Q3 2021 Erie Indemnity Co Earnings Call (Pre-Recorded)

October 29, 2021

Good morning, and welcome to the Erie Indemnity Company third quarter 2021 earnings Conference call. This call was prerecorded and there'll be no question and answer session. Following the recording now I'd like to get in.

Your host for the call Vice President of Investor Relations Scott <unk>.

Thank you and welcome everyone.

We appreciate you joining us for this recorded discussion about our 2021 third quarter results.

This recording will include remarks from Tinder Castro, 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 closed and are available within the Investor Relations section of our website Erie insurance Dot 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 28, 2021 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.

Thanks, Scott and thanks to all of you for taking time to learn more about <unk> performance in the third quarter of 2021.

In our last call I discussed our plans to begin returning significant numbers of employees to our offices in September.

However, as the delta variance spread presenting new challenges and uncertainties. We made the decision to pause those plans until January of 2022.

Returning more employees back to our offices is important to our close relationship based culture and we're eager to do so.

But ensuring the health and safety of our employees and communities, while maintaining business continuity remains the top priority.

One decision we didn't really head on was the historic and long anticipated dedication of various new seven storey office tower at the.

Thomas be Hagen building appropriately named for steam Chair of the Board is an impressive addition to our home office campus and the city of Erie.

This location was delayed by 17 months due to the pandemic. However, the dedication date of September 15th with significant.

It was the 68th anniversary of the day, Tom Hagen joined Erie insurance as a part time childcare.

Pending college.

Tom of course is one of my predecessors, and the CEO office and since 2007 and he has served as the chairman of Erie Indemnity.

Tom's influence and contributions as an eerie CEO of businessmen philanthropist Reservationist and historian are evident across the city.

And his wisdom and leadership have helped Erie insurance growing to the thriving company. It is today the.

The Hagen building is a monumental symbol of that continued growth and success and of our hope for the future.

When the building was designed it was targeted to provide relief to expanding employee range supporting a robust business growth.

In the workplace reset underway the building provides us ample space and inspiring environment for new safely used to come together.

We're targeting January to start to return of our workforce two onsite locations.

Return is marked by greater flexibility and empowerment in deference to our relationship culture and the changing nature of work.

Now, let's turn to our third quarter financial results as you saw in our press release filed after the market closed yesterday Erie Indemnity reported net income of $90 million or $1 72 per diluted share for the third quarter.

This is compared to net income of $89 million or $1 71 per diluted share in the third quarter of 2020.

I'd now like to me by Greg Gutting to share a deeper review of the financials Greg.

Thanks, Tim Good morning, everyone. Thank you for taking time today to be a part of the Erie Indemnity third quarter earnings call.

I'm proud to be here today to share with you our strong financial performance for the third quarter and the first nine months of 2021.

With that I'd like to share with you our third quarter results.

Starting with the exchange the insurance operations, we manage direct written premium growth for the third quarter was three 8% driven.

Driven by growth in both our homeowners and commercial multi peril products.

During the third quarter the exchange experienced an increase in frequency in auto and increased severity in both auto and property.

Reflecting the driving activity resuming to nearly a pre pandemic level and the increased cost of automobile parts and building supplies the.

Exchange also experienced an increase in weather related losses in the third quarter.

The combined ratio for the quarter was 110, 6%.

Which increased the combined ratio to 98, 7% for the first nine months of 2021.

The exchange surplus remained very strong at $11 7 billion.

Turning our attention to your company indemnity in the third quarter and then these net income was $90 million or $1 72 per diluted share compared to $89 million or $1 71 per diluted share in the third quarter of 2020.

For the first nine months of 2021, net income was $243 million or $4.64 per diluted share.

Compared to $231 million.

Or $4 41 per diluted share in the first nine months of 2020.

Operating income before taxes decreased one 2% or $1 million in the third quarter of 2021 compared to the third quarter of 2020.

Indemnity also saw a decrease in operating income before taxes of six 2%.

Or $17 million for the first nine months of this year compared to the same period in 2020.

And then these management fee revenue for policy issuance of renewal services increased $20 million or four 2% in the third quarter of 2021 compared to the third quarter of 2020.

While for the first nine months of 2021, and definitely saw an increase of $51 million or three 6% compared to the first nine months of 2020.

