Q4 2022 Erie Indemnity Co Earnings Call

Speaker 2: Co.

Speaker 3: Thank you and welcome everyone.

Speaker 4: We appreciate you joining us for this recording discussion about our fourth quarter and year-end results.

Speaker 4: District Court in one include remarks from can the Castro, President and Chief Executive Officer and great-gutting, executive vice president and Chief Financial Officer.

Speaker 4: Our early release is up management where you should yesterday afternoon, after the market closed and are available within the Investor Relations section of our website, ureinsurance.com.

Speaker 4: Before we begin, I would like to remind everyone that today's discussion may contain four 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 different materially from those described in these remarks.

Speaker 4: For information on important factors and necologist differences, please see the safe harbor statements in our form 10k filing with the FEC filed yesterday and in the related cuts released.

Speaker 4: This pre-recorded call is the property of the Indian Dammity Company. It may not be reproduced or re-broidcats by any other party without the prior written consent of the Indian Dammity Company. With that, we move on to Tim's remarks.

Speaker 5: Thanks Scott, and thanks to all of you for taking time to learn more about your recent performance in the fourth quarter of 2022 and our year-end results. As you're all aware, we find ourselves in a time of historic economic challenges. Inflation, supply chain issues, and labor shortages, to name just a few of the challenges, that puts substantial pressure on our bottom line, which will cover in more detail in a few minutes.

Speaker 5: Fortunately, our perseverance through 98 years of stability is helping us adapt to and withstand the current financial climate. Our ability to adapt has also helped us transition to new ways of working for the past year. Throughout 2022, we returned employees and welcomed new buyers to our offices. We also began resuming the in-person gatherings that had either been canceled.

Speaker 5: or shipped it to a virtual format for over the two years during the heights of the pandemic. It's been a learning experience as we've entered his greater flexibility in how and where people collaborate and connect. The majority of eerie employees are now working in a hybrid format, split in their time between in office and remote work.

Speaker 5: Many of our office spaces are now neighborhoods, a mixture of dedicated and flexible workspaces. And meeting rooms have been equipped with new technology that supports the experience of employees participating in both in-person and virtually.

Speaker 5: It's clear that the world of work has changed significantly over the past three years, and the competition for talent continues. That's why gathering employee feedback is critical to making sure we're handling these returns the right way.

Speaker 5: We'll continue to learn and adapt to these new ways of working to assure Erie remains an employer of choice in today's tight talent market while maintaining the culture, traditions, and relationships that are so important to us and distinctive to our service brand. Before I share some additional updates from the past year, let's turn to our fourth quarter and your end financial results.

Speaker 5: As I mentioned earlier, we are feeling the impact of the current economic climate, most notably in the combined ratio for area insurance exchange, which was 116.1% for 2022 compared to 103.9% for 2021. While we saw claims frequency remains slightly below pre-pandemic levels in the fourth order.

Speaker 5: We continue to see higher than usual severity. A lot of repair costs are up 19.5% through December . The consumer price index is up 6.5%. And more extreme weather events like hurricanes and thunderstorms are creating higher industry property losses.

Speaker 5: Like the rest of the industry, we've responded to these economic challenges through rate increases, which we're doing with a measured approach, along with expense management, adhering to our strengths underwriting guidelines, and agency profitability reviews.

Speaker 5: In this continued hard market, we know more customers will shop. While customers may be looking for a more attractive price, they also demand a superior value proposition. That's something that Iri offers.

Speaker 5: and we're pleased to see that reflected in our growth numbers. Our top-line growth was strong this past year. Its premium growth climbed and unprecedented 9.2% and new business premium increased 14.5%.

Speaker 5: Overall, policies in force are up 3.6 percent, and our retention rate remains strong at over 90 percent for personal and commercial lines combined.

Speaker 5: With that, I'll pass it to right for a deeper review of the financials. Great. Thanks, Tim. As Tim alluded to at the beginning of this discussion,

Speaker 4: The exchange, the insurance operations we manage, continues to see unprecedented loss costs related to claims severity driven by inflation. Because of this deep rise in claims costs, we have quickly adapted to become more agile, agile in a way that still compels us to perform for our policy holders and agents. We have taken a more diligent approach to underwriting.

