Erie Indemnity Co

NASDAQ:ERIE

Earnings Call Transcript 2018-Q3

[Operator]

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

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

[Scott Beilharz, VP of IR]

Thank you, and welcome, everyone. We appreciate you joining us for this pre-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 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 October 25, 2018, and in the related press release. This pre-recorded call is a 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'll move on Tim's remarks.

[Timothy NeCastro, President and CEO]

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're continuing the pace we set during the first half of the year resulting in another strong quarter for Indemnity. As you saw on our third quarter 10-Q filed yesterday, we reported net income of $80 million or a $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 the 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've had strong PNC premium growth over the past decade, growth which has outpaced the industry in each of the last 10 years.

We nearly doubled personal lines premium over the past nine years with growth largely from our existing agents. Average premium per agency has claimed more than 60% since 2009, and 1.9 million to 3.1 million.

In commercial, we brought an additional $1 billion in premiums in the last five years alone. It's a result driven by our continued effort to bolster our agent's knowledge, skills and capabilities to meet the needs of small to mid-size 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're always prepare for the worst or hoping for the best. With our claims teams and agents mobilized for all hands response, we responded to nearly 6000 claims following Florence. That preparation made a noticeable difference in the communities that suffered the brunt of storm damage last month.

I like to share this comment from one 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 to the claims and branch team has so far - anything even close to what my other carriers have done.

We are very proud of the dedication and caring our claims team and agents bringing to every claim of them. 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 what the weather brings, we're driven by promise to be there. For our customers, our agents, our communities to serve them on the near as most.

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

[Gregory Gutting, EVP and CFO]

Thanks Tim.

As Tim mentioned we are very pleased with the financial 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 a $1.54 per diluted share compared to $59 million or a $1.12 per diluted share in the third quarter of 2017. For the first nine 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 nine months of 2017.

Total operating revenue outpace the growth in total operating expenses in both the third quarter and the first nine months of 2017 resulting in an increase in operating income of $15 million or 19% in the third quarter 2018 compared to the third quarter of 2017 and an increase in operating income of 16% or $38 million for the first nine months of this year compared to the first nine 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 nine 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 for policy contributed to the growth 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 nine months of 2018 compared to the same periods in 2017.

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

Non- commission expenses in the third quarter increased $6 million compared to last year driven mainly by increases in information technology cost of $4 million and administrative and other expenses of $2 million.

In the first nine months of 2018, non-commission 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 cost.

Personnel costs for the first nine 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 of 2018. These increase personnel costs were somewhat offset by lower estimated cost for incentive plan awards related to underwriting performance.

Total investment income remained flat for both third quarter and the first nine months of 2018. Finally, Indemnity's income tax expense decreased just over $6 million in the third quarter and $23 million in the first nine 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 nine months of 2018, our strong performance has enabled us to pay our shareholders' dividends in the amount of the $117 million.

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

[Timothy NeCastro, President and CEO]

Thanks Greg.

Clearly we remain in the position of strength for continued profitable growth and for continued investment in our future success. That investment is taking shape across the four areas of focus I talked about on past calls and where we’re relying resources to sustain and accelerate Erie's success in the changing market.

These areas include continuing to enhance the Erie's 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 four 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 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 model policies and a new endorsement here towards smaller corporations within a 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 exchanges wise subsidiary Erie's Family Life.

Medicare supplement provides both a new revenue opportunity and needs to more fully meet the protection needs of our customers. In personal lines, we reached a key milestone wrapping up a three-year project at our homeowners lines. We now have the functionality for agents to be able to endorse Erie secure home policies using DSpro Web, the web-based system our agents use for quoting and writing new personal lines business.

We're currently piloting this group of agents in Tennessee and Pennsylvania with the expectation of the complete rollout of the third quarter of next year. These kind of achievements are part of the steady drumbeat of enhancements that support the business our agents continue to bring in the order.

We’re also moving ahead on new initiatives at telematics pilot to began earlier this year. I've talked about this program on prior calls. It's a program aimed at encouraging safer driving among the younger motorists. We are getting ready to expand this program. To-date more than 5000 drivers have registered for the smartphone app in our pilot states of Ohio and West Virginia. From early results, we're seeing the customers who choose to register have better loss ratios than others.

Next year we’ll extend the program called YourTurn to our entire footprint sending 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 or helping to encourage safer driving.

Before we wrap up this recording, I’d like to share some recent recognition Erie earned from two national organizations for our commitments 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 1000 companies participate 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 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 secure 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 area code 814-870-7312. Thank you and have a great day.