Erie Indemnity Co

NASDAQ:ERIE

Earnings Call Transcript 2019-Q4

[Operator]

Good morning and welcome to the Erie Indemnity Company’s Fourth Quarter and Year-End 2019 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, Vice President-Investor Relations,]

Thank you and welcome, everyone. We appreciate you joining us for this recorded discussion about our 2019 fourth 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-K filing with the SEC dated February 27, 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'll move on to Tim's remarks.

[Tim NeCastro, President and Chief Executive Officer]

Thanks, Scott, and thanks everyone for your interest in Erie’s performance in the fourth quarter of 2019 and our year-end results. Your company has ended the year with solid financials, well equipped to take on the New Year, our 95th year of operations. In our press release filed yesterday, we reported net income of $60 million, or $1.14 per diluted share for the fourth quarter. Comparing the fourth quarter of 2019 to 2018, we saw a decrease in net income of nearly $3 million. However, for the total year 2019, we increased that income by nearly $29 million compared to 2018 driven by strong operating and investment income.

Greg will talk in more detail about the financial performance of Erie Indemnity Company. But first, I'd like to share some highlights for the year for the Erie Insurance Exchange, the insurance operations we manage, recognizing that a healthy exchange is an integral part of Indemnity’s success. In 2019, the exchange grew property/casualty premium by 5.2% over 2019 to $7.5 billion. This result exceeds Conning's industry growth forecast of 4.6%, making 12 straight years that Erie’s premium growth has outpaced the industry. Driving Erie’s premium growth was a combination of strong retention and higher average premium per policy, particularly in our commercial lines business.

Erie’s growth this past year came against the backdrop of a highly competitive market, as I’ve shared on past calls. Pricing indices for the industry show that 2019 saw one of the softest markets for auto insurance in the past two decades. At Erie, we maintained a consistent sustainable approach that reinforces our reputation for reliability and stability and we make pricing decisions with care and a focus on long-term profitability. Both our customers and agents appreciate that stability as reflected in our strong retention rates consistently at or above 90%.

Finally, we saw a continued improvement in weather related losses throughout the second half of the year. While catastrophe related claims were more in line with what we experienced in 2018, last year's active spring storm season and the higher severity of those claims drove up increased losses in 2019. The exchange end of the year with a combined ratio of 105 compared to 103 in 2018. Erie continued to grow policyholder surplus to $9.5 billion, up nearly $900 million for the year. That growth reflects strong investment returns.

Erie's growth in a tough market reflects the drive and determination of our agents and our teams in sales, marketing, underwriting and products and of course the strength of Erie's value proposition and protection and service demonstrated by our claims and customer service personnel. I want to recognize and thank our agents and employees for their hard work this past year. They’ve delivered in meaningful ways for our customers, our company and our communities. Erie's results of operations and balance sheet are healthy and positioned us well for a successful 2020. I'll talk more about our 2019 progress in a few moments following Greg's review of the financials. Greg?

[Greg Gutting]

Thanks, Tim. As Tim mentioned, we saw a solid performance during 2019 and we are positioned to have a successful 95th year in 2020 despite a continued challenging market. I am pleased to share with you both the quarterly and year-end results. Starting with the fourth quarter of 2019, net income was $60 million, or $1.14 per diluted share, compared to $62 million, or $1.19 per diluted share in the fourth quarter of 2018. Although the fourth quarter saw operating revenue increased $20 million, operating income in the quarter decreased $6 million, down 8.1% compared to the fourth quarter of 2018.

Management fee revenue from policy issuance and renewal services increased $17 million, or 4.1%, in the fourth quarter of 2019, driven by a 4.1% increase in the direct and assumed premiums written of the exchange while total cost of operations from policy issuance and renewal services increased $23 million for the quarter. Commission expenses increased $10 million as a result of the 4.1% increase in the direct and assumed premiums written by the exchange. Non-commission expenses increased $13 million in the quarter compared to the fourth quarter of last year.

Information technology cost increased $6 million due to increased professional fees and hardware and software costs. Administrative and other expenses increased $5 million, primarily due to increased personnel costs, as well as several multi-year commitments we made during the quarter to support community development initiatives. And lastly, underwriting and policy processing costs increased $2 million due to elevated underwriting report costs and other policy acquisition costs. Total pretax investment income in the quarter was nearly $7 million, up $2 million compared to the same period in 2018 driven by an increase in net realized gains on investments.

Turning to the full year 2019 results, net income was $317 million, or $6.06 per diluted share, compared to $288 million, or $5.51 per diluted share in 2018. Operating income before taxes increased $13 million, or 3.8%, in 2019 compared to 2018. Management fee revenue earned on the direct and assumed premiums written of the exchange increased $94 million, or 5.3% for the year. Commissions paid to our independent agents increased $41 million in 2019 compared to 2018 resulting from a 5.2% increase in the direct and assumed premiums written by the exchange, somewhat offset by lower agent incentive awards related to less profitable business.

