Erie Indemnity Co

NASDAQ:ERIE

Earnings Call Transcript 2020-Q1

[Operator]

Good morning and welcome to the Erie Indemnity Company's First Quarter 2020 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.

[Scott Beilharz, VP, IR]

Thank you and welcome, everyone. We appreciate you joining us for this recorded discussion about our 2020 first 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 Web site, 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-K filing with the SEC, dated May 7, 2020, 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.

[Tim NeCastro, President and CEO]

Thanks, Scott. And thanks to all of you for taking time to learn more about Erie's performance in the first quarter of 2020. I hope you and your loved ones are healthy and staying safe. These last few months have demanded a lot from all of us, deeply impacting how we live, how we work, and how we connect with one another. Our thoughts and prayers are with everyone affected by the pandemic. I want to extend our sincere appreciation to those serving on the frontlines, the first responders and healthcare providers, and to the workers on the job every day making sure we have deliveries, food, and other necessities.

I also want to express my gratitude to our nearly 6,000 employees and the 13,000 license agents who make up the Erie family. As members of an essential industry, all of us have adapted, and adapted quickly to new ways of working and serving our customers. Every day our agents and customer care team have challenging conversations with our customers. Some have lost loved ones. Others are no longer working or are facing the potential loss of the business they built. These complex situations not only require a high level of care and empathy, which our agents and employees are showing, but also actions that will give our customers some relief and piece of mind in these uncertain times. I'd like to talk more about how we're doing that before we get into Erie's performance for the first quarter.

Next week, we'll start mailing policyholder dividends to our personal auto and commercial auto customers, providing roughly $200 million in immediate financial relief. The divided reflects the significant decline in both miles driven and auto insurance claims that we've seen across our territory due to stay-at-home directives. This immediate relief represents about 35% of the customers' auto insurance premiums over a two-month period or a 5% of their annual premium. The average annual premium per personal auto policy is $1,400. So that provides eligible customers an average dividend of $70. The dividend is in addition to the rate reductions in personal and commercial auto insurance which we announced last month. The overall rate reduction is 5%, so the impact will vary by state and individual customer.

These reductions are being implemented state by state, and most will be effective in the third quarter with a few states following in Q4. Through the dividends and rate reductions we're providing our customers a combined total of $400 million in both immediate relief and sustained support. These actions build on the long-standing efforts of our agents and customer care team who are working with customers one on one, offering flexibility in billing and payments as well as the protection that meets their individual needs. We believe this multipronged approach makes a more meaningful different for our customers. We've received a lot of customer feedback affirming this.

A long-time customer from Pennsylvania wrote, "My customer rep was very understanding of my concerns. He helped me change my payment plan to monthly, which I felt would be easier to budget. I have been an Erie customer for almost 30 years, and appreciate their shared values and efforts during this time of uncertainty."

Our comprehensive package of relief doesn't end with our customers. We're also providing additional financial support for the communities we serve. We recently increased the amount of funding available to our field office and to our agents to support charitable giving across our footprint. In our hometown of Erie, Pennsylvania, where a leading partner in a fund established to support nonprofit organizations helping local residents impacted by the pandemic. All in, Erie has provided almost $2.6 million to charitable works throughout our territories, since March. Our agents and employees have stepped up in big ways too, feeding first responders and healthcare workers in partnership with local restaurants. Some have purchased gift cards to give to those on the frontlines, while also supporting businesses and their community.

Many have donated cash and much needed supplies, like facemasks. While the majority of our workforce is now remote, our claims teams continue to serve customers in the field, and the limited number of essential employees are reporting to our offices across our footprint. These employees are performing work critical to our operations, and we believe that extra level of commitment should be rewarded. We are providing up to an extra $500 in biweekly compensation for these employees. Lastly, we have extended assistance to our agents to help maintain agency revenue through our commission protection program. The program provides an interest-free loan to fill the gap between Erie commissions earned in March, and those earned in April, May, and June.

These immediate and long-term actions to support our customers, agents, employees, and communities are guided by our 95-year commitment to being above all in service. We are very fortunate to have a strong financial foundation that allows us to offer that support when it's needed the most. I'll talk more about our response to the pandemic and progress on key initiatives in a few minutes, following Greg's review of the financials. Greg?

