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Donegal Group (NASDAQ:DGICA)
Q4 2017 Earnings Conference Call
Feb. 23, 2018 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Sonya and I will be your conference operator today. At this time, I would like to welcome everyone to the Donegal Group, Inc.'s Q4 2017 Earnings Conference Call. All lines have been switched on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press *, then the number 1 on your telephone keypad. If you'd look like to withdraw your question, press the # key. Thank you.

Mr. Jeff Miller, chief financial officer, you may begin your conference.

Jeffrey Miller -- Executive Vice President and Chief Financial Officer

Thank you very much. This is Jeff Miller, chief financial officer. Good morning, everyone, and welcome to the Donegal Group conference call for the fourth quarter and year ended December 31, 2017. This morning we issued a news release outlining our quarterly and full-year results.

For a copy of that release, please visit the Investor Relations section of our website at donegalgroup.com. I will begin today's call with commentary on our financial results. Kevin Burke, president and chief executive officer, will then provide his comments on the quarter and discuss our current business developments and initiatives. After our prepared comments, we will open the lines for any questions you may have.

Before we get started, you should be aware that certain statements made in our news release and in this conference call are forward-looking in nature and involve a number of risks and uncertainties. Please refer to our news release for more information about forward-looking statements. Further information on risk factors that could cause actual results to differ materially from those projected in the forward-looking statements is available in the 2016 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 under the SEC filings link.

We plan to file our 2017 form 10-K on or around March 9. We provided a reconciliation of non-GAAP information as required by SEC Regulation G in the news release we issued this morning.With that, let's move to a discussion of our quarterly operating results. While our results reflected a number of challenges that we experienced throughout the fourth quarter of 2017, we did see a number of positive trends that we believe will improve our operating performance going forward. There were a lot of moving parts during the quarter and I will attempt to clarify the impact as we go along.

Our fourth quarter was highlighted by strong organic growth across our regional markets, as evidenced by higher premiums for the period in both our commercial and personal-lines business segments. Net premiums earned of $181.1 million for the fourth quarter of 2017 increased 7.2% compared to the fourth quarter 2016. Net premiums written of $171.4 million for the fourth quarter 2017 increased 5.9% compared to the fourth quarter 2016. We expect our 2018 growth to shift toward more profitable lines of business as a result of a number of measures that we are continuing to implement.

Kevin will provide more details about those measures in a few minutes.Turning to the impact of the Tax Cuts and Jobs Act that was enacted in December 2017, we reported additional income tax expense for the fourth quarter 2017 of $4.8 million, or $0.17 per diluted Class A share. This impact represented the effect of applying the reduced 2018 corporate income tax rate to our net deferred-tax assets. Beginning in 2018, we expect the tax law changes to be beneficial, reducing our effective tax rate and income tax expense. Net income excluding the tax impact was $2 million, or $0.07 per diluted Class A share for the fourth quarter 2017, compared to $5.6 million, or $0.21 per diluted class A share for the fourth quarter 2016.

Our combined ratio was 104.8% for the fourth quarter 2017, compared to 100.5% for the prior-year quarter. The increase related primarily to an increase in our loss ratio of 72%, compared to 67.1% for the fourth quarter 2016. I'll provide some additional details with respect to our fourth-quarter loss experience. Weather-related losses totaled approximately $5.4 million, or 3 percentage points of our loss ratio, decreasing from the $7.4 million weather-related losses, or 4.3 percentage points of our loss ratio for the fourth quarter 2016.

Weather-related losses were generally in line with our five-year average for the fourth quarter. Large-fire losses, which we defined as individual fire losses exceeding $50,000, were $7.7 million, or 4.3 percentage points of our loss ratio for the fourth quarter 2017, compared to $7.4 million, or 4.4 percentage points for the fourth quarter 2016. In total, net development of reserves for losses incurred in prior accident years did not have a material impact on our loss ratios for the fourth quarters and full years of either 2017 or 2016. However, favorable development of workers compensation loss reserves largely offset unfavorable development of commercial multiperil, personal auto, and commercial auto loss reserves.Though the impact of weather, fires, and reserve development was fairly consistent with our experience of the prior-year quarter, the increase in our loss ratio is primarily related to higher frequency and severity of casualty losses.

