Erie Indemnity Company
Q3 2019 Earnings Call Transcript

Published: 27 Oct 2019

[Operator:]

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

Thank you, and welcome, everyone. We appreciate you joining us for this recorded discussion about our 2019 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 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-Q filing with the SEC, dated October 24, 2019, 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.

[Timothy NeCastro:]

Thanks, Scott, and thanks to all of you who have a continued interest in the Erie's results and success. During our third quarter of 2019, Erie Indemnity continued the strong favorable performance we saw through the first half of the year. As we reported in our press release, filed yesterday, Indemnity's net income was $94 million or $1.80 per diluted share. That's an increase of $14 million over our third quarter in 2018, and it brings net income year-to-date to $257 million compared to $226 million in the first nine months of 2018, an increase of 14%. Greg will get into the details around Indemnity's results, but before he does, I'll share some of the highlights of the insurance operation we manage, Erie Insurance Exchange. Direct written premium grew by over 5% for the third quarter and year-to-date compared to 2018, which positions the exchange well to once again outperform the industry.Conning's latest forecast for industry growth in direct premium is 4.4%. As we mentioned in the last earnings report, we're continuing to see a more competitive marketplace, with softening prices in private passenger auto. In challenging markets, we, at Erie, maintained a steady, long-term approach to pricing that reinforces our reputation for reliability and stability.Finally, we saw some improvement in the weather during the third quarter. Our claims teams and agents responded to 5 major weather events over the past 3 months, down from 9 in the second quarter. The most recent storms were more localized, affecting customers in North Carolina, Virginia and Wisconsin as well as in parts of Pennsylvania, Ohio and Maryland. That's about half our operating territory. But again, the damaging wind and hail of summer caused more localized damage compared to what we saw in the spring. Our combined ratio for the third quarter was 96.9% compared to 97.6% a year ago. Year-to-date, the combined is 105.7%, higher than a year ago when the combined was 102.1%. It's in times like these that we demonstrate our value to our customers and to our communities that we deliver on our promise of service, our promise to be there and to make things better. My thanks to our Erie agents and, of course, our Erie claims teams for their superior work during these weather events. They have an incredibly difficult and important role in the organization, and they give it their all.And despite the stormy weather, Erie continued to grow its policyholder surplus to over $9 billion, up $500 million for the year, thanks to strong investment returns. Next week, we'll finish our visits we make to all of our field office territories each year where we recognize and celebrate the efforts of our agents and sales teams and the service commitment of our claims teams. Especially in a year of so many damaging storms, I leave these meetings humbled by how incredibly dedicated and hard-working our claims employees are. Both in the field and at our home office campus, I'm frequently approached by employees and agents who share an appreciation for Erie's commitment to being above all in service, not only in terms of customers, but in how we treat each other as employees, how we support our agents and how we show up for our communities.I'll talk more about how that philosophy aligns with our focus on strategic initiatives, ensuring we maintain Erie's distinctive human touch even in a digital world. But first, Greg will review the financial results for the third quarter.

[Gregory Gutting:]

Thanks, Tim. As Tim mentioned, we are very pleased with the financial results we are seeing this year. They reflect the dedication of our agents and our employees as well as our commitment to be above all in service. Starting with the third quarter of 2019, net income was $94 million or $1.80 per diluted share compared to $80 million or $1.54 per diluted share in the third quarter of 2018. For the first nine months of 2019, net income was $257 million or $4.92 per diluted share compared to $226 million or $4.32 per diluted share in the first nine months of 2018.Total operating revenue outpaced the growth in total operating expenses in both the third quarter and the first nine months of 2018. That resulted in growth in operating income of $9 million or 10% in the third quarter of 2019 compared to the third quarter of 2018. For the first nine months of this year, operating income increased $19 million or 7% over the first 3 quarters of last year.Total management fee revenue increased $24 million in the third quarter and $77 million in the first nine months of 2019 compared to the same period in 2018. This is due to an increase in the direct and assumed premiums written of over 5% in both periods. The increase in both policies in force and average premium per policy contributed to this growth in premiums. Indemnity's total cost of operations for policy issuance and renewal services increased $15 million for the third quarter compared to the third quarter of 2018. For the first nine months of 2019, total cost of operations grew $57 million.Commissions increased $10 million in the third quarter and $31 million year-to-date compared to 2018 as a result of the 5% increase in the direct and assumed premiums written by the exchange. This was partially offset by lower agent incentive costs related to less profitable growth compared to the third quarter and first nine months of 2018. Non-commission expenses in the third quarter increased $5 million compared to last year. Information technology costs increased $5 million due to increased professional fees, underwriting and policy processing expenses increased $2 million, and customer service costs increased $1 million. These increases were somewhat offset by administrative and other expenses, which decreased by $3 million in the quarter, driven by lower long-term incentive plan costs due to the decrease in the company's stock price during the third quarter.In the first nine months of 2019, non-commission expenses increased $26 million compared to the same period in 2018. IT costs increased $17 million as a result of higher professional fees. Administrative and other expenses increased by $6 million, driven by an increase in the long-term incentive plan costs due to a higher company stock price in 2019 compared to the same period in 2018.Personnel costs in all expense categories were impacted by additional bonuses awarded to all employees of approximately $1 million for the first nine months of 2019 and $5 million for the first nine months of 2018. Investment income for the third quarter totaled $14 million, an increase of $5 million compared to the third quarter of 2018. For the first nine months of the year, investment income totaled $33 million, which was an increase of $12 million compared to the same period in 2018. Our continued strong operating results have enabled us to pay our shareholders dividends in the amount of $126 million in 2019.With that, I'll turn the call back over to Tim.

[Timothy NeCastro:]

Thanks, Greg. As we discussed on each earnings call, our strategic focus at Erie is centered on 4 strategic areas that we believe are critical for moving us into the future, we're building on our strong business model and distinctive ability to deliver service with a human touch. The 4 areas are

[End of Q&A:]

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