Erie Indemnity Company
Q1 2015 Earnings Call Transcript

Published: 1 May 2015

[Operator:]

Good morning and welcome to the Erie Indemnity Company’s First Quarter 2015 Earnings Conference Call. I would like to introduce your host for today’s call, Scott Beilharz, Vice President of Investor Relations. Please go ahead, sir.

[Scott Beilharz:]

Thank you, Ashley, and welcome everyone. We appreciate you joining us for today’s discussion about first quarter 2015 results. Joining me today are Terry Cavanaugh, President and Chief Executive Officer; Marcia Dall, Executive Vice President and Chief Financial Officer; and Sean McLaughlin, Executive Vice President, Secretary and General Counsel. 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. As we typically do, we’ll start the call today with opening remarks from Terry and Marcia and then we will open the call for your questions. 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 April 30, 2015 and in the related press release. Also during this call, we may discuss non-GAAP measures. A reconciliation to the GAAP-based results can be found in our Form 10-Q that was filed with the SEC yesterday. This call is being recorded and recording 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. A replay will be available on our website today after 12

[Terry Cavanaugh:]

Thank you, Scott. Good morning everyone. Today, I’ll talk about our first quarter results. Marcia will then go over the financials and I’ll finish with some recent recognition we received. We will then take your questions. As you saw on our press release, our net income of $0.74 per share was down from $0.88 last year. Our results were primarily driven by the following four factors

[Marcia Dall:]

Thank you, Terry, and good morning everyone. As Terry mentioned, our earnings per share on a diluted basis decreased $0.14 per share to $0.74 in the first quarter, compared to the same period last year. While we continue to deliver strong top line growth, net income decreased due to a reduction in management operating pre-tax income and lower earnings from our alternative investment portfolio. Management operating pre-tax income decreased 10% for the quarter to $53 million compared to the first quarter of 2014. Revenue from management operations grew $25 million to $351million in the first quarter. Indemnities top-line growth of 7.5% was driven by 7.7% growth in the direct written premium of the Property and Casualty Group. Direct written premium benefited from both solid increases and policies in force and average premium per policy on all of our major product lines. Furthermore, we saw consistent growth in both personal lines and commercial lines with personal lines growing 6.6% and commercial lines growing 10.1%. Indemnities strong top line growth was offset by higher agent compensation and ongoing strategic technology investments. Commission expenses increased $20 million, or 11.2% in the first quarter, compared to last year. This increase resulted from based commission growth, consistent with our growth in direct written premium, and also an increase in projected agent incentive costs related to underwriting profitability for the Property and Casualty Group. As a reminder, the first quarter of 2014 saw significant weather related events resulting in a statutory combined ratio for the Property and Casualty Group of 108%. Our first quarter 2015 combined ratio of a 103% was significantly lower than the first quarter of last year due to improved current accident year trends and no major weather-related events. Therefore, the projected profitability based agent bonuses where higher compared to the prior year quarter. Non-commission expenses increased $10 million, or 11.7% in first quarter, compared to last year. As Terry mentioned, the biggest driver here relates to our investment in technology. Technology cost increased $5 million, which included $3 million to consulting and contract labor, and $1 million each of cost related to employees, and hardware and software. As Terry mentioned, this necessary investment in technology allows us to remain competitive and positions us for future profitable growth. Indemnity’s investment income of $6 million in the first quarter of this year is down from $11 million in the first quarter of 2014. The primary driver of this decrease is a decline in our alternative investment portfolio earnings, as expected, based on the continued runoff of this portfolio. Finally, we paid $31.7 million in dividends to our shareholders in the first quarter of 2015. Now I’ll turn call the back over to Terry.

[Terry Cavanaugh:]

Thank you, Marcia. We understand that you, as investors, may not be pleased with our quarter-over-quarter drop in earnings. Our business model can result in variability of earnings quarter-to-quarter. However, we remain committed to creating shareholder value for the year and over the long-term. Last month we held our annual shareholder meeting. I’m pleased to announce that all 12 members of our Board of Directors were elected to serve another year. I would like to thank our directors for their continued guidance and commitment to Erie and thank our shareholders for their continued support. And now I’d like to highlight our recent recognitions. February results of the 2015 J.D. Power Property Claim Satisfaction study, which measures customer satisfaction across the Property Claims experience was released. I’m proud to report that Erie continues to rank in the high satisfaction tier. In March, Erie was listed among four of the Americas’ best employers list, we were ranked 72nd on the list of 500, and fourth out of 25 insurance companies ranked. And just this week, it was announced that Erie earned first place in the J.D. Power Insurance Shopping Study for the third time in a row, and the six times since 2007. We continue to score high in all three of the shopping study factors

[Terry Cavanaugh:]

Again, we thank you for your participation. And we look forward to talking to you next quarter.

[Scott Beilharz:]

Thanks again for joining us. A recording of this call will be posted on our website erieinsurance.com after 12

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today's program. You may all disconnect. Everyone have a wonderful day.