Erie Indemnity Co

NASDAQ:ERIE

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, and welcome to the Erie Indemnity Company's Second Quarter 2018 Earnings Conference Call. I'd like to introduce your host for today's call, Scott Beilharz, Vice President of Investor Relations.

[Scott Beilharz, VP, Capital Management & IR]

Thank you, Sandra, and welcome, everyone. We appreciate you joining us for today's discussion about our 2018 second quarter results. Joining me today are Tim NeCastro, President and Chief Executive Officer; Greg Gutting, Executive Vice President and Chief Financial Officer; and Sean McLaughlin, Executive Vice President and General Counsel.

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 these differences, please see the safe harbor statements in our Form 10-Q filing with the SEC, dated July 26, 2018, and in the related press release. This call is being recorded and recording is the property of Erie Indemnity Company. It may be reproduced or rebroadcast by any other party without the prior written consent of Erie Indemnity Company. A replay will be available on our website today after 12:30 p.m. Eastern time.

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

[Timothy NeCastro, President & CEO]

Thanks, Scott. Good morning, everyone. Thank you all for taking the time to join us today. Erie Indemnity had a strong first half of the year. In our second quarter 10-Q filed yesterday, we reported net income of $145 million or $2.78 per share for the first six months of 2018. We're very pleased with these results and confident in our direction for the months ahead. Before Greg gets further into the financial details, I'd like to share a few highlights for the Exchange, the insurance operation we manage. For the past decade, premium growth has outpaced the industry, an accomplishment the Exchange is on track to repeat in 2018. Direct and assumed premiums grew almost 7% in the first half of 2018 compared to 2017.

For comparison, Conning's industry forecast for this year is a 4.9% growth. Policyholder surplus is up slightly for the year to $8.8 million, reflecting Erie's healthy operational and financial position. That increase comes at the same time we've responded to increased storm activity across much of our territory. Second quarter storms were frequent, but smaller in scale compared to the winter storms we saw in the first three months of the year. The reported combined ratio for the Property and Casualty Group was 103.4 for the second quarter, down slightly from the 105.6 reported for the first three months of this year. Our year-to-date result is 104.25 compared to 98.2 at mid-year 2017.

Our employees and agents stepped up to meet the needs of our customers and communities in the aftermath of snow, wind and hail storms. Our team of dedicated cat adjusters joined local claims employees to make sure that we had people on the ground needed to expedite claims handling with the human touch that is so critical to our customers in our customers' time of need. I'd like to thank the team, our employees and agents for their efforts and dedication throughout these past few months. The work they do brings care and compassion to the recovery process, making a huge difference to our customers. We're also continuing to invest in our strategic initiatives to strengthen our ability to compete now and into the future. I'll talk more about the progress we're making in a few minutes.

But now, I'll turn it over to Greg.

[Gregory Gutting, EVP & CFO]

Thanks, Tim. As Tim mentioned, we are very pleased with the financial results we are seeing this year. They reflect the dedicated service of our agents and our employees as well as our commitment to deliver on our strategy. Starting with the second quarter of 2018, net income was $80 million or $1.52 per diluted share compared to $59 million or $1.12 per diluted share in the second quarter of 2017.

For the first six months of 2018, net income was $145 million or $2.78 per diluted share compared to $106 million or $2.03 per diluted share in the first half of 2017. Total operating revenue outpaced the growth in total operating expenses in both the second quarter and the first six months of 2017, resulting in an increase in the operating income of 14.2% or $12 million in the second quarter of 2018 compared to the second quarter of 2017, and an increase in operating income of 15% or $23 million in the first six months of this year compared to the first six months of last year. The Exchange's premium growth continues to outpace the industry. Management fee revenue from policy issuance and renewal services increased $13 million in the second quarter and $27 million in the first six months of 2018 compared to the same period in 2017, driven by the increases in the direct and assumed premiums written by the Exchange as both policies in force and average premium per policy increased in both periods.

Indemnity's cost of operations for policy issuance and renewal services increased 4% in the second quarter and 4.4% in the first six months of 2018 compared to the same periods in 2017. Commissions increased $10 million in the second quarter and $24 million in the first half of 2018 compared to 2017 driven by the increase in the direct and assumed premiums written by the Exchange, slightly offset by lower agent incentive costs related to less profitable growth. Non-commission expenses in the second quarter increased $4 million compared to last year driven by the increases in underwriting and policy processing costs, customer service costs and administrative costs. In the first six months of 2018, non-commission expenses increased $7 million compared to the same period in 2017, driven by increases in underwriting and policy processing costs and customer service costs.