Management fee revenue allocated to administrative services decreased $400000 in the third quarter and $500000 in the first nine months of 2021 compared to the same periods in 2020.

Focusing on <unk> cost of operations.

Commissions increased $15 million in the third quarter and $39 million in the first nine months of 2021.

To the same periods in 2020.

The increases in commission in both the third quarter and year to date are driven by the growth in the direct and assumed premiums written by the exchange and to a lesser extent the increase in agent incentive compensation.

Non commission expense increased $6 million in the third quarter of 2021 compared to the third quarter of 2020.

Information technology costs increased by $4 million.

Driven by increases in hardware and software expenses as well as personnel costs sale.

Sales and advertising costs increased $1 million due to personnel costs.

A point to note all expense categories were impacted as it relates to personnel costs due to an increase in medical costs compared to 2020.

This is true for both the third quarter as well as year to date as many elective procedures were delayed in 2020 due to the COVID-19 pandemic.

For the first nine months of 2021 and deadly saw an increase in non commission expenses of nearly $27 million.

Increases in technology costs of $11 million were driven by hardware and software costs as well as personnel costs.

Administrative and other expenses increased almost $13 million in the first nine months driven by increases in building and equipment depreciation professional fees and personnel costs.

Underwriting and policy processing expense increased nearly $3 million, primarily due to increased personnel costs and underwriting report costs.

Income from investments before taxes totaled $21 million in the third quarter of 2021 and $55 million year to date for 2021.

Which included income from limited partnerships of $12 million and $27 million respectively.

Limited partnerships were the largest contributor to investment income in both the quarter and year to date.

I will remind you that limited partnership asset class is in run off and we continue to expect more limited and inconsistent earnings from this asset class in the future.

In closing the indemnity company is continuing to perform through the uncertain times of a pandemic and it is this performance that has allowed us to pay our shareholders nearly $145 million in dividends this year.

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

Thanks, Greg.

It's hard to imagine where we'd be if not for the technology that has allowed us to transfer and physical location to connect and collaborate virtually for more than a year and a half.

This is not only opened our eyes to a new world of work, but to the new demands of doing business.

Sometimes it's become very clear is that being fully present in operational in the digital space is critical.

Consumers are more reliance on digital commerce than ever before.

Grown to expect the same level of ease in doing business with their insurance provider as they do with their favorite online retailer.

But what's different about Erie is the human touch that has been our differentiator and source of success for nearly a century.

It's core to who we are and how we operate and that will never change.

That's why we're focused on the strategy that embraces technology that we that gives customers access to digital tools when they women in contact with a person when they need it.

The self service capabilities offered through online account or a great example of that including the new chat functionality.

The chat function was first piloted last year with the phased rollout is continuing into 2022.

Mine accounts paperless billing option introduced emerge is approaching 100000 policies enrolled.

Another recent example, digital enablement our claims handlers now have the ability to contact payments by text message.

We're seeing great initial usage rates for this service with the claims team engaging in more than 16000 types conversations per month since July and 72% of applicable customers opting in.

These numbers are a strong indication that sometimes the human touch means meeting people, where they are and communicating the message they prefer.

That outside in approach to service delivery and product development using customer data to drive our strategic priorities across the enterprise is key to our strategy moving forward.

This will ensure that we deliver seamless customer experiences that are highly satisfying and providing agents with data tested products and services to help them grow their businesses.

Two expected product enhancements for 2020 to support our growth objectives.

On the commercial side for rolling out an expanded cyber security coverage to be quoted on all new re secured business policies.

This comprehensive endorsement, we provide first and third party coverage of digital tax like data breaches and computer abroad.

For personal lines rolling out extended water flood coverage early in 2022.

Using underwriting and pricing sophistication will be able to manage our exposures and price risks properly to offer this coverage to customers who may benefit from it.

Growing in preparing our workforce for the future is another area of focus as we move forward and implementing more inclusive and equitable recruiting strategies is a key component of that.

As part of this journey to build a more diverse workforce, we're proud to be collaborating with the perceived as an organization focused on unemployment for people with disabilities.

With them, we are piloting a program that leverages the talents of adults with autism.

