. Large fire losses, which we define as over $50,000 in damages, contributed 2.6 percentage points to the loss ratio for the third quarter of 2026, which was lower than the 4.4 percentage points for the prior year quarter and reflected a decrease in the severity of both commercial and homeowners fire losses.

Our insurance subsidiaries experienced $3.5 million of net favorable development of reserves for losses incurred in prior accident years, or a 1.5 percentage point reduction in the loss ratio for the third quarter of 2026, compared to $1 million of unfavorable development, or a 0.4 percentage point increase in the loss ratio for the prior year quarter. Specific line of business detail for the third quarter of 2026 included favorable development of $2.3 million for commercial auto, $2.3 million for workers' compensation, and $900,000 for homeowners, offset partially by unfavorable development of $1.2 million for commercial umbrella and $800,000 for commercial multi-peril. The expense ratio was 34.8% for the third quarter of 2026, compared to 33.5% for the prior year quarter. The increase primarily reflected the impact of the lower base of net premiums earned for the current quarter.

In closing, solid underwriting income and higher investment income contributed to after-tax net income of $18.2 million for the third quarter of 2026. To provide more details about our commercial and personal lines segment results, I will turn the call over to Jeff Hay.

Thank you, Jeff. As Kevin mentioned, we are pleased with the underwriting profitability in the third quarter of 2026, and we continue to emphasize the need to increase new business in targeted areas to offset attrition and achieve moderate growth levels in this softening market. Within our commercial lines segment, our third quarter 2026 results were impacted by several primary drivers, including high weather losses compared to the third quarter of 2025, more favorable prior year reserve development, and an increase in core loss ratio that was partially due to a notable increase in severe workers' compensation claims. I will expand upon each of these, but first, as the overall market remains soft, there is intense competition for quality new business. We continue to stand firm in maintaining underwriting and pricing discipline to protect margins.

Although we fell short of our business plan objective in the third quarter, I am pleased to report that we had continued success in new business writings. New business volume increased by 11% over the same quarter in 2025, with 69.5% of new business written in our highly targeted classes with higher expected profitability. Our investment in small commercial capabilities continues to accelerate. Additionally, our focus on increasing quote volume and distribution points continues to expand across our footprint. Compared to the same quarter in 2025, we have seen a 10% or higher increase in small business quote volume in more than half of our top small commercial agencies. More than 75% of our top agencies have increased quote volume year-over-year in 2026. Real retention fell slightly to 81.5% for the third quarter of 2026 as we continue to work with our independent agents to retain quality accounts.

The decline also reflects the impact of our exit from the farm line of business, as mentioned in prior calls. The non-renewal farm business had a negative impact of 1.0 points on retention and 1.2 points on our overall commercial lines growth rate for the quarter. Excluding the impact of the farm exit, we achieved a real retention rate of 82.5% with overall growth at 2.5%. Our commercial lines rate and exposure increase, excluding workers' compensation, slowed to 6.7% for the third quarter of 2026. We believe we are generally rate adequate across our lines of business and continue to emphasize driving rate increases in areas where the intersections of class, line of business, and geography present challenges in order to keep pace with loss costs.