Information technology costs decreased slightly in the first half of 2018 compared to last year, but keep in mind these costs will fluctuate from quarter-to-quarter as we will continue to invest in this area. The total investment income decreased $200,000 in the second quarter of 2018 and $700,000 in the first half of 2018 compared to the same periods in 2017. The decreases were primarily driven by net realized losses and impairments on investment. Finally, Indemnity's income tax expense decreased just over $ 9 million in the second quarter and $17 million in the first six months of 2018 compared to 2017 due to the lower income tax rate of 21%, which became effective January 1st of this year.

We take a measured approach to capital management and diligently maintain a strong balance sheet. For the first six months of 2018, our strong performance has enabled us to pay our shareholders dividends in the amount of $78 million.

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

[Timothy NeCastro, President & CEO]

Thanks, Greg. Our continued strong results provide a solid backdrop for our investments in the future. On past calls, I talked about our areas of focus; four areas where we're directing resources to sustain and accelerate Erie's success in a changing market. These areas include: enhancing the Erie experience, improving strategic platforms and data management, exploring new sources of revenue and preparing the workforce for the future. We continue to make progress across all fronts.

Let me call out a few significant steps we've taken in these past three months. After 25 years in service, our former claims management system is fully retired. We're not completely operational with ERIE ClaimCenter, a system we began to deploy in late 2015. ERIE ClaimCenter was our first major strategic investment in improving platforms and data and it has already enabled us to successfully handle over $1 million claims.

For our agents, who continue to expand the capabilities of our online commercial quote and application system, the most recent edition is the ability to write a business development policy with a new account, a move that also supports our efforts to drive more same-store sales, while improving protection for our customers.

We are seeing strong growth in our commercial businesses that directly linked -- that is directly linked to our agents' ability to write more with Erie faster and easier. Premium and commercial lines is up almost 7% fueled by strong retention and new premium growth is up nearly 13%.

Last quarter, I shared with you plans for piloting new smart home technology and a telematics program for youthful drivers. Both are underway and early results are promising. Since March, customers have stalled nearly 400 Roost sensors in their homes. The sensors are about the size of deck of playing cards and they can detect a water leak or severe temperature changes and notify homeowners through a smartphone app. Installed devices have protected leaks enabling homeowners to stop a potentially costly problem or damage or losses occurred. Additionally, we launched our telematics pilot in Ohio and West Virginia. At 45 days in, more than 2,000 customers have registered for this smartphone app, even encouraging safer driving behaviors among our youthful motorists.

Erie continues to gain recognition from highly respected third-party firms. Let me share some of our recent accomplishments. I'm very pleased to say that Erie ranked first in the Midwest Atlantic region in J.D. Power's 2018 U.S. Auto Insurance Study. This honor marks the fourth time Erie has won in this region over the past six years.

Erie also earned a second award from J.D. Power this year, winning top honors from the firm's Annual Auto Insurance Shopping Study for the sixth consecutive year. Erie now boasts 22 awards from J.D. Power, the most that any agency represent a company. In addition to recognition from J.D. Power, A.M. Best has affirmed our financial strength rating of A+ Superior for the Property and Casualty Group, and the A Excellent rating for the Erie Family Life.

Erie Insurance Exchange is one of just 67 companies to retain at least an A rating for 75 or more years. Erie has 79 consecutive years and counting. Erie's A.M. Best rating reflects a healthy balance sheet as well as strong operating performance, favorable business profile and an appropriate enterprise risk management. Just 12% of U.S. property-casualty insurers earned the A+ rating.

Finally, last week, Erie Insurance Group was named towards 50 top-performing property-casualty insurers for 2018. It's Erie's 18th appearance on the list since 1981. These honors reflect the deep commitment and work for more than 5,500 employees and nearly 2,200 agencies, along with the firm foundation on which Erie was built.

Before I end my comments today, I want to recognize Executive Vice President and General Counsel, Sean McLaughlin. This week, Sean shared his decision to retire from Erie at the end of 2018. Sean is an Erie Pennsylvanian and graduate of Georgetown University and Georgetown University Law Center. He joined our organization in August 2013 following a distinguished carrier on the federal bench. He served nearly 20 years as Federal District Court judge and completed his tenure on the court as Chief Judge of the United States District Court for the Western District of Pennsylvania before assuming the role of Erie's General Counsel.

We're deeply grateful for the legal acumen and wisdom Sean has shared as part of the Erie's executive team over the past five years. His early notice allows us time for a thoughtful search in transition and we'll begin that process immediately. Thank you, Sean.

We appreciate your participation in today's call. And now, I'll turn it back over to Scott.

[Scott Beilharz, VP, Capital Management & IR]

Thank you, Tim., and thank you, everyone, for tuning in today. A recording of this call will be posted on our website, erieinsurance.com. Once again, please direct any questions regarding our second quarter 2018 results to me at [phone].

[Timothy NeCastro, President & CEO]

Thank you, everybody.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This has concluded the program, and you may all disconnect. Everyone, have a great day.