You may recall from prior calls that we had an unusually low loss-severity in our workers compensation line of business for the first nine months of 2017. In the fourth-quarter workers compensation losses exceeding $50,000 spiked to $10.5 million, far in excess of any quarter during the last two years. We attribute the increase of timing variations in the occurrence of large-loss activity. Favorable prior-year loss reserve development partially offset the severity increase, netting to an 80.7% fourth-quarter 2017 workers compensation combined ratio.

And for the full year, we achieved an excellent 79% combined ratio in that line. Similar to our experience in the fourth quarters of the past several years, we noted a significant impact from seasonality in the frequency and severity of personal auto and commercial auto losses. We primarily attribute this seasonality to increased driving activity around the holidays and the onset of winter weather conditions in several of our regions during the fourth quarter. Our loss ratios in both these lines also reflected prior-year reserve development and additional IBNR reserves to mitigate the adverse development trends we've experienced in recent years.

During the full year 2017, we increased our bulk IBNR reserves by 15%. That compares with an increase of 11% during 2016. The 2017 reserve increases were heavily concentrated in commercial multiperil, personal auto, and commercial auto, which were the lines where we experienced adverse reserve development in 2017. We expect our actions to strengthen reserves in these lines during the year will improve our loss experience in 2018.

Our expense ratio was 31.9% for the fourth quarter 2017, compared to 32.4% for the fourth quarter 2016, with the decrease attributable to lower underwriting-based incentive costs.Turning briefly to the balance sheet and investment portfolio, Donegal Group continues to operate from a position of financial strength, adhering to a relatively conservative investment strategy intended to limit the impact of market volatility on our investment income and portfolio values. The fourth-quarter 2017 net investment income was relatively consistent with the fourth quarter 2016. Net realized investment gains were $1.5 million for the fourth quarter 2017, compared to $321,000 for the fourth quarter 2016. Our total investments exceed $1 billion, with 90% invested in high-quality, fixed-security investments.

At December 31, 2017, our book value per share was $15.95, compared to $16.21 at December 31, 2016. The decrease was primarily attributable to the impact of the December 2017 tax law change, which reduced our book value per share by $0.17. We expect to recoup that impact quickly through reduced income tax expense beginning in 2018.At this point, I'll turn the call over to Kevin for his comments on our quarterly results and business developments. Kevin?

Kevin Burke -- President and Chief Executive Officer

Thank you, Jeff. During 2017, we made progress in a number of our core objectives while dealing with a difficult set of challenges, many of which apply to our industry as a whole. The long-term goal of Donegal Group has always been outperforming the property and casualty insurance industry in terms of service, profitability, and book-value growth. We're working diligently toward that goal.

Our thanks goes out to our independent agents and employees for helping Donegal to respond to these challenges, including the many losses our policyholders experienced due to a number of severe weather events throughout our regions in 2017. While the weather-related claims prevented us from achieving our profit objectives, we expect the fulfillment of our promise to our policyholders, to be there when it matters, to most generate benefit for us in the future. Unlike the first half of 2017, weather-related losses were fairly low during the fourth quarter of 2017. So I'll begin with a few comments on the increase in casualty losses.

Jeff covered the spike in workers compensation losses and mentioned that throughout the quarter we continued to experience elevated loss activity within our personal and commercial automobile lines of business. The underlying causes are issues that our entire industry has been confronted with over the past several years, factors such as higher cost of vehicle repairs, increased accident activity due to distracted driving, and driving activity related to positive economic growth have all cited -- been reasons for the sharp increase in loss cost over a multiyear period. All those factors have so far more than offset improvements in vehicle safety and expanding implementation of accident-avoidance technologies. Our No.

1 priority is to take every available action to address our automobile challenges and bring our loss ratios down to acceptable levels. The first step in that process is restoring rate adequacy. We have historically taken a measured approach in rate increases, seeking to provide a stable market for our agents and policyholders. However, we have become increasingly aware that our rate increases over the past several years have not been sufficient to keep pace with loss-cost increases as a result of the factors I mentioned earlier.

Further, our auto new business growth rates in several regions far exceeded our target goals for 2017 and clearly indicate to us that our rates are too competitive in some of those markets. We are using every tool available to us to improve our auto profitability. We're aggressively implementing rate increases and have expanded our utilization of predictive analytical tools in all of our auto lines in all the states in which we conduct business. A fresh round of commercial auto rate increases will begin to take effect in the second quarter of 2018.

