Erie Indemnity Co

NASDAQ:ERIE

Earnings Call Analysis

Erie Indemnity reports strong growth amidst increased premiums and natural disasters.

In Q3 2024, Erie Indemnity demonstrated impressive performance, with management fee revenue rising 18.5%, supported by the Erie Insurance Exchange's premium growth of over 18%. The average written premium per policy increased by 12.8%, and policies in force grew by 6%. However, Hurricane Helene impacted the combined ratio, which rose to 113.7%. Year-to-date, the combined ratio improved to 112 from 121.9 in 2023. Net income reached $160 million ($3.06 per share), a 22% increase from 2023. Financial strength remains stable with a policyholder surplus of $9.2 billion, while dividends paid over the first nine months approached $178 million.

Resilient Growth Amid Challenges

In a turbulent environment marked by increasing weather-related events and pressure on premium rates, Erie Indemnity Company showcased resilient financial performance in the third quarter of 2024. The company's direct and affiliated assumed written premiums witnessed an impressive growth of over 18% for the quarter and just over 19% year-to-date compared to the previous year. This growth is primarily attributed to strategic rate increases that reflected a significant year-over-year average written premium increase of 12.8%. Despite these advances, the company faces a challenge with a combined ratio of 113.7% for the third quarter, influenced largely by losses from Hurricane Helene.

Compelling Management Fee Performance

The revenue model of Erie Indemnity is intricately linked to the performance of the Erie Insurance Exchange. The management fee revenue for policy issuance and renewal services surged by $120 million, or 18.5%, in the third quarter compared to the same quarter last year. For the first nine months of 2024, this figure further climbed to $355 million—up 19.3% year-over-year. The company retains a management fee, capped at 25% of the written premiums, which further demonstrates the direct relationship between premium growth and revenue.

Cost Pressures and Operational Efficiency

Operational costs have risen in tandem with revenue, with commissions—Erie's largest expense—growing by $66 million (18.7%) in the third quarter. Year-to-date, commission costs are up $202 million, a 19.9% increase. Noncommission expenses also saw an uptick of 13.8%, primarily due to personnel and production-related costs. Notably, higher agent compensation tied to profitability contributed to these increases. Despite the cost pressures, the company’s operating income increased significantly by 21% or $32 million in the third quarter, showcasing improved operational efficiency.

Solid Financial Foundation

Erie Indemnity's financial foundation remains robust, reflected in a policyholder surplus of $9.2 billion at the end of September 2024, relatively stable compared to $9.3 billion at the end of 2023. The net income for the third quarter stood at $160 million, translating to $3.06 per diluted share, a notable increase from $131 million or $2.51 per diluted share in the same period last year. Furthermore, year-to-date net income rose to $448 million or $8.57 per diluted share, compared to $335 million or $6.41 per diluted share a year earlier, maintaining a healthy growth trajectory.

Strategic Investments for Future Growth

The company continues investing in technology and community initiatives to sustain its growth. Notably, Erie is modernizing its platforms with a significant move towards cloud-based systems. In line with its commitment to community welfare, Erie Insurance donated $450,000 to nine nonprofits as part of its educational grants initiative in August, which aligns with its strategy to bolster community ties and support educational programs. The company’s focus on both technology and community investment is crucial for future competitiveness.

Guidance and Outlook

Looking ahead, Erie Indemnity underscores its optimistic guidance for continued growth, despite the potential for challenges related to weather events and evolving market conditions. The company demonstrated resilience through its strong policyholder retention rate of 90.8% and is committed to navigating the complexities of the insurance landscape. Investors should keep an eye on future developments regarding rate increases and operational efficiency, especially as the blended combined ratio shows a trend of improvement from 121.9% in 2023 to 112% in the current year, indicating a pathway to enhanced profitability.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to the Erie Indemnity Company Third Quarter 2024 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, executive]

Thank you, and welcome, everyone. We appreciate you joining us for this recorded discussion about our third quarter results. This recording will include remarks from Tim NeCastro, President and Chief Executive Officer; and Julie Pelkowski, 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 these differences, please see the safe harbor statements in our Form 10-Q filing with the SEC filed yesterday 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 the Erie Indemnity Company.

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

[Timothy NeCastro, executive]

Thanks, Scott, and thanks to all of you for listening in to learn more about Erie's performance in the third quarter of 2024. The storms have been ravaging parts of our country and all those impacted by these disasters have certainly been on our minds in recent weeks. The aftermath of the Hurricane Helene, in particular, has been devastating in areas of our footprint. Our claims teams and agents in the impacted areas and additional employees deployed to assist have been facing incredibly difficult circumstances. Many of them are experiencing losses themselves while providing much needed service to our policyholders.