80% of adults with autism in the U S are unemployed or underemployed. According to the precision lists.

Yet when properly assessed and trained people with autism and other neuro diversities are extremely high performing employees.

Individuals in the pilot program or identified assessed trained and employed by the precision is to engage as consultants and project based work as members of our teams and data human resources and information technology.

This partnership promises to be a win win helping Erie build a more diverse workforce, while making a positive difference in the lives of these talented individuals.

I'm also proud to report that <unk> was honored with several third party recognition since our last call.

Independent agents ranked <unk> among personal lines insurers in J D. Power's 2021 U S independent agent performance and satisfaction survey.

Newsweek named one of America's Best customer service companies for 2022 ranking us fourth in the homeowners insurance category.

U S news and we will report ranked <unk> in its best renters insurance companies of 2021, calling out <unk> competitive pricing.

Reading from a M best and policy features such as personal property coverage lots of use coverage personal liability and guest medical coverage.

Forbes lucid area as a top company in five different personal insurance categories. In its 2022 list of America's Best insurance companies.

And Forbes also named <unk> to its list of America's Best in state employers for 2021 in Pennsylvania.

And finally, the global <unk> network, the world's largest network of employee resource groups and diversity counsels recognized your East African American affinity network and dignity and respect affinity network with a top 25 <unk> diversity impact award.

Fred Johnson, Vice President and manager of the Wisconsin branch.

It was one of five recipients of the diversity impact executive sponsor of the year honor.

Brent is the sponsor of Aries African American affinity network.

Before we close I'd like to acknowledge two changes to our executive team.

Dionne Wallace Oakley, former executive Vice President of human resources and strategy announced her decision to resign from Erie in July to pursue another executive career opportunity in Washington D C area.

We are deeply grateful for Dms leadership expertise and creativity and the perspective, she shared during her career with eerie, which spans more than a decade.

Human resources Senior Vice President Sean Dougan is taken on oversight at the collective areas of responsibility HR strategy strategic communications and employment and privacy and is reporting directly to me as we determine next steps for this role.

And executive Vice President and Chief Information Officer, Bobby shared his plans to retire at the end of this year.

Bob joined Erie in August 2012, and under his leadership areas achieved numerous technology gains with our agents customers and employees.

These accomplishments have given here you're a solid foundation for continued success in the years ahead.

Bob's early notice provided time to begin an internal and external search for his replacement, which is currently underway.

We think both Bob and Dion for their significant contributions to the organization and wish them all the best in their new chapters.

As always I'd like to express my gratitude to our employees and agents for their commitment to being above all in service.

And to our shareholders for their continued support and trust.

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

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

Okay.

Sure.

[music].

Right.

[music].

Good morning, and welcome to the Erie Indemnity Company third quarter 2021 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 by a horse.

Thank you and welcome everyone.

We appreciate you joining us for this recorded discussion about our 2021 third quarter results.

This recording will include remarks from Kinder Castro, 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 closed and are available within the inverse.

The relations section of our website Erie insurance Dot 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 28, 2021, and the related press release.

This prerecorded call is the property of your 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 move on to Tim's remarks.

Thanks, Scott Thanks to all of you for taking time to learn more about <unk> performance in the third quarter of 2021.

In our last call I discussed our plans to begin returning significant numbers of employees to our offices in September.

However, as the Delta variant spread presenting new challenges and uncertainties. We made the decision to pause those plants until January of 2022.

Returning more employees back to our offices is important to our close knit relationship based culture, and we're eager to do so.

Ensuring the health and safety of our employees and communities, while maintaining business continuity remains the top priority.

One decision we didn't really head on was the historic and long anticipated dedication of various new seven storey office tower the.

Thomas be Hagen building appropriately named for our esteemed chairman of the Board is an impressive addition to our home office campus and the city of Erie.

This location was delayed by 17 months due to the pandemic. However, the dedication date of September 15th with significant.

It was the 68th anniversary of the day, Tom Hagen joined Erie insurers as a part time childcare.

Pending college.

So I'm of course is one of my predecessors, and the CEO office and since 2007. He has served as the chairman of Erie Indemnity.

Tom's influence and contributions as an eerie CEO of businessmen philanthropist Reservationist and historian are evident across the city and his wisdom and leadership have helped Erie insurance grow into that's driving company. It is today the.