Rate increases for personal auto are subject to regulatory approval. And while we are being more aggressive in the rate increases we have filed within the past several months, with the number of filed increases well into the double-digit percentages, it will take some time before those actions will begin to positively impact our loss ratios. We have been implementing changes in our underwriting guidelines and taking a more definitive marketing actions to slow growth in lines that are not achieving our profitability targets and ultimately to enhance our overall profitability. An example is we have placed a moratorium on writing of new personal-lines policies in certain Midwestern states where that business has generated consistent underwriting losses for us and many of our peers.

This underperformance is largely due to the pervasive need for more rate in light of the propensity for extreme weather in those states. We will keep the new-business moratorium in place while we file additional rate increases and evaluate whether those markets present a viable opportunity for us to write personal-lines business profitably in the future. In spite of the challenges we face in our automobile lines and the impact of unusually frequent and severe weather events, we achieved net income for the full year 2017 of $11.9 million, excluding the one-time impact of the December tax law change. We are pleased with the performance and the potential of our commercial-lines business.

For the full year 2017, our commercial lines combined ratio was in 93.6%, our workers compensation results were excellent despite a handful of large losses in the fourth quarter. Commercial multiperil also performed to expectation when normalized for the unusual weather impact earlier in the year. And we are continuing to see opportunities to obtain modest renewal premium increases, although there is increased competition for quality commercial accounts and a number of our competitors are aggressively pursuing workers compensation business. Our new premium increases during the fourth quarter generally ranged in the 3% to 6%, which is consistent with the past several quarters.

Throughout 2017, our commercial policy retention held firmly in the mid 80% range, and we believe we are in an excellent position within the marketplace to continue to profitably grow our commercial lines.Before we open it up for questions, let me conclude by reporting that we have begun to conduct our annual agency sales meetings that will continue over the next several months, and based on feedback from those meetings, we see clear opportunities to achieve commercial market-share gains as we continue to strive to shift the mix of our overall business more toward commercial lines. We have a very solid management team within the home office and our field operations, and they are fully engaged and ready to do the hard work necessary to achieve our business goals.With that, we'll ask the operator to open the lines for any questions that you may have. Thank you.

Questions and Answers:

Operator

At this time, I would like to remind everyone, in order to ask a question, press *, then the number 1 on your telephone keypad. We'll pause for just a moment to compose a Q&A roster. Again, if you'd like to ask a question, press *, then the number 1 on your telephone keypad. Your first question comes from the line of Christopher Campbell from KBW.

Your line is open.

Christopher Campbell -- Keefe, Bruyette, and Woods -- Assistant Vice President

Hi. Good morning, gentleman. I guess my first question is just kind of on the underwriting results. So, clearly personal and commercial at least in 2017 aren't going in the right direction but you're going to take some rate increases in '18.

And then homeowners and CMP sound like they're softening a little bit based on the underwriting we saw. And I know workers comp remains strong but how much longer are you thinking that the workers compensation, that strength will be able to subsidize the deteriorating underwriting in the other lines?

Kevin Burke -- President and Chief Executive Officer

Well, Chris, we wish we knew the answer to that. We have taken aggressive steps to make sure that we retain the workers comp business that we have. As you've said, it's performed very positively, it's profitable. We've increased some commission pieces for the workers comp because we understand what some of our competitors are doing.

But you raise an excellent point. We're very much aware that the workers comp business is only going to sustain that level of profitability for a period of time, and that is why we have taken such aggressive steps as it relates to private-passenger auto and our commercial auto lines. We have a tremendous focus on those two lines of business because we recognize that at some point in time we're not going to be able to rely on the overall profitability of the workers comp line. And when we see how aggressive other carriers are being with it, there's some erosion in terms of price, we recognize that that's an industry issue.

Now, the time frame of that, Chris, I simply don't know. Is it going to last another year? Is it two years? For us, it's not necessarily the time period. It is what are we doing with these other core lines of business to ensure that we're in a position to sustain if workers comp becomes less profitable at some point in the future.

Christopher Campbell -- Keefe, Bruyette, and Woods -- Assistant Vice President

Thanks. That's very helpful. And then just digging in a little bit more on workers comp, I know in the press release there was a couple of large losses. Are you seeing anything on the severity side that could be giving you concerns, like increasing settlement amounts? And then just in terms of your workers comp loss trends, how do they compare with what you're seeing in pricing and terms and conditions because you did mention that the terms and conditions were getting a little bit weaker?

