Erie Indemnity Co

NASDAQ:ERIE

Earnings Call Analysis

Erie Reach $10B Premium, Faces Challenges

Erie is nearing its centenary, celebrating a landmark $10 billion in premiums in Q4 2023 and an unprecedented indemnity net income surpassing $446 million. Net income surged more than 17%, contributing to a near 7 million policy count. However, heightened weather claims, rising by 40% to 70,000 in 2023, led to a combined ratio inflation to 119.1%. Despite this, operating income rose substantially by $144 million annually, with revenue outstripping expense growth. Management fee revenue ballooned by over 17%, echoing premium growth from a 38% uptick in new business yearly. The expansion drove commission expenses up by $169 million, while technology and personnel investments propelled noncommission costs higher. Investment income for the year leaped to $29 million. Shareholders benefited from a dividend payment of $222 million and a planned 7.1% dividend hike for 2024.

Marking Milestones Amidst Challenges

Erie Insurance has marked a significant achievement by reaching $10 billion in premiums in the fourth quarter of 2023, illustrating strong growth as the company approaches a century of service. The year brought with it both record-setting growth, with Erie Insurance Exchange seeing a 20-year high at a rate of 17%, and challenges, particularly with net income for Erie Indemnity Company hitting over $446 million. Despite these successes, the company faced headwinds in the form of elevated weather-related claims, which surged to nearly 70,000 in 2023 from about 50,000 in the previous year.

Navigating Profitability and Shareholder Value

To deal with the profitability crunch stemming from these weather events, Erie has embarked on a series of initiatives. Rate increases are being deployed alongside a sharpened focus on underwriting standards and profitability action plans with independent agents. This strategy is designed to gradually improve the combined ratio, which ended at 119.1% for the year, an uptick of 3 points from 2022. Additionally, strategic investments are being made in modernizing technology platforms, with expectations of long-term savings and improved customer offerings. They have also announced a 7.1% increase in the 2024 regular quarterly cash dividend for both Class A and Class B shares, fostering shareholder goodwill.

Financial Performance Highlights

Erie reported strong financial results with net income nearly doubling to $111 million in the fourth quarter of 2023 from $65.5 million in the same quarter in 2022. Total year net income surpassed $446 million, eclipsing the $299 million of the previous year. This increase came as indemnity operating income grew by 38.3% year-on-year. Moreover, management fee revenue significantly increased, correlating directly with a substantial rise in new business premiums, which surged by over 43% in the fourth quarter and nearly 38% for the year compared to prior periods. These figures display Erie's robust ability to grow revenue and increase profitability despite underlying challenges.

Investing in Innovation and Customer Experience

In the face of rapidly changing technology and consumer behavior, Erie made concerted efforts to modernize. Highlighting their progress, they have significantly advanced their infrastructure by moving legacy platforms to the cloud, leading to a 75% reduction in system outage time. The company has also launched a new workers' compensation platform with impressive policy servicing capabilities and rolled out an enhanced claim status portal that has been adopted by nearly all of their auto claims handlers and over 70% of property claims handlers. These upgrades reflect Erie's commitment to agility and customer-centric innovation, including venture capital activities focusing on adjacent markets such as pet insurance and automated process enhancements.

Recognition of Excellence in Customer Satisfaction

Despite the increased weather-related claim activity, Erie has been recognized by J.D. Power as the top-ranked firm in home insurance customer satisfaction, scoring 37 points higher than the average for the Homeowners Insurance segment in 2023. This is illustrative of Erie's dedication to service, achieving milestones in both operational performance and customer excellence even under the most demanding circumstances.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to the Erie Indemnity Company Fourth Quarter and Year-End 2023 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 fourth quarter and year-end 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 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 such differences, please see the safe harbor statements in our Form 10-K 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 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 taking time to learn more about Erie's fourth quarter and year-end results for 2023. We're proudly moving closer to celebrating a century of service, and we're doing so as a company with $10 billion in premium, a milestone reached in the fourth quarter of 2023. This came in a year of both record-setting growth and significant challenges.

