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Edited Transcript of ERIE earnings conference call or presentation 26-Oct-18 2:00pm GMT

Q3 2018 Erie Indemnity Co Earnings Call (Pre-Recorded)

ERIE Oct 31, 2018 (Thomson StreetEvents) -- Edited Transcript of Erie Indemnity Co earnings conference call or presentation Friday, October 26, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory John Gutting

Erie Indemnity Company - Executive VP & CFO

* Scott W. Beilharz

Erie Indemnity Company - VP of Capital Management & IR

* Timothy Gerard NeCastro

Erie Indemnity Company - President & CEO

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Presentation

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Operator [1]

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Good morning, and welcome to the Erie Indemnity Company Third Quarter 2018 Earnings Conference Call. This call was prerecorded, and there will be no question-and-answer session following the recording.

Now I'd like to introduce your host for the call, Vice President of Investor Relations, Scott Beilharz.

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Scott W. Beilharz, Erie Indemnity Company - VP of Capital Management & IR [2]

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Thank you, and welcome, everyone. We appreciate you joining us for this recorded discussion about our 2018 third quarter results. This recording will include remarks from Tim NeCastro, President and Chief Executive Officer; and Greg Gutting, Executive Vice President and Chief Financial Officer. Our earnings release and financial supplement were issued yesterday afternoon after the market closed, and are available within the Investor Relations section of our website, erieinsurance.com.

Before we begin, I would like to remind everyone that today's discussion may contain forward-looking remarks that reflect the company's current views about future events. These remarks are based on assumptions subject to known and unexpected risks and uncertainties. These risks and uncertainties can cause results to differ materially from those described in these remarks. For information on important factors that may cause these differences, please see the safe harbor statements in our Form 10-Q filing with the SEC dated October 25, 2018, and in the related press release. This prerecorded call is the property of Erie Indemnity Company. It may not be reproduced or rebroadcast by any other party without the prior written consent of Erie Indemnity Company.

With that, we will move on to Tim's remarks.

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Timothy Gerard NeCastro, Erie Indemnity Company - President & CEO [3]

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Thanks, Scott, and thanks to everyone for taking the time to learn more about Erie's performance through the third quarter.

I'm pleased to share that we are continuing the pace we set during the first half of the year, resulting in another strong quarter for Indemnity. As you saw in our third quarter 10-Q filed yesterday, we reported net income of $80 million or $1.54 per share for the quarter. We're very pleased with these earnings results.

For context, I'd like to share a few bright spots from the Exchange, the insurance operations we manage. Then, Greg will follow with more of the details around Erie Indemnity's third quarter results.

We reached a significant milestone during the third quarter, achieving $7 billion in total direct-written premium over the rolling 12-month period. That $7 billion reflects $5 billion in premiums from personal lines and nearly $2 billion from commercial.

We have had strong P&C premium growth over the past decade. Growth that has outpaced the industry in each of the last 10 years. We've nearly doubled personal lines premium over the past 9 years, with growth largely from our existing agents. Average premium per agency has climbed more than 60% since 2009 from $1.9 million to $3.1 million.

In commercial, we wrote an additional $1 billion in premium in the last 5 years alone. It's a result driven by our continued effort to bolster our agents' knowledge, skills and capabilities to meet the needs of small to midsize businesses.

We've also grown policyholder surplus, which reached $9 billion in the third quarter. That result reflects Erie's healthy operational and financial position and our ability to be there for the customers who place their trust in us.

While increased storm activity continued during the third quarter, including impact from Hurricane Florence, the effect on our territories was modest compared to expectations. Similarly, while Hurricane Michael heavily affected parts of Florida and other coastal states, our claims impact was again less than anticipated.

Our reported combined ratio through the third quarter was 102.1 year-to-date compared to 95.6 year-to-date at September 30, 2017. The higher combined ratio this year reflects the impact of multiple events, none of them individually significant. This is very much a business where we always prepare for the worst while hoping for the best.

With our claims teams and agents mobilized for an all-hands response, we responded to nearly 6,000 claims following Florence. That preparation made a noticeable difference in the communities that suffered the brunt of storm damage last month.

I'd like to share this comment from one of our agents in North Carolina. He said, "Erie's response during Florence has been and continues to be nothing short of amazing. The leadership in response of the claims and branch team has so far

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even close to what my other carriers have done." We are very proud of the dedication and caring our claims teams and agents bring to every claim event. We care deeply about the communities in the Erie footprint. And to that end, we donated to the American Red Cross to aid those areas harmed by Hurricane Florence. Regardless of the season or the weather it brings, we're driven by a promise to be there for our customers, our agents, our communities to serve them when they need us most.

I'm going to turn it over to Greg and then, I'll talk more about progress we're making on key initiatives in a few minutes. Greg?

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Gregory John Gutting, Erie Indemnity Company - Executive VP & CFO [4]

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Thanks, Tim. As Tim mentioned, we are very pleased with the finance results we are seeing this year. They reflect a dedicated service of our agents and our employees as well as our commitment to deliver on our strategy.

Starting with the third quarter of 2018, net income was $80 million or $1.54 per diluted share compared to $59 million or $1.12 per diluted share in the third quarter of 2017.

For the first 9 months of 2018, net income was $226 million or $4.32 per diluted share compared to $165 million or $3.15 per diluted share in the first 9 months of 2017.