Jeffrey Miller -- Executive Vice President and Chief Financial Officer

Sure. This is Jeff. On the large losses in the fourth quarter, as an example, the one loss related to a workplace-violence event where a number of people were fatally injured and others were injured, so that was a very unusual loss. We did incur the annual aggregate deductible that applies to our workers comp reinsurance.

So the overall impact of that one loss was close to $2 million. There were a few other more severe workers comp claims that were presented to us in the fourth quarter but nothing there indicated to us that there was some change in trends or any underwriting deficiencies. As we said, in the third quarter we were surprised at how low the severity of losses was in workers comp. So we really think it's just more of a timing anomaly, and if you can look at the year as a whole, the experience has been very good.

There are a few states where pricing is certainly an issue, where we have seen some run-off of our workers comp business. Michigan would be a prime example of that, where the market has become very competitive for workers comp and, as Kevin said, we're not necessarily changing terms and conditions or policy coverage issues there. It's more tweaking of the rates, of the loss cost multipliers and doing some commission changes to try to make our products as attractive to the agents and as price-competitive as possible.

Christopher Campbell -- Keefe, Bruyette, and Woods -- Assistant Vice President

That extra color, that's definitely helpful. And, Jeff, just a few numbers ones. Could you unpack the reserve movements by products for the quarter? Do you have those numbers available?

Jeffrey Miller -- Executive Vice President and Chief Financial Officer

I do. As far as workers comp, I think we had it in the release. There was a $4 million benefit from reserve development and that partially offset, almost completely offset the CMP which was $2.3 million and commercial auto, which was $1.6 million and personal auto, which was $1.5 million.

Christopher Campbell -- Keefe, Bruyette, and Woods -- Assistant Vice President

OK. And then just in terms of the tax rate, how should we be thinking about that going forward, post-tax reform?

Jeffrey Miller -- Executive Vice President and Chief Financial Officer

Sure. Obviously, it really depends on our level of pre-tax income but it's kind of normalized our results and let's say, just for example, we had a $40 million pre-tax income amount after you account for the tax-exempt interest, we would expect that our effective tax rate would drop in the 9% to 10% range. So we expect somewhere in the 9% to 10% reduction of our overall tax rates at that level of pre-tax income. So it would vary obviously if our income is higher or lower than that number.

Christopher Campbell -- Keefe, Bruyette, and Woods -- Assistant Vice President

OK. And that's from the old statutory 35% or what would be your baseline?

Jeffrey Miller -- Executive Vice President and Chief Financial Officer

Yes, from the 35% to 21%, that would be the difference.

Christopher Campbell -- Keefe, Bruyette, and Woods -- Assistant Vice President

OK, got it. So, 35% to 21%, you would be looking somewhere in that 25%, 26% range.

Jeffrey Miller -- Executive Vice President and Chief Financial Officer

The effective tax rate at 35% statutory, that they would have been somewhere in the 27%, 28% range. Under 21% tax rate, we would be closer to 17% effective tax rate. I'm not necessarily providing that as guidance. I'm just saying as an example that's the impact if we were able to produce a $40 million pre-tax income.

Christopher Campbell -- Keefe, Bruyette, and Woods -- Assistant Vice President

OK. And just one more. Can we get an update on Mountain States? I think everything was supposed to move over, I think in the last call you had mentioned new business and renewal business was supposed to move over on 1/1. So just kind of thoughts on how that transition is progressing and any updated thoughts on when those could potentially be in the DGI pool?

Kevin Burke -- President and Chief Executive Officer

Chris, this is Kevin. Yes, in fact, we did hit the January 1 date. So, all of new business and renewal business for New Mexico was effective and on the Donegal operating platform effective January 1. The additional states, as you know, there was some business in Texas, Utah, and Colorado, and the schedule for those, Chris, is on April 1.

We will be writing the Texas business on Donegal. June 1 would be Utah, and September 1 is Colorado. Those are all on schedule and we're making great progress. If you think about it, it was last May of 2017 and when this was official, when we merged them into Donegal Mutual and of all the acquisitions and affiliations that we've had over the years, this was the one that was done very quickly.