The lives lost, the homes and businesses destroyed and the devastation in those communities is hard to comprehend. Let's please keep them in our thoughts and prayers as they navigate this challenging and heartbreaking situation, and please support the relief efforts in any way you can.

Our generous Erie employees have been donating to hurricane relief causes bolstered by Erie's matching gifts program. Typical 100% match on shareable giving was doubled for donations to the lean relief funds for the American Red Cross, World Kitchen and Team Rubicon. I'm pleased to share that so far, more than $60,000 has been donated by Erie employees and matched by Erie.

Early in September, Erie made a $250,000 charitable contribution to the American Red Cross Disaster Responder program, and we're working on additional donations to other local rescue causes and affected portions of our territory. We believe it's always important to do the right thing and give -- how you can, but especially on our people and our communities need it the most.

Turning to our financials now. A lean and other weather-related activity over the past quarter have had a negative impact on the combined ratio for Erie Insurance Exchange, but Erie Indemnity Company continues its strong performance, thanks to continued growth in new business and solid retention. This growth was represented recently with Erie's addition to the S&P 500 Index for the first time in September.

Here to provide some additional context around our third quarter results is Chief Financial Officer, Julie Pelkowski, Julie?

[Julie Pelkowski, executive]

Thank you, Tim, and good morning, everyone. As Tim mentioned, Erie Indemnity Company continues to experience strong operating performance, which likely contributed to the addition of our company to the S&P 500 Index this quarter.

As we've highlighted previously, the strong operating performance is driven by the recent significant increases in our primary source of revenue or management fee revenue. As a reminder, we serve as the attorney in fact for the subscribers or policyholders of the Erie Insurance Exchange, which includes providing policy issuance and renewal services as well as administrative services.

For the services provided, we retain a management fee calculated as a percentage, not to exceed 25% of the direct and affiliated assumed premiums written by the Exchange. Thus, any changes to the Exchange's premiums will have a corresponding effect on the amount of the management fees we receive.

The insurance industry has been experiencing increased loss cost pressures and weather-related activity that have resulted in significant increases to premium rates. The Exchange has not been immune to these pressures, and we've taken significant rate increases to combat the resulting profitability challenge. Because we write 12-month policies, there is a lag in timing to fully earn these rate increases intended to cover the increased loss costs. The realized premium from rate increases can take up to 24 months to impact the combined ratio, the Exchange's measure of profitability.

Now as it relates to the third quarter, the Exchange's direct and affiliated assumed written premiums grew over 18% for the quarter and just over 19% year-to-date when compared with the prior period of 2023. The tremendous premium growth in both periods in 2024 can largely be attributed to the continued realization of rate increases, which are reflected in a significant increase in the year-over-year average written premium per policy of 12.8%. Year-over-year policies in force grew 6% despite the rate increases, and the Exchange maintained a strong policyholder retention at 90.8%.

The Exchange's combined ratio was impacted by Hurricane Helene, as Tim referenced, and contributed 5.3 points to the third quarter 2024 combined ratio of 113.7% and 1.9 points to the Exchange's year-to-date combined ratio of [ 112 ].

While 2024 continues to pose certain challenges, the rating and other actions we've taken, in addition to lower weather events overall this year, resulted in this current year-to-date combined ratio of 112 showing incremental improvement from the 2023 combined ratio at this time of 121.9. The Exchange's financial strength, as measured by policyholder surplus has remained relatively stable at $9.2 billion at the end of September 2024 compared to $9.3 billion at the end of 2023.

Turning to the indemnity. In the third quarter, the indemnity generated net income of $160 million or $3.06 per diluted share compared to $131 million or $2.51 per diluted share in the third quarter of 2023. For the first 9 months of 2024, net income was $448 million or $8.57 per diluted share compared to $335 million or $6.41 per diluted share for the same period in 2023. Operating income increased 21% or $32 million in the third quarter of 2024 compared to the third quarter of 2023 while year-to-date operating income increased 29.5% or $116 million compared to the first 9 months of 2023. The main driver of these increases continues to be higher management fee revenue resulting from the Exchange's significant direct written premium growth.

The indemnity's management fee revenue for policy issuance and renewal services increased $120 million or 18.5% in the third quarter of 2024 compared to the third quarter of 2023. For the first 9 months of 2024, indemnity saw an increase of $355 million or 19.3% compared to the same period of 2023, which is in line with the direct written premium growth of the Exchange in the similar period.