Total operating revenue outpaced the growth in total operating expenses in both the third quarter and the first 9 months of 2017, resulting in an increase in operating income of $15 million or 19% in the third quarter of 2018, compared to the third quarter of 2017, and an increase in operating income of 16% or $38 million for the first 9 months of this year compared to the first 9 months of last year.

Management fee revenue from policy issuance and renewal services increased $16 million in the third quarter and $43 million in the first 9 months of 2018 compared to the same periods in 2017, driven by an increase in direct premiums written and assumed by the Exchange of 7%. Increases in both policies in force and average premium per policy contributed to the growth from direct-written premiums.

Indemnity's cost of operations for policy issuance and renewal services increased 3.9% in the third quarter and 4.2% in the first 9 months of 2018 compared to the same periods in 2017.

Commissions increased $8 million in the third quarter and $32 million in the first 9 months of 2018 compared to 2017. The increase in commissions was driven by a 7% increase in the direct and assumed premiums written by the Exchange, while slightly offset by lower agent incentive costs related to less profitable growth.

Noncommission expenses in the third quarter increased $6 million compared to last year, driven mainly by increases in information technology costs of $4 million and administrative and other expenses of $2 million. In the first 9 months of 2018, noncommission expenses increased $13 million compared to the same period in 2017, driven by increases in information technology, underwriting and policy processing costs and customer service costs.

Personnel costs for the first 9 months of 2018 were impacted by additional bonuses of approximately $4.8 million awarded to all employees as a result of tax savings realized from the lower corporate income tax rate that became effective January 1, 2018. These increased personnel costs were somewhat offset by lower estimated costs per incentive plan awards related to underwriting performance. Total investment income remained flat for both the third quarter and the first 9 months of 2018.

Finally, Indemnity's income tax expense decreased just over $6 million in the third quarter and $23 million in the first 9 months of 2018 compared to 2017, due to lower income tax rate of 21%, which became effective January 1 of this year.

For the first 9 months of 2018, our strong performance has enabled us to pay our shareholders dividends in the amount of $117 million.

With that, I'll turn the call back over to Tim.

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Timothy Gerard NeCastro, Erie Indemnity Company - President & CEO [5]

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Thanks, Greg. Clearly, we remain in a position of strength for continued profitable growth and for continued investment in our future success. Net investment is taking shape across the 4 areas of focus that I've talked about on past calls, and we're realigning resources to sustain and accelerate Erie's success in a changing market. These areas include continuing to enhance the Erie experience, improving our platforms and data management, exploring new sources of revenue and preparing the workforce for the future. We're making good progress on all 4 areas of focus, and I'd like to share a few highlights from the latest quarter.

We recently delivered new products to help our agents better meet protection needs of our customers and attract new business. In commercial lines, we expanded our successful custom collection to include a program designed for the growing market of wineries, breweries and distilleries. Custom collection continues to drive strong growth with 55% of all commercial premium now coming from custom collection classes. Agents also began offering an enhanced coverage option for business auto policies and a new endorsement geared towards smaller corporations with a name business owner.

With our licensed agents, we're now offering Medicare Supplement insurance to help our customers pay some of the hospital and Medicare costs, not covered by Medicare. This coverage is available in most states through the Exchange's life subsidiary, Erie Family Life. Medicare Supplement provides both a new revenue opportunity and means to more fully meet the protection needs of our customers.

In personal lines, we reached a key milestone, wrapping up a 3-year project in our homeowners lines. We now have the functionality for agents to be able to endorse ErieSecure Home policies using DSpro Web, a web-based system our agents use for quoting and writing new personal lines business. We are currently piloting this with a group of agents in Tennessee and Pennsylvania with the expectation of a complete rollout by the third quarter of next year.

These kinds of achievements are part of a steady drumbeat of enhancements that support the business our agents continue to bring in the door. We're also moving ahead on new initiatives, like the telematics pilot that began earlier this year. I've talked about this program on prior calls. It's a program aimed at encouraging safer driving among younger motorists. We're getting ready to expand this program. To date, more than 5,000 drivers have registered for the smart phone app in our pilot states of Ohio and West Virginia. From early results, we're seeing that customers who choose to register have better loss ratios than others. Next year, we'll extend the program called YourTurn to our entire footprint, pending approval from state insurance departments. YourTurn will strengthen our ability to compete in the youthful driver market in a way that is profitable and sustainable long-term, while helping to encourage safer driving.

Before we wrap up this recording, I'd like to share some recent recognition Erie earned from 2 national organizations for our commitment to employee health and wellness. First, Erie received a Gold Level Recognition in the American Heart Association's 2018 Workplace Health Achievement Index. More than 1,000 companies participated in the index, which also provides a benchmark for health and wellness initiatives. Erie has received the index's highest recognition each year since 2013.

Second, Erie earned a gold award in the National Business Group on Health 2018 Best Employers for Healthy Lifestyles Program. This honor is the second-highest presented by the National Business Group and recognizes an organization's commitment to holistic well-being and related metrics. Erie has received either a platinum, gold or silver award from the group each year since 2009.

Preparing our workforce for the future is an area of focus that very much involves our employees today. We take care of our employees and they in turn appreciate our value proposition. That's why it's so important that we offer employees a competitive total rewards package with benefits to help them and their families enjoy healthier, more secured lives. We're proud of honors like these that validate our efforts, and we know the importance of looking at new emerging opportunities for our workforce today and in the future.

Thank you for your time today. We appreciate your support and your interest in Erie. If you have any questions, please feel free to reach out to our Vice President of Investor Relations, Scott Beilharz, at (814) 870-7312. Thank you, and have a great day.