We took fairly aggressive steps to start to clean up the book of business. So we're in a very good position as we sit here going into 2018, and we have just recently hired a couple of senior managers for that location as well. We have the head of marketing that actually just started two weeks ago. We have the head of claims operation, and we have one of our Donegal home office commercial lines underwriting managers actually relocating out to that location.

So we have some reason for optimism that we're really infusing some talent and we've got the platform now in place to hopefully continue to grow. We have taken very aggressive underwriting, reunderwriting stance in Mountain States. We felt that it was necessary to make sure that for 2017 we did everything possible to sort of clean up the book and make sure that we're in a good position going forward and every claims file has also been reviewed. And so they've set reserves and, again, we've been very aggressive about it.

So we're thinking 2018 is where we start to move forward with the organization. In terms of when we would start to include it in the pool, it would be something that would definitely not happen for 2018, probably not for 2019. We would take a hard look at it at the end of this year. It is definitely an 18-month, 24-month time period where we would start to strongly consider that.

Christopher Campbell -- Keefe, Bruyette, and Woods -- Assistant Vice President

OK. Yeah. And just in terms of like the premium [Inaudible], you've been taking underwriting actions. Any high-level thoughts on how much premium has, I guess, from Mountain States statutory like how much premium's been lost, and have you seen any underwriting improvement so far?

Kevin Burke -- President and Chief Executive Officer

Well, we had approximately 30% of the overall direct-rate premium has been non-renewed. So we've taken some aggressive steps. The January numbers actually looked pretty good, where we are starting to win some quality accounts, the Donegal type of accounts and, again, we're doing this on an account-by-account basis. So, we think that we're in pretty good shape going forward but it was about 30%, Chris, from a direct-rate premium standpoint, was non-renewed.

Christopher Campbell -- Keefe, Bruyette, and Woods -- Assistant Vice President

All right, thanks for all the answers and good luck in 2018.

Kevin Burke -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Bob Farnam from Boenning and Scattergood. Your line is open.

Robert Farnam -- Boenning and Scattergood -- Analyst

Hi there and good morning. When you look at the overall book, personal plus commercial, do you see the rate changes that you're getting in excess of loss-cost trends? I understand it's falling short on the auto side, but when you look at the overall book, how do you see -- I guess I'm trying to figure out how to model kind of the core loss ratio going forward when you back all the catastrophes and development out.

Jeffrey Miller -- Executive Vice President and Chief Financial Officer

Sure. This is Jeff. I'll take a shot and then Kevin can certainly chime in. Yeah, we made a commentary about the auto.

We're playing catch-up somewhat there. On the other lines, I think, we expect that our loss ratios are keeping pace with the loss-cost increases, especially in the other commercial lines. Workers comp, of course, as we've already talked about, is starting to soften, and although we have some cushion in that line, that line has obviously subsidized our underperformance in others. So we would say that we expect to continue to be able to write workers comp profitably and, as Kevin mentioned, normalizing for weather and CMP, we haven't seen a significant increase in loss cost there, and we are continuing to take renewal price increases.

Homeowners, I think, we're in good shape there. We believe that we're continuing to take some rate increases depending on the geography, those areas that had been hit harder by hail losses are taking a higher percentage increase. We're looking at some of the regions where we had gotten hit from a property-loss perspective and tightening up on some underwriting criteria. So we think that everything we're doing will put us in good shape for 2018 and into 2019.

On the auto side, it's just going to take some time because until we can get those rate increases filed, make some other adjustments to our rating structure, etc., it takes a while for that to work its way through to the earned premiums, but we have a clear path and we're hitting it hard.

Robert Farnam -- Boenning and Scattergood -- Analyst

All right, OK. And the increased use of the predictive analytical tools, maybe you can provide more color into what you're expecting from these tools to be able to do for your underwriting.

Kevin Burke -- President and Chief Executive Officer

Absolutely. One of the items that we very aggressively implemented in the third and fourth quarter of last year, Bob, was looking and applying our risk-index scores and we've got a model that we have used. The good news is that there is a lot of confidence in this model because we have seen the results of it as we piloted it, and there's a lot of confidence in it. The challenge for us is, we just simply can't seem to get it implemented quick enough.

We're aggressively doing it. So what's going to be happening is that I'm going to give you examples as it relates particularly to private-passenger auto. That entire book of business for all new private-passenger auto business that's coming in is getting scored and basically, it's getting scored from 1 to 10. The scoring of it isn't necessarily the fact that it is bad business if you score an 8, 9, or 10.