[Greg Gutting, EVP and CFO]

Thanks, Tim. Good morning everyone and thank you for your time today. I am happy to be sharing with you today the first quarter financial results for Erie Indemnity Company. Before I begin, I'd like to comment on the obvious. These are unprecedented times, and it is in times such as these that our above all in service mantra is earned. Tim shared with you earlier the many ways in which we are responding to the COVID-19 pandemic. I want to assure you that because of the financial strength of both the Erie Insurance exchange and Erie Indemnity Company, we are well-positioned to continue our mission in support of our customers, agents, employees and shareholders in this difficult time.

In fact, on April 20, the Board of Directors again approved the quarterly dividend of 96-and-half cents per Class A share to be paid in July. Also on April 20, Erie Indemnity Company held its 95th annual shareholders meeting because of the current state home order in place in Pennsylvania. We held this year's meeting virtually, although the meeting had a very different feel than years past. The message of continued outstanding financial results and superior financial strength were the same.

Now let's turn our focus to the first quarter results for 2020. Starting with the exchange, the insurance operations we manage, direct written premium growth for the first quarter was 3.5%. While the combined ratio for the quarter was 95%. The exchange's policyholder surplus remains strong at $8.8 billion, down from $9.5 billion at the end of 2019, due to unrealized losses in the investment portfolio.

Now shifting to Indemnity, first quarter 2020 net income was $59 million, or $1.13 per diluted share, compared to $75 million, or $1.44 per diluted share in the first quarter of 2019. Operating income decreased $400,000 or 0.5% in the first quarter of 2020, compared to the first quarter of 2019, as the growth in total operating revenue fell just short of the growth in total operating expenses.

Indemnity's management fee revenue for policy issuance and renewal services increased $13 million, or 3% to $444 million in the first quarter of 2020, compared to the first quarter of 2019. Management fee revenue allocated to administrative services increased $1 million, or 5.9% to nearly $15 million in the first quarter of 2020, compared to the same period last year.

Turning to Indemnity's cost of operations related to policy issuance and renewal services, commissions increased $9 million in the first quarter of 2020, compared to the first quarter of 2019. This was a result of the 3.5% increase in the direct and assumed premiums written by the exchange. Non-commission expense increased $5 million in the first quarter of 2020, compared to the first quarter 2019. Underwriting policy processing expense increased $3 million, primarily due to increased personnel costs and underwriting report cost.

Information technology costs increased $3 million, primarily due to increased professional fees and personnel costs. Administrative and other expenses decreased $2 million, primarily driven by a decrease in the long-term incentive plan cost due to a decrease in the company stock price in the first quarter of 2020, compared to an increase in the first quarter of 2019.

Losses from investments before taxes totaled $9 million in the first quarter of 2020, compared to income of nearly $10 million in the first quarter of 2019. Net realized losses were $11 million in the first quarter of 2020, compared to net realized gains of $2.5 million in the first quarter of 2019. The losses were driven by decreases in the fair value of equity securities due to significant financial market volatility, resulting from the COVID-19 pandemic.

Net impairment losses of $3 million in the first quarter of 2020 were also driven by the COVID-19 pandemics impact on the financial markets. Losses from limited partnerships were almost $4 million in the first quarter of 2020, compared to losses of $1 million in the first quarter of last year.

In closing, I want to reiterate what I mentioned earlier. We are positioned well to handle these trying times. Through our nearly 6000 employees and over 13,000 agents across our footprint, Erie Indemnity will remain above all-in-service.

Now I'll turn the call back over to Tim. Tim?

[Tim NeCastro, President and CEO]

Thanks Greg. COVID-19 has presented challenges unlike anything many of us experienced or expected, but with our strong financial position, as Greg just reported, we have a lot working in our favor at Erie. We now have the benefit of being past the initial surprise that came in March when much of the United States was directed to stay at home. We've since become accustomed to the rhythm of change and uncertainty.