Looking at the indemnity's cost of operations for policy issuance and renewal services, commissions, our largest expense, increased $66 million or 18.7% in the third quarter and $202 million or 19.9% in the first 9 months of 2024 compared to the same period in 2023. The increases in both periods were driven by, and in line with, the growth in the Exchange's direct and affiliated assumed written premium. To a lesser extent, agent incentive compensation contributed to the increase driven by the profitability component of the incentive.

Noncommission expenses increased $23 million or 13.8% in the third quarter of 2024 compared to 2023. Primary drivers of the increase include higher personnel costs, higher costs tied to production, such as underwriting and policy processing expenses, and our additional investments in technology. We also continue to make community-related investments, as Tim highlighted earlier. For the first 9 months of 2024, indemnity saw an increase in noncommission expenses of nearly $42 million or 8.4%. Similar to the quarter, we saw higher personnel costs, higher costs tied to production, including underwriting and policy processing expenses and increased community-related investments.

On a year-to-date basis, we also had higher agent related costs and credit card processing fees while we had lower information technology costs. The personnel cost increases in both the third quarter and year-to-date through September were impacted by increased compensation including higher estimated costs for our long-term incentive plan awards, which was primarily due to the substantial increase in the stock price throughout 2024.

Turning to our investment operations. Indemnity maintains a conservative portfolio to support our objectives of steady and consistent growth in earnings per share, current and future dividend growth, protecting the company from downside risks in its operations as well as reinvesting in the business if opportunities arise.

In the third quarter of 2024, investment income before taxes totaled $19.5 million, compared to just over $12 million in the third quarter of 2023. Over the first 9 months of 2024, investment income before taxes was $48.5 million compared to just over $19 million in the first 9 months of 2023.

As always, we take a very measured approach to our capital management, and we maintain a strong balance sheet. For the first 9 months of 2024, our financial performance enabled us to pay our shareholders over $178 million in dividends.

Thank you again for your time today. Now I'll turn the call back over to Tim. Tim?

[Timothy NeCastro, executive]

Thanks, Julie. As our customer base continues to grow, it's increasingly important to make sure our products and services meet their needs and that we equip agents with the tools to provide personalized and efficient service. One recent example is Business Auto 2.0, Erie's newly refreshed and enhanced Business Auto product currently being piloted in Indiana. It includes several new options and features, all conceived and developed based on agency back. It aims at helping agents meet the unique needs of their business customers, including enhanced quoting and processing experience and the ability to have vehicles for multiple states on one policy. A refreshed rating plan with new pricing factors also helps ensure competitive pricing for the most favorable risks and that all business is priced appropriately and sustainably. .

Agents piloting the new offering have been sharing valuable feedback, which has already led to several design enhancements. Continued interaction with our pilot agents through year-end will help us determine any additional adjustments needed before expanding the rollout into other states in early 2025.

We also successfully launched a 10-state rollout of a new capability that can automatically enroll customers in our online account platform at the point of sale. Online account enhances customers' ability to access information, pay bills and track claims, increasing efficiencies and allowing our call center staff and agents to spend more time on more complex and meaningful interactions. [ New ] capabilities helping to increase adoption of this important tool and will also help us to better leverage customer data.

Enhancements like these are part of a broader strategy to modernize our platforms, programs and data capabilities. Additional migrations of legacy platforms to the cloud and other digital capability improvements have been made over the past quarter and are ongoing.

At Erie, we've always believed that our commitment to service extends not just to our customers, but also to the communities within our footprint. In August, Erie Insurance donated [ $450,000 ] in grants to 9 nonprofits through the company's Investing in our Future Educational Brand initiative. Program is aimed at strengthening the connection between academic programming and out-of-school time activities with the goal of eliminating poverty through education. Since the grant program was launched in 2021, more than $1.7 million in grants have been awarded by Erie Insurance for education nonprofits in and around our home city of Erie, Pennsylvania. This is in addition to more than $10 million donated to educational causes over the years to Pennsylvania's Educational Improvement Tax Credit program.

I'm also pleased to share 2 recent workplace accolades. First, Erie Insurance was named to the Forbes list of America's best in-state employers for 2024 for the fifth straight year. Erie's ranked among the top 20 out of 100 employers in Pennsylvania that made the list. Erie Insurance was also awarded with 4 2024 diversity impact awards from the Global ERT, the world's largest network of employee resource groups, business resource groups and diversity councils. Our African-American Pride Alliance, Veterans and Women's Affinity Networks were recognized for being champions and diversity, equity and inclusion in our organization.

As I close on our call for the third quarter, I'd like to share my appreciation for our employees and independent agents who uphold our Above all in Service promise every day and there any circumstance. Thank you also to our shareholders for your trust and support. Thanks to all of you for your interest in Erie.