It's really a pricing-sensitivity tool. So, it may not be a bad risk but it's underpriced. And so what we have done is, we've taken a very aggressive approach by region that all new business that's coming in and getting scored in, let's say, the 8s, 9s, and 10s that it is deferred to the underwriter, and the underwriter then has to take a deeper dive and really look at the risk and apply appropriate rate. Now, that's the most simplistic example that I have.

On the commercial line side of, all new business for commercial auto is being scored as well, as well as the current book of business, and by mid-April, we will have the entire commercial lines auto books scored. And, again, what it's doing is, it's really refining our ability to price this business. We have regulatory guidelines that we have to follow, as you know, by state, and they vary, and we are pushing in terms of what we can do with those various scores of 9s and 10s and, I think, the aggressive approach that we're taking with it will definitely start to yield some results. At our core, when you look at our core book of business, it performs relatively well.

It's this remaining 12% or 13% of our private-passenger auto book where we're winning accounts and, but we're winning big, we're winning in terms of it's underpriced business. And the fact that we've got this predictive analytics program in place and the fact that we are accurately scoring this business and then taking action on it, I feel as though that's going to definitely provide some benefits for us in the coming months and quarters.

Robert Farnam -- Boenning and Scattergood -- Analyst

Right. Do you see your retention ratio dropping a bit because of the kind of the rate increases going to some accounts that may not have realized they were underpriced?

Jeffrey Miller -- Executive Vice President and Chief Financial Officer

Yes, we are definitely seeing that, especially as it relates to the 9s and 10s. We're seeing a significant drop in the policies that we're writing that are in those scores and we're pushing a lot of those depending on the state but in most states, we're pushing those higher-scored business into our most highest-priced tier. It's almost like a non-standard tier. When we're quoting any new business, it automatically goes into those tiers and we're not winning a lot of that business because of the higher price.

We believe that we're going to see some decline in our overall retention, which we view as a good thing because we want to make sure that we're doing everything to keep the business that is appropriately priced but to do everything we can to shed business that is underpriced and to not write in more of it, especially in states where we just have very poor loss experience.

Kevin Burke -- President and Chief Executive Officer

And we have built that into our business plan for 2018, knowing that we would definitely have some retention pieces there. We're hoping to augment that with the commercial business, which, again, we've been winning a lot a lot of those accounts and we've had overall some very good results.

Robert Farnam -- Boenning and Scattergood -- Analyst

Right. And it sounds like kind of the underwriting criterion that you're looking for particularly in the Midwest as you reunderwrite that book, or call some of those risks, do you see, is it meaningful enough to actually have a benefit to your kind of expected catastrophe losses or weather-related losses?

Kevin Burke -- President and Chief Executive Officer

Yeah, I think that that's an ancillary result of doing what we have done by putting that moratorium on all new business. As you can imagine, Bob, we sit back and we look at rate indications, we look at what our competitors are doing before we actually file any rates per state, and when we got to a particular number of Midwest states, Jeff and I and others realized that for the time being, in order to really get to an area where we may achieve rate-adequacy, we cannot add any additional policies to the book of business. We need to take aggressive rate, continue to monitor it. And those are the sorts of aggressive steps, I think, that we haven't necessarily done in the past.

We absolutely think it's the right thing to do at this particular time as we sort of refine the overall book of business.

Jeffrey Miller -- Executive Vice President and Chief Financial Officer

And, Bob, this Jeff. Just to add to that, your question is right on point because the one state that I'm thinking of in the Midwest that we had significant cat losses that drove up the reinsurance costs for the other states in the Midwest region. We do have a separate reinsurance program for cat losses in that region, and our price went up in 2018 as a result of that activity. So, it's not just the performance in that one state that's impacted.

It's actually the cost of doing business in the other states. So, that's really what drove our decision to really cut back.

Robert Farnam -- Boenning and Scattergood -- Analyst

All right, OK. And how have the independent agents been taking this news that you're going to be raising rates more aggressively than you have in the past?

Kevin Burke -- President and Chief Executive Officer

Bob, they've heard it, I think, from every other carrier. We just had one of our agency sales meetings, one of the largest ones that we have, yesterday, last evening, and I was there, and we talked in detail about what we need to do it as an organization relating to private-passenger auto. And there were many, many agents, we had over 100 agents at that meeting, that were sort of hearing me and nodding their head as we were going through the presentation. So, they understand.