Non-commission expenses in 2019 increased nearly $40 million compared to 2018. Underwriting and policy processing costs increased $6 million and the information technology costs increased $23 million due to an increase in professional fees and hardware and software costs. Customer service costs increased $3 million due to an increase in credit card processing fees as well as personnel costs. Finally, administrative and other expenses increased $11 million driven by an increase in long-term incentive plan costs due to a higher company stock price in 2019 compared to 2018 as well as several multi-year commitments we made to support community development initiatives.

The increase in non-commission expenses was slightly offset by a decrease in sales and advertising expenses of $3.2 million. Income from investments on a pretax basis totaled $40 million for the year compared to $26 million in 2018. The positive results were driven primarily by an increase in net realized gains of $8 million compared to 2018 as well as a $3 million increase in net investment income. Lastly, in 2019, we paid our shareholders dividends in the amount of $168 million and in December of last year, our board approved a 7.2% increase in the regular quarterly cash dividend for both Class A and Class B shares for 2020.

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

[Tim NeCastro, President and Chief Executive Officer]

Thanks, Greg. We coupled our strong 2019 financials with steady progress on key initiatives during 2019. We continue to invest in our areas of focus as I've shared on each of our calls this past year. These four areas are critical to our future success while we build on our longstanding business model and our deep commitment to service. Those four areas are first strengthening our business platforms and use of data; second, continuing to enhance the Erie experience we create for our customers, agents and employees; third, identifying and developing new sources of revenue; and four, preparing the workforce for the future.

We've invested heavily in platforms and data and the Erie experience, two areas of focus that are closely linked. Stronger platforms and use of data enables us to enhance the experience of our customers, agents and employees. Our recent accomplishments include moving nearly half of our legacy homeowners policies online to our contemporary ErieSecure Home product. This was an ongoing transition that is creating new efficiencies for Erie and our agents, while also expanding coverage options for customers. The transition has been largely seamless.

We also accelerated delivery of a refreshed Rate Lock product in personal auto. Rate Lock offers customers the ability to lock in their auto insurance rate until they've made a qualifying change. With this refresh, Rate Lock will allow us to provide a more competitive rate to support our agents in pursuing new business more aggressively, while we adhere to steady as you go pricing philosophy and sound underwriting principles. Agents in Pennsylvania, our largest premium volume state, began quoting the refreshed product in January and early indications are positive. The new version of Rate Lock will be rolled out to additional States throughout the year.

Well, 2019 was a busy year for claims handling. It was also a year of reshaping the claims experience to better meet the needs of our agents and customers as we integrated digital capabilities with a human touch that is distinctly Erie. On last quarter's call, I spoke about our efforts to engage with our customers, agents and employees to develop a deeper understanding of their needs and expectations. That understanding has influenced our strategy and planning around the Erie experience and has reflected in recent deliveries that enhance the services we provide.

For example, in 2019, we introduced real-time claim status online for our agents and in the fourth quarter made that same functionality available to customers. We are among only a handful of carriers that offer real-time claim status to both agents and customers and we do it while continuing to provide the personal caring response of our customer service and claims teams. Additionally, our agents play an integral role in claim service. They take more than 50% of the initial loss reports and our customers continue to express high satisfaction when our agents are involved. Having the ability to see more claims information online and in real-time helps our agents better serve our customers. Customer satisfaction with claims overall remains high based on ongoing customer surveys.

Responsiveness, quality and caring are just a few of the common themes we see in customer feedback, whether it's in our surveys or in unsolicited emails and letters. A customer in Tennessee shared this complement during a recent claim. I was amazed with a quick turnaround from the time I reported by an accident to the response of the adjuster and the receipt of the payment for repairs. There was no hassle and I'm glad I switched to Erie Insurance.

Before we close, I want to share with you some recent third-party recognition that we're especially proud of. First, Erie Insurance was named one of Forbes Best Employers for Diversity for 2020. This list recognizes 500 companies for their representation of diversity based on an independent anonymous survey of employees. At Erie, we're committed to a diverse and inclusive workplace. We work hard to make sure our nearly 6,000 employees feel supported and appreciated for who they are for their unique attributes and for their contributions to our mission of protection and service.

The second recognition we received comes from BenchmarkPortal, an industry leader in customer contact center best practices. Following a lengthy process, BenchmarkPortal has certified Erie’s first notice of loss team as a center of excellence. This honor reflects the commitment and effort of this team to serve our customers with real concern and compassion every day. Our first notice of loss team is often the initial contact our customers have with Erie when reporting a claim. The certification recognizes the FNOL team's performance beyond industry benchmarks for efficiencies and service. FNOL is Erie’s second call center to earn benchmark certification. In 2017, our customer care operations were also recognized as a center of excellence. Congratulations to our team and first notice of loss. They set a high bar for service and routinely exceed those expectations for the benefit of our customers, agents and the company.

Thank you again for your time and interest in Erie. Have a great day everyone.

[Operator]

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