Speaker 4: and we've also taken a deeper look into our policy rate structures. All of these efforts are putting us in a position to deliver improved financial results as we are already seeing top-line growth.

Speaker 4: The exchange direct written premium growth for the fourth quarter was 12.1 percent, driven by an increase in the average premium per policy and increased policy retention.

Speaker 4: For the year, the exchange saw an increase in direct-written premiums of 9.2% compared to 2021.

Speaker 4: The increase was driven by strong new policy growth of 3.7 percent and an increase in new director and premium of 14.5 percent.

Speaker 4: increased was driven by strong new policy growth of 3.7 percent and an increase in new director and premium of 14.5 percent combined with increased policy retention.

Speaker 4: Turning to the results for indemnity, net income was over $65 million or $1.25 per diluted share in the fourth quarter of 2022 compared to $55 million or $1.5 per diluted share in the fourth quarter of 2021. 2022 total year net income was $299 million.

Speaker 4: or $5.71 per diluted share compared to $298 million or $5.69 per diluted share in 2021.

Speaker 4: Operating income in the fourth quarter increased nearly $20 million or 31.7% compared to the fourth quarter of 2021. From a total year perspective, in-dem the experience and increase in operating income of $58 million or 18.3% compared to 2021. Management fee revenue from policy issuance and renewal services increased over 53.5%

Speaker 4: premiums of the exchange. The total cost of operations from policy issuance and renewal services increased $35 million for the fourth quarter and over $118 million for the total year 2022 compared to the same periods in 2021. Commission expenses for the fourth quarter through $16 million.

Speaker 4: for the fourth quarter and definitely saw an increase of over $19 million compared to the fourth quarter of 2021. The fourth quarter increase was driven by increases in underwriting and policy processing costs, information technology costs,

Speaker 4: Sales and advertising costs had administrative another cost. For the total year of 2022, non-commissioned expense grew by $47 million compared to 2021. Underwriting and policy processing costs increased $6 million, driven by personnel costs, as well as underwriting report costs.

Speaker 4: Information technology costs grew $13 million due to increased hardware and software costs, as well as personnel costs. Sales and advertising costs increased $7 million due to increased advertising in agent-related costs. And finally, administrative and other expenses.

Speaker 4: increased nearly $23 million, driven by personnel costs, related compensation, and increased professional fees. In the four-quarter pre-tax income from investments total $300,000, this represents a decrease of roughly $12 million, compared to the fourth quarter of 2021.

Speaker 4: The decrease was driven by losses in the limited partnership investments. In demilies total year of pre-tax income from investments was just over $600,000, a decrease of $67 million compared to 2021.

Speaker 4: The large decrease is attributable to losses in our limited partnership portfolio of $10 million. Recorded in 2022, compared to earnings on limited partnerships of $32 million recorded in 2021. And, definitely, also incurred $27 million in realising unrealised losses in 2022.

Speaker 4: compared to gains of $5 million recorded in 2021. I will remind you that the limited partnership asset classes and runoff, and we continue to expect more limited and inconsistent earnings from this asset class in the future.

Speaker 4: Finally, in 2022, we paid our shareholders dividends in the amount of $207 million. Also, 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 2023. Now I'll turn the call back over to Tim. Kim?

Speaker 4: We paid our shareholders dividends in the amount of $207 million. Also, 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 2023. Now I'll turn the call back over to Tim. Tim? Thank you, Greg.

Speaker 5: Technology has not only become vital to how our workforce connects, but it's also an integral part of how we do business. This isn't new to us, but the speed and focus of technology has certainly been heightened over the past three years.

Speaker 5: Eerie strategy in essence is to modernize our business model with career digital capabilities or continue our investment in one of our most unique assets.

Speaker 5: and S&S system modernize our business model with greater digital capabilities, will continue our investment in one of our most unique assets, our independent agency force.