It truly is an industrywide issue and it is not an excuse for us internally. If we need to do some very aggressive things to get our private-passenger auto and commercial auto back in line, we're going to do that, but as an industry, I just looked at some results from 2016. I'll be curious as to what 2017 shows but just on the private-passenger auto, the average combined ratio was 105.9. I will be curious to see what 2017 as an industry shows up.

So the agents are not surprised by any of these actions.

Robert Farnam -- Boenning and Scattergood -- Analyst

Got it. OK, thanks, gentlemen.

Kevin Burke -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Jamie Inglis from Philo Smith. Your line is open.

Jamie Inglis -- Philo Smith and Company -- Managing Director

Good morning, guys. I'm trying to get some additional information on what we were just talking about. If you look at sort of Donegal's traditional approach and you talked about it a minute ago or before about certain measured rate increases, steady, as you will, and juxtapose against the growth rates which you've seen, which [Inaudible] too high, and I'm wondering what's the genesis of all that. I mean, is it a few agents pushing business toward Donegal? Is it a few markets that are bumping up rate increases substantially, therefore driving business toward Donegal or sort of a general market position that you find yourselves to be in?

Kevin Burke -- President and Chief Executive Officer

It's probably a couple of items and, Jeff, please feel free to chime in on that. We've got things like the comparative rater, which is a good example. Automation in our industry, particularly in personal lines, is a wonderful thing, but it can also harm you because the more automated you become, and if you use a comparative rater and you have a particular product that is, in this case, underpriced, that we do not have rate-adequacy, what it does is it really creates a very quick way for an agent to place business with you based on rate right away. And sometimes that's very difficult to get a handle on.

So the automation piece in this particular example has not been helpful. It is where we find ourselves. So, one of your last comments was, is it where you find yourself in the marketplace. We have built the very, very solid agency base, as very loyal agency base, and they really do look to place business with us, whether it's commercial lines or personal lines.

And when they see that we have in some cases very, very competitive rates, those agents are really motivated to send business our way. At one point we were incentivizing agents on the personal line side of the business. We do not do that in 2018. There are no incentives in terms of continuing to bolster that book of business until we take these corrective measures.

So it's really a combination of a number of items, and that's why the marketing piece of this. It's not just taking rate. The marketing piece of this is that our field-marketing representatives are working with the independent agents directly, per agency, to look at the number of policies that are coming in in private-passenger auto. Are they rounded accounts in terms of making sure they're matched with a homeowners policy? And if we have runaway growth in any particular agency, those marketing reps are handling that at the agency level.

All those corrective measures that we have put in place, we're sure that they're going to provide some benefits for us this year.

Jeffrey Miller -- Executive Vice President and Chief Financial Officer

The only thing I would add to that, Jamie, is that this is not a problem that's pervasive throughout our book. There are pockets of either regions or particular products in certain areas where our loss experience is not good. That's not to say that there are -- we have a lot of very good performing personal-lines accounts and it's one of those 80-20 rules were 20% of the business is providing 80% of the losses. It may be not quite exactly that percentage but the point is that there's a small percentage of our overall book that's really contributing to those losses.

And so if we are able and successful to manage that 20% of the business or 15%, 20% that is underperforming, the remainder of the book is performing extremely well, is appropriately priced, and as we're taking these rate actions to make sure that we're protecting the portion of our book that is actually performing well and priced appropriately.

Jamie Inglis -- Philo Smith and Company -- Managing Director

OK, thanks a lot. Good luck.

Kevin Burke -- President and Chief Executive Officer

Thank you.

Operator

And there are no further questions at this time. I'll turn the call back over to the presenters.

Jeffrey Miller -- Executive Vice President and Chief Financial Officer

Thank you. We thank everyone for joining the call today. We look forward to speaking to you again in April after the release of our first-quarter results. Thank you, everyone.

Kevin Burke -- President and Chief Executive Officer

Thank you.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 44 minutes

Call Participants:

Jeffrey Miller -- Executive Vice President and Chief Financial Officer

Kevin Burke -- President and Chief Executive Officer

Christopher Campbell -- Keefe, Bruyette, and Woods -- Assistant Vice President

Robert Farnam -- Boenning and Scattergood -- Analyst

Jamie Inglis -- Philo Smith and Company -- Managing Director

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