The Hagen building is a monumental symbol of that continued growth and success of our hope for the future.

When the building was designed it was targeted to provide relief to expanding employee ranks supporting a robust business growth.

In the workplace reset underway. The building provides us ample space, we are inspiring environment for new safely used to come together.

We're targeting January to start to return of our workforce two onsite locations.

Return is marked by greater flexibility and empowerment in deference to our relationship culture and the changing nature of work.

This is compared to net income of $89 million or $1 71 per diluted share in the third quarter of 2020.

I'd now like to buy Greg Gutting assured deeper reviews the financials Greg.

Thanks, Tim Good morning, everyone. Thank you for taking time today to be a part of the Erie Indemnity third quarter earnings call.

I'm proud to be here today to share with you our strong financial performance for the third quarter and the first nine months of 2021.

With that I'd like to share with you our third quarter results.

Starting with the exchange fee insurance operations, we manage direct written premium growth for the third quarter was three 8% driven.

Driven by growth in both our homeowners and commercial multi peril products.

During the third quarter the exchange experienced an increase in frequency in auto and increased severity in both auto and property.

Reflecting the driving activity resuming nearly a pre pandemic level and the increased cost of automobile parts and building supplies the.

Exchange also experienced an increase in weather related losses in the third quarter.

The combined ratio for the quarter was 110, 6%.

Which increased the combined ratio to 98, 7% for the first nine months of 2021.

The exchange surplus remained very strong at $11 7 billion.

Turning our attention to your company indemnity in the third quarter and then these net income was $90 million or $1.72 per diluted share compared to $89 million or $1 71 per diluted share in the third quarter of 2020.

For the first nine months of 2021, net income was $243 million or $4.64 per diluted share.

Compared to $231 million or $4 41 per diluted share in the first nine months of 2020.

Operating income before taxes decreased one 2% or $1 million in the third quarter of 2021 compared to the third quarter of 2020.

Indemnity also saw a decrease in operating income before taxes of six 2%.

Or $17 million for the first nine months of this year compared to the same period in 2020.

And then these management fee revenue for policy issuance and renewal services increased $20 million or four 2% in the third quarter of 2021 compared to the third quarter of 2020.

Well for the first nine months of 2021, and definitely saw an increase of $51 million or three 6% compared to the first nine months of 2020.

Management fee revenue allocated to administrative services decreased $400000 in the third quarter and $500000 in the first nine months of 2021 compared to the same periods in 2020.

Focusing on <unk> cost of operations commissions increased $15 million in the third quarter and $39 million in the first nine months of 2021 compared to the same periods in 2020.

The increases in commission in both the third quarter and year to date were driven by the growth in the direct and assumed premiums written by the exchange and to a lesser extent the increase in agent incentive compensation.

Non commission expense increased $6 million in the third quarter of 2021 compared to the third quarter of 2020 <unk>.

Information technology costs increased by $4 million.

Driven by increases in hardware and software expenses as well as personnel costs.

And advertising costs increased $1 million due to personnel costs.

A point to note all expense categories were impacted as it relates to personnel costs due to an increase in medical costs compared to 2020.

This is true for both the third quarter as well as year to date as many elective procedures were delayed in 2020 due to the COVID-19 pandemic.

For the first nine months of 2021 and definitely saw an increase in non commission expenses of nearly $27 million.

Increases in technology costs of $11 million were driven by hardware and software costs as well as personnel costs.

Administrative and other expenses increased almost $13 million in the first nine months driven by increases in building and equipment depreciation professional fees and personnel costs.

Underwriting and policy processing expense increased nearly $3 million.

Primarily due to increased personnel costs and underwriting report costs.

Income from investments before taxes totaled $21 million in the third quarter of 2021 and $55 million year to date for 2021, which.

Which included income from limited partnerships of $12 million and $27 million respectively.

Limited partnerships were the largest contributor to investment income in both the quarter and year to date.

I will remind you that limited partnership asset class is in run off and we continue to expect more limited and inconsistent earnings from this asset class in the future.

In closing the indemnity company is continuing to perform through the uncertain times of a pandemic and is this performance that has allowed us to pay our shareholders nearly $145 million in dividends this year.

