U.S. Markets close in 3 hrs 53 mins

Edited Transcript of ERIE earnings conference call or presentation 26-Jul-19 2:00pm GMT

Q2 2019 Erie Indemnity Co Earnings Call

ERIE Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Erie Indemnity Co earnings conference call or presentation Friday, July 26, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning and welcome to the Erie Indemnity Company Second Quarter 2019 Earnings Conference Call. This call was prerecorded and there will be no answer-and-question session following recording. Now I'd like to introduce your host for the call, Vice President of Investor Relations, Scott Beilharz.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you and welcome, everyone. We appreciate you joining us for this recorded discussion about our 2019 second 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 close 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 may cause results to differ materially from those described in these remarks.

For information on important factors that may cause such differences, please see the safe harbor statements in our Form 10-Q filing with the SEC dated July 25, 2019, 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Scott, and thank you, everyone, for your time today and interest in Erie's second quarter results. Erie Indemnity performed well over the past 3 months. As you saw in our press release filed yesterday, Erie Indemnity reported net income of $88 million or $1.68 per diluted share for the quarter. That's over $8 million more than the second quarter in 2018.

Greg will talk more about what's behind that increase. Before he does, I want to share recent highlights for Erie Insurance Exchange, the insurance operation that we manage. In the second quarter, premiums grew 5.6% over the prior year to nearly $2 billion. Renewal premium is driving this growth as we continue to experience strong policy retention. The Exchange's growth continues to exceed Conning's latest industry forecast of 4.1%. This result puts Erie on pace to outperform the industry on premium growth for the 12th year in a row.

As we've shared on past calls, our long-term growth goal is to outpace the industry and grow our market share. The gap between Erie's premium growth and the industry has slowed over the last 2 years, driven by several factors.

First are the market conditions. Prices are softening in private passenger automobile as carriers hold steady on rates or take decreases, which dampens shopping activity. Secondly, at Erie, we're slowing down the private passenger auto growth that is not generating a profit. This is an intentional move to shore up our competitive position and bolster our ability to provide a competitive rate for the very best risks. It's a move we believe that is necessary to stay true to our commitment to steady growth and steady pricing.

At the end of the second quarter, policyholder surplus was almost $9 billion compared to $8.6 billion at the end of 2018. The growth was driven by investment returns. Lastly, I want to share some context around our combined ratio. For the first half of 2019, the Exchange's combined ratio totaled 110.3 compared to 104.5 a year ago. That increase reflects an extremely active spring storm season that affected much of our Midwest, including parts of Erie's operating territory.

One of the most significant events took place over Memorial Day when storms brought strong winds and hail to Indiana, Illinois, Pennsylvania and Ohio. The Dayton, Ohio area was hit hard by destructive tornadoes.

In times like those, our employees and agents deliver in a big way for our customers. They're in our customers' neighborhoods quickly, typically before the representatives of other insurers, to take care of immediate needs and start the process of recovery.

I want to share with you a note we received from a customer in Dayton about her experience with her agent and our adjuster. Both individuals, she wrote, are examples of why I've chosen Erie as my insurance provider. I can't thank them enough for providing me with a high level of comfort and confidence as I work through the devastation of this tornado. I too want to thank our dedicated claims employees and our agents. Your care and commitment make a great difference to our customers and the communities we serve.

Overall, we're pleased with the results so far this year and our progress on strategic initiatives. I'll talk more about that and recent recognition for the Erie following Greg's review of the financials. Greg?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Tim. As Tim mentioned, it was a solid second quarter, but this quarter's successes go beyond traditional financial measures and can be seen in our award-winning customer service and customer experience. Whether it is responding to catastrophic weather events like those experienced in May or expanding our availability to offer electronic claims payments, we continue to be above all in service.

During the second quarter, we continued to pilot new claims e-payment capabilities. Today, I am proud to say that we have provided all of our auto and property claims adjusters with the ability to offer customers their settlement electronically through Visa Direct and Zelle. The initial feedback has been outstanding, and we look forward to the continued satisfaction this capability will provide for our customers.

Now I'd like to share with you Indemnity's financial results. Starting with the second quarter, Erie's net income was $88 million or $1.68 per diluted share compared to $80 million or $1.52 per diluted share in the second quarter of 2018.

For the first six months of 2019, net income was $163 million or $3.12 per diluted share compared to $145 million or $2.78 per diluted share in the first half of 2018.

Operating income increased 1.3% or $1 million in the second quarter of 2019 compared to the second quarter of 2018. Indemnity also saw an increase in operating income of 5.7% or $10 million in the first 6 months of this year compared to the first 6 months of last year.

Management fee revenue from policy issuance and renewal services increased $26 million in the second quarter and $51 million in the first 6 months of 2019 compared to the same periods in 2018. Driving that change were increases in the direct and assumed premiums written by the exchange, reflecting growth in both policies in force and average premium per policy in both periods. And as Tim pointed out, the exchange's premium growth continues to outpace the industry.

Indemnity's cost of operations for policy issuance and renewal services increased 6.7% in the second quarter and 5.8% in the first 6 months of 2019 compared to the same periods in 2018.