We saw net income for Erie Indemnity Company reaching an all-time high of more than $446 million, and growth for Erie Insurance Exchange hit a 20-year high of 17%, helping us hit that $10 billion mark and moving us towards 7 million policies in force.

With all that said, we've certainly been feeling the negative effects of the economic and environmental pressures that continue to impact our industry. Weather-related claims rose to nearly 70,000 in 2023 compared to roughly 50,000 in 2022. Even with the typical decline in weather-related claims in the second half of the year and overall claims severity leveling out, we ended the year with a combined ratio of 119.1%, 3 points higher than year-end 2022. We've responded to the tough market conditions through rate increases, and we're also reinforcing our focus on underwriting standards and partnering with our independent agents on individualized profitability action plans where appropriate.

This multipronged approach is aimed at improving the combined ratio over time. In addition, we've placed a greater emphasis on managing expenses across the enterprise and expect to see long-term savings through our work to modernize legacy technology platforms and to introduce new digital capabilities.

I'll share an update on recent progress with those modernization efforts in a few minutes. But first, I'd like to introduce Chief Financial Officer, Julie Pelkowski who will provide a deeper review of our financials. Julie?

[Julie Pelkowski, executive]

Thank you, Tim, and good morning, everyone. Throughout 2023, we've discussed how weather events and severity were the primary drivers of the profitability challenge for the exchange. As Tim mentioned, we've taken action on several fronts aimed at improving profitability. We are starting to see the benefits of the more significant rate increases taken recently with more to come.

As a reminder, our policy span 12 months, unlike most of our competitors, so it takes longer to realize the benefits. We haven't yet seen a slowdown in new business growth and our retention levels remained strong at 91.2% despite these rate increases.

Policyholder surplus ended at $9.3 billion at December 2023. While this was lower than where we started the year, we did see a positive turn in the fourth quarter with surplus increasing $203 million. Again, the combined ratio for the year ended at 119.1%, which was an improvement from September year-to-date given the fourth quarter experienced a lower level of weather events and more moderate severity growth.

Turning to the results for indemnity. Net income was almost $111 million or $2.12 per diluted share in the fourth quarter of 2023 compared to $65.5 million or $1.25 per diluted share in the fourth quarter of 2022. 2023 total year net income was just over $446 million or $8.53 per diluted share compared to $299 million or $5.71 per diluted share in 2022.

Operating income in the fourth quarter increased nearly $46 million or 56.1% compared to the fourth quarter of 2022. For the total year, indemnity experienced an increase in operating income of $144 million or 38.3% compared to 2022. Both periods saw revenue growth outpace expense growth.

From a revenue perspective, management fee revenue from policy issuance and renewal services increased over $98 million or 19.5% in the fourth quarter of 2023 compared to the fourth quarter of 2022 and over $354 million or 17% for the total year compared to 2022. These increases in both the fourth quarter and total year were in line with the respective increases in the direct and assumed written premiums of the Exchange. Main driver of the premium increase was that the exchange was continuing to experience substantial growth in new business premium, which grew over 43% in the fourth quarter and almost 38% for the year compared to the same respective prior year periods.

From an expense perspective, the total cost of operations from policy issuance and renewal services increased just over $54 million or 12.2% for the fourth quarter and almost $216 million or 12% for the total year 2023 compared to the same periods in 2022. Our most significant cost of operations are commission expenses, grew $53 million for the fourth quarter, while the total year commission expenses increased $169 million.

The higher commissions in both periods were driven by the increase in direct and affiliated assumed written premiums of the Exchange. Noncommission expenses for the fourth quarter grew $1 million, while the total year noncommission expenses grew $47 million. The fourth quarter increase was driven by additional investments in both technology of $3 million and customer service of nearly $1 million, offset by lower sales and advertising costs of over $2 million.