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

Thanks, Greg.

It's hard to imagine where we'd be if not for the technology that has allowed us to trees and physical location to connect and collaborate virtually for more than a year and a half.

This is not only opened our eyes to a new world of work, but to the new demands of doing business.

So I think that it's become very clear is that being fully present in operational in the digital space is critical.

Consumers are more reliant on digital commerce than ever before.

Grown to expect the same level of ease in doing business with their insurance provider as they do with their favorite online retailer.

But what's different about Erie is the human touch that has been our differentiator and source of success for nearly a century it's.

It's core to who we are and how we operate and that will never change.

It's why we're focused on the strategy that embraces technology that gives customers access to digital tools when they want it and contact with a person when they need it.

The self service capabilities offered through online account are a great example of that including the new chat functionality.

The chat function was first piloted last year with the phased rollout is continuing into 2022.

And online accounts paperless billing option introduced in March is approaching 100000 policies enrolled.

Another recent example, digital enablement our claims handlers now have the ability to contact payments by text message.

Were seeing great initial usage rates for this service with the claims team engaging in more than 16000 takes conversations per month since July.

72% of applicable customers opting in.

These numbers are a strong indication that sometimes the human touch means meeting people, where they are and communicating the message they prefer.

That outside in approach to service delivery and product development using customer data drives our strategic priorities across the enterprise is key to our strategy moving forward.

This will ensure that we deliver seamless customer experiences that are highly satisfying and provide agents with data tested products and services to help them grow their businesses.

Two expected product enhancements for 2020 to support our growth objectives.

On the commercial side rolling on expanded cyber security coverage to be quoted on all new Erie secure business policies. This comprehensive endorsement will provide first and third party coverage of digital tax like data breaches and computer abroad.

For personal lines rolling out extended water, where flood coverage early in 2022, using underwriting and pricing sophistication will be able to manage our exposures and price risks properly to offer this coverage to customers who may benefit from it.

Growing in preparing our workforce of the future is another area of focus as we move forward and implementing more inclusive and equitable recruiting strategies is a key component of that.

As part of this journey to build a more diverse workforce, we're proud to be collaborating with the precision as an organization focused unemployment for people with disabilities.

With them, we are piloting a program that leverages the talents of adults with autism.

80% of adults with autism in the U S are unemployed or underemployed. According to the precision just yet.

Yet when properly assessed and trained people with autism and other neuro diversities are extremely high performing employees.

Individuals in the pilot program are identified assessed trained and employed by the precision is to engage as consultants and project based work as members of our teams and data human resources and information technology.

This partnership promises to be a win win helping Erie build a more diverse workforce, while making a positive difference in the lives of these talented individuals.

I'm also proud to report that Erie was honored with several third party recognition since our last call.

Independent agents ranked <unk> among personal lines insurers in J D. Power's 2021 U S independent agent performance and satisfaction survey.

Newsweek named Gary one of America's Best customer service companies for 2022 ranking us fourth in the homeowners insurance category.

U S News and we'll report ranked <unk> in its best renters insurance companies of 2021, calling out <unk> competitive pricing a plus rating from am best and policy features such as personal property coverage lots of use coverage personal liability and guest medical coverage.

Forbes lucid area as a top company in five different personal insurance categories. In its 2022 list of America's Best insurance companies.

And Forbes also named <unk> to its list of America's Best in state employers for 2021 in Pennsylvania.

And finally, the global <unk> network, the world's largest network of employee resource groups and diversity counsels recognized Erie as African American affinity network and dignity and respect affinity network with a top 25 EOG diversity impact award.

And Fred Johnson, Vice President and manager of the Wisconsin Branch was one five recipients of the diversity impact executive sponsor of the year honor.

Brent is the sponsor of <unk> African American affinity network.

Before we close I'd like to acknowledge two changes to our executive team.

We are deeply grateful for Dms leadership expertise creativity and the perspective, she shared during her career with eerie, which spans more than a decade.

Human resources Senior Vice President John Duggan has taken an oversight of the collected areas of responsibility HR strategy strategic communications and employment and privacy and is reporting directly to me as we determine next steps for this role.

And executive Vice President and Chief Information Officer, Bob Ingram shared his plans to retire at the end of this year.