Over the past several weeks, we've shown how well we can respond and adapt. Within just one week in March, we grew our remote workforce from 34% to 95%. Ours is an essential industry. And well we and our agents have continued operations and service to our customers. We are seeing impacts on our business as a result of the pandemic.

Starting with the top line, we like the rest of the property, casualty industry expect pressure on premium growth in 2020 due to the economic challenges. We're delivering on plans to shore up our competitive position in the auto insurance market. We also continue to invest in key initiatives to support our agent's growth with Erie.

I'll talk more about some of those efforts and early results in a moment. As always, we continue to be disciplined in our spending and we'll make decisions that protect our strong financial foundation. The other piece of our financial picture impacted by COVID-19 is our losses. Some states have made moves to expand the scope of business interruption and workers compensation to provide coverage for COVID-19 related losses, we continue to monitor those efforts and are working closely with our industry partners like the American Property Casualty Insurance Association, to make sure that our lawmakers and regulators have the complete understanding of the insurance model and the impacts of their decisions.

Our commercial customers and our agents are all small business owners. We understand the challenges they face daily and the pain they're feeling now. We are doing what we can to help and continue to consider additional support through this difficult and unprecedented time. It is critical that Erie and our industry retain a strong financial foundation so that we can be there for our customers with the protection and service we promise in every policy. I'm really proud of our team, our employees, and agents for coming together and adapting quickly to this new environment. In addition to the financial support I talked about earlier, we're enhancing some of our existing products and processes to create new opportunities for serving customers.

For a limited time, Erie Family Life, or life insurance operation is offering many applicants a past life insurance coverage without the requirement of an in person paramedical exam. To date, 1,450 customers have exercised the offer. For customers with our ErieSecure Home Insurance coverage, we're now providing reimbursement for gift card balances that can no longer be used if a business closes. This enhancement is being added at no additional cost.

We recently expanded digital capabilities for our customers so that requests for less complex changes can be made online. This expansion builds on Erie's Online Account platform which continues to gain more and more active customers, providing additional self service capabilities has also helped increase the capacity of our customer care team to focus on more complex customer needs. We'll be taking this capability to agents next. In late January, we introduced a refresh of our Erie Rate Lock product in Pennsylvania. In February, in March alone, Pennsylvania auto applications were up 14% over last year, giving us a strong start in our largest state for premium volume.

Rate Lock offers customers the ability to lock in their auto insurance rate until they've made a qualifying change. The Refresh provides a more competitive rate to help our agents pursue new business while we adhere to our steady pricing philosophy and underwriting discipline. Agents in Ohio, Tennessee, and West Virginia recently started quoting Refresh Rate Lock pricing with a positive initial response. Additional states will gain the same benefit throughout the year.

We're confident that the Refresh coupled with the auto insurance rate reductions I mentioned earlier, will create an even stronger long-term competitive position for our agents to support both new and renewal business. Additionally, we remain on track to deliver new products and an enhanced experience for agents and customers in both commercial lines and life insurance.

In commercial lines, we're working towards delivery of the streamlined commercial multi-peril product starting in September. The products will include new coverages and employ a new platform creating efficiencies for Erie and our agents. For our commercial customers, the product will provide an easy to understand package a protection, backed by support for risk management, and peace of mind that the right protections and service are there when needed.

Family Life is making strong progress on a transactional Term Life product written in a process similar to personal lines, for customers they will have an opportunity to protect loved ones financial well being and a fast, easy process and at a price point that fits most budgets.

Last month, we marked a significant milestone in Erie's history, our 95th anniversary, but these aren't normal times. And along with other gatherings, events and flights in general, our plans for a celebration are on hold. This pandemic has changed so many aspects of how we live and work. What it hasn't done though is dampen the Erie family spirit.

I've seen amazing things happen in Erie over these past several weeks. We've more than doubled our remote workforce. Our customer care team has shown an extremely high level of compassion for our customers facing hardships. Our claims employees continue the necessary work to serve our customers and across Erie, we continue to challenge ourselves to do the right thing for our employees, our agents, our customers, our communities and our shareholders. I say this often, and I say it, because I truly believe it. We're all in this together, and we'll get through this together.

Thank you for your continued interest in Erie. Take care, and stay safe.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.