Tim will provide greater detail on our technology and customer service deliveries in a couple of minutes. The increase in total year noncommission expenses was due to additional investments in technology of almost $19 million and higher administrative and other expenses of $20 million driven by higher personnel costs.

So the growth in number of policies led to an increase in underwriting and policy processing costs of $9.4 million. Our investments generated almost $10 million in pretax income in the fourth quarter of 2023 compared to $300,000 in the fourth quarter of 2022.

For the total year 2023, pretax income from investments was $29 million compared to $600,000 for 2022. Finally, in 2023, we paid our shareholders $222 million in dividends. Also, in December of last year, our board approved a 7.1% increase in the 2024 regular quarterly cash dividend for both our Class A and Class B shares. Now I'll turn the call back over to Tim. Tim?

[Timothy NeCastro, executive]

Thanks, Julie. The rapid pace of technology and changing consumer behaviors have heightened a sense of urgency to modernize our platforms and introduce new digital capabilities. As I mentioned earlier, we know it's important to long-term expense savings, and it's critical to our ability to offer innovative and customer-centric products and services. That's why we made modernization one of our top priorities in 2023.

A notable example of progress is the migration of several legacy platforms to the cloud, a technology infrastructure that is more stable, secure and efficient. Largest cloud conversion to date was our Erie Claims Center platform, which is now seeing a 75% reduction in system outage time and significantly reduced costs.

In our third quarter call, I shared that we launched a pilot for refreshed workers' compensation platform starting in Indiana. Since that time, our teams have successfully rolled out the platform in every state in our footprint, the refresh introduces full policy servicing capabilities, online account for commercial customers and a new billing platform that allows customers the ability to manage their automatic payments.

Other significant progress was made in the enhancement to our claim status portal, a valuable tool that puts important claims information at the fingertips of agents and customers. In 2023, more than 75 different enhancements were made to the platform to improve the user interface and to make the information provided by the tool more robust.

Nearly 100% of auto claims handlers and more than 70% of the property claims handlers are using the tool to share important updates with agents and customers, helping claims can handle faster and more efficiently.

These modernization efforts are continuing in 2024 and beyond, and we're embracing agile ways of working to help us work faster, improve our speed to market and deliver the capabilities demanded by today's marketplace, that spirit of innovation is also behind the investments we're making through Erie's strategic ventures.

This venture capital arm of Erie Indemnity Company formed in 2022, focuses on investing in the personal and commercial insurance value chain. And recently, we announced 3 initial start-up investments. Wagmo, which offers tech-enabled pet wellness and insurance. Roots Automation, which leverages artificial intelligence to automate manual and time-consuming insurance processes and Trust & Will an online estate planning platform.

These initial investments are adjacencies that have the potential to deliver value to Erie, our agents and policyholders. In addition to capital, the start-up companies also benefit from Erie's industry expertise. We look forward to continuing to build our portfolio to support more visionary entrepreneurs and help bring innovative products and services to the market.

As I mentioned earlier in the call, weather claims have been up and significantly over the prior year, which makes accolades like those we recently received from J.D. Power even more meaningful. In December, J.D. Power ranked Erie, the best in home insurance customer satisfaction coming in, #1 for both homeowners and rental insurance. Erie's score of 856 on J.D. Power's 1000-point scale, was 37 points higher than the Homeowners Insurance segment average for 2023. And both our ranking and score improved during a year when the study cited overall homeowner satisfaction is flat compared to the previous year.

This recognition comes on the heels of two other first place rankings from J.D. Power in 2023, one for property claims experience and another for independent agent satisfaction in personal lines. I'd like to express my gratitude to our agents and frontline employees from claims, first notice of loss and customer care operations continuing to be above all in service, even in and especially in these demanding times.

Thank you all for listening in today and for your continued interest in Erie.