Commissions increased $12 million in the second quarter and $21 million in the first half of 2019 compared to 2018. That increase was driven by the growth in the direct and assumed premiums written by the exchange, somewhat offset by lower agent incentive costs related to less profitable growth.

Noncommission expenses in the second quarter increased $14 million compared to last year driven by increases in information technology costs of $6 million, administrative and other expenses of $5 million and customer service costs of $2 million.

In the first 6 months of 2019, noncommission expenses increased $22 million compared to the same period in 2018 driven by a $12 million increase in information technology costs and a $9 million increase in administrative and other costs. The increased information technology costs were due to higher professional fees, and the increased administrative and other costs were due to an increase in long-term incentive plan costs driven by the higher stock price during the year.

Total investment income increased $3 million in the second quarter of 2019 and over $7 million in the first half of 2019 compared to the same periods in 2018. The increases were driven primarily by growth in our net realized gains in both periods.

Finally, Indemnity's income tax expense decreased in the second quarter by $3 million but remained relatively flat for the first 6 months compared to the same periods in 2018. We take a measured approach to capital management and diligently maintain a strong balance sheet. For the first 6 months of 2019, our strong performance has enabled us to pay our shareholders nearly $84 million in dividends.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Greg. Our financial foundation is strong, positioning Erie well for continued profitable growth and a bright future. We continue to invest in that future with a focus on 4 areas: strengthening our business platforms and use of data, continuing to enhance the Erie experience, identifying and developing new sources of revenue and preparing the workforce of the future.

We're making progress across all 4 areas. Our recent achievements include further expansion of efforts to strengthen our competitive position and create revenue opportunities. We recently introduced a web-based driver training program designed to reduce motor vehicle accidents among young drivers. Teen drivers in Virginia and Wisconsin are using the program now and earning discounts on their auto insurance premiums. This program complements our expanding telematics program, which rewards teens for good driving behavior and is on track for introduction to all states as we head into 2020.

In our homeowners line of business, we're nearing the finish line for converting policies from our legacy Home Protector program to our web-based ErieSecure Home platform. This conversion is significant on a number of fronts. It simplifies our agents' processes for writing homeowners business with Erie.

They'll have one platform for this line of business and easy-to-sell bundles to customize a customer's coverage. The conversion also gets us one step closer to full online capabilities for personal lines, further improving the experience of our agents when it comes to writing and servicing this high-volume line of business.

And lastly, with the conversion, we're able to offer all of our homeowners customers industry-leading coverages and protection. I'm very pleased to share that the conversion has gone extremely well for agents and customers alike. We're on track to complete this change in most states by year-end.

Finally, I want to share recent developments aimed at sharpening our focus on innovation. Innovation has long been a key function at Erie, both within our core operations and within a team that is dedicated to exploring new opportunities and advancing experiments with new technology.

One of our senior leaders, Keith Kennedy, is taking on this charge and leading what we call next-level innovation. Keith and his team are responsible for evaluating opportunities to advance our capabilities to deliver products and services beyond our current offerings while also assisting with innovation where necessary in our core business.

Keith brings to his new role more than 20 years of broad experience in helping organizations define and build new products and capabilities. He has been a part of our team since 2008, first in a consulting capacity before he joined the company in 2011 to lead geographic expansion. Keith has built a strong network of like-minded leaders, most recently through his work with the Erie, Pennsylvania Innovation District.

Before we close, I'd like to share some recent recognitions for Erie. First, A.M. Best has affirmed Erie's financial strength rating of A+ (Superior). According to A.M. Best, this rating reflects Erie's strong balance sheet and operating performance in addition to a favorable business profile and appropriate enterprise risk management. This is Erie's 80th year in a row to earn at least the A+ rating from A.M. Best. A.M. Best also affirmed the A (Excellent) rating for our life subsidiary, Erie Family Life.

Now I'm very proud to share with you recent recognition that reflects our customers' experience with our agents and with Erie. Along with our agents, we've again earned an award from J.D. Power for the highest customer satisfaction score for auto insurance in the Mid-Atlantic region. This is the fifth time Erie has led this region since the auto study moved to regional awards in 2012.

Earning this honor for the Mid-Atlantic region is especially noteworthy because the area comprises our markets with the highest premium volume: Pennsylvania, Virginia, West Virginia, Maryland and the District of Columbia. The Mid-Atlantic trophy is Erie's second from J.D. Power this year following our top finish in the 2019 U.S. Auto Insurance Shopping Study.

What I really like about these 2 awards is that they reflect the complete life cycle of an auto insurance customer from their time shopping and choosing Erie Insurance and through the service and renewal of their policy. Together, these honors are a great testament to the strength of the value proposition we offer with our agents. It's a value proposition built on protection that matters and service that makes a difference for our customers.

Lastly, I want to share some national recognition earned by our employees who serve on Erie's leadership council for diversity and inclusion. The council recently earned a spot among the top 2% of employee resource groups in the United States for the second year in a row, placing 21st in the nation for 2019. This list was compiled by the Association of ERGs & Councils to recognize the contributions and results of the strong focus on D&I across business operations.

Fostering a diverse and inclusive workforce in the market is the right thing to do for our employees, agents, customers and communities, and it also makes good sense for our business. This is a great honor for our D&I team.

I want to thank you for your time today, and we appreciate your interest in Erie.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.