Speaker 5: And because of the face of technology, we're focused on acceleration and agility to get that strategic work done. This means working faster, working smarter, and being nimble. It also means setting objectives and tracking key results to ensure we're hitting goals and timelines, engaging the effectiveness and success of our overall strategy. Not only will it allow us to modernize legacy platforms and bring new products and services to work it more quickly.

Speaker 5: A shorter run times for major projects and initiatives will also lead to expense reductions. This accelerated agile approach was used to launch a recent pilot for a new online quoting an agent routing program called quote flow.

Speaker 5: This aims to capture more digital prospects to a more streamlined quoting process combined with personal interaction with an area agent. It brings together the technology to meet customers where they are with the human touch that differ in J. Ziri from the competition, which is exactly what our strategy is about. Following the pilot, we expect to expand the program to more agencies throughout 2023.

Speaker 5: We also continue to invest in our new enhanced ways to serve our existing customers. Our online account platform, which acts as a digital, sell service tool for customers, is now used by more than 1 million households, and chat services that become a popular feature of the customer experience.

Speaker 5: More than 22,000 conversations were handled by the digital services team last year. It increased more than 200% over 2021. Based on recent survey data, customers rated the tool an average of 4.7 out of 5. Two new products launched in 2022 are also showing promising early results. The combined cyber sweep coverage, which protects businesses against cyber attacks, now covers more than 11,000 ear security.

Speaker 5: The relationship we have with our agency force is unparalleled.

Speaker 5: We place a high priority on seeking their input, recognizing their successes, and making sure they have the very best products, technology, and business processes in place.

Speaker 5: These efforts were recognized recently when Erie was ranked highest among personalized insurers in the JD Power 2022 U.S. Independent Asian Satisfaction Study released in October .

Speaker 5: This is the second year in a row that independent property cashier insurance agents have rated your highest in satisfaction. Our independent agent distribution model has been a key driver of our success for nearly 100 years, and we will continue to build a matriation of trust and collaboration as we continue moving over our second century.

Speaker 5: Before we close, I do want to acknowledge some changes to our executive team that have been announced since our last call. As we share publicly in November , Executive Vice President and Chief Financial Officer Greg Thatting will be retiring at the end of April . Greg is familiar voice on this call and he's been an extremely valuable member of our executive team. Both for the wise financial perspective and expertise he offers.

Speaker 5: and the institutional knowledge he's gained in his nearly 40-year career in Erie. His partnership will be truly messed. Julie Pellakowski will succeed right to become executive vice president and chief financial officer on May 1st.

Speaker 5: Julie currently serves as Senior Vice President of our Enterprise Office. Prior to taking on that leadership role last year, Julie served as Senior Vice President and Controller. She began her career in 1991 with the Light and Toosh and joined IRI in 1998 as an internal auditor if we're moving into various leadership roles within our finance division. Julie's years of exceptional leadership have positioned us strongly for the future.

Speaker 5: Finally, we welcome to our executive team, Sean Dugan. Sean was promoted to your executive vice president of Human Resources and Corporate Services on January 1st. Since 2020, Sean has led our Human Resources as Senior Vice President and prior to that he held the position of Corporate Human Resources Officer. We have a special report for our comrades and for all our patients across the country.

Speaker 5: As 30-year eerie career includes leadership roles spanning underwriting, corporate training, development, televac position, and community outreach. Sean Dexfartis involved business and support functions and his deep knowledge of the organization is a tremendous asset to our executive team. As always, I'd like to thank our employees and agents for their dedication.

Speaker 5: to our above all in the service commitment, our shareholders for their continued support and trust, and all of you for your continued interest in your e. Thank you all for listening and today. Ladies and gentlemen, this concludes the program. Thank you for your participation. You may now disconnect. Connect.

Speaker 1: The conference will begin shortly. To raise and lower your hand during Q&A you can dial star 1-1.

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Speaker 4: great gutting, executive vice president and chief financial officer. Our ring release supplemented by an instrument where you should yesterday afternoon, after the market closed and are available within the Investor Relations section of our website ureinsurance.com. Before we begin, I would like to remind everyone that today's discussion may contain for the remarks.

Speaker 4: Very much 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 in different materially from those described in these remarks.

Speaker 4: For information on important factors that make all of this difference is, please see the State Parvast statements in our form 10k filing with the SEC filed yesterday and in the related press release. This pre-recorded call is the property meeting deputy company.

Speaker 7: It may not be reproduced or rebroadcast by any other party without the prior written consent of your indemnity company.

Speaker 5: With that, we'll move on to Kenji Marks. Ken? Thanks Scott, and thanks to all of you for taking time to learn more about your performance in the fourth quarter of 2022 and our year-end results.

Speaker 5: As you're all aware, we find ourselves in the time of historic economic challenges. Inflation, supply chain issues, and labor shortages, to name just a few of the challenges, have put substantial pressure on our bottom line, which will cover in more detail in a few minutes. Fortunately, our first events through 98 years of stability is helping us adapt to and withstand the current financial climate.

Speaker 5: Our ability to adapt is also a helpless transition to new ways of working for the past year. Throughout 2022, we returned employees and welcomed new buyers to our offices. We also began resuming the in-person gatherings that had been canceled or shifted to a virtual format for more than two years during the height of the pandemic. It's been a learning experience as we've entered its greater flexibility in how and where people collaborate and connect. The majority of eerie employees are now working in a hybrid format, splitting their time between in-office and remote work. Many of our office spaces are now neighborhoods.

Speaker 5: Our ability to adapt is also a helpless transition to new ways of working for the past year. Throughout 2022, we returned employees and welcomed new buyers to our offices. We also began resuming the in-person gatherings that had been canceled or shipped to a virtual format for more than two years during the height of the pandemic. It's been a learning experience as we've entered into greater flexibility in how and where people collaborate and connect. The majority of eerie employees are now working in a hybrid format, splitting their time between in-office and remote work. Many of our office spaces are now neighborhoods, a mixture of dedicated and flexible workspaces.

Speaker 5: And meeting rooms have been equipped with new technology that supports the experience of employees participating in both in-person and virtually. It's clear that the world of work has changed significantly over the past three years, and the competition for talent continues. That's why gathering employee feedback is critical to making sure we're handling these returns the right way. We'll continue to learn and adapt to these new ways of working to assure Erie remains an employer of choice in today's tight talent market while maintaining the culture, traditions, and relationships that are so important to us.

Speaker 5: and distinctive to our service brand. Before I share some additional updates from the past year, let's share our fourth quarter and your financial results. As I mentioned earlier, we are feeling the impact of the current economic climate, most notably in the combined ratio for area insurance exchange, which was 116.1% for 2022 compared to 103.9% for 2021. While we saw claims reconsider means slightly below pre-pandemic levels in the fourth quarter, we continue to see higher than usual severity.

Speaker 5: A lot of repair costs are up 19.5% through December . The consumer price index is up 6.5% and more extreme weather events like hurricanes and thunderstorms are creating higher industry property losses. Like the rest of the industry, we've responded to these economic challenges through rate increases, which we're doing with a measured approach along with expense management at Harry Dora Strait's Underwriting Guidelines and Agency Profitability Reviews.

Speaker 5: In this continued hard market, we know more customers will shop. While customers may be looking for a more attractive price, they also demand a superior value proposition. That's something that Iriovars and we're pleased to see that reflected in our growth numbers.

Speaker 5: Our top line growth is strong this past year. Its premium growth climbed in M. Prince's 9.2% and new business premium increased 14.5%. Overall, policies in force are up 3.6% and our retention rate remains strong at over 90% for personal and commercial lines combined.

Speaker 4: With that, I'll pass it to Greg for a deeper review of the financials. Greg? Thanks, Tim. As Tim alluded to at the beginning of this discussion, the exchange, the insurance operations we manage, continues to see unprecedented loss costs related to claim severity driven by inflation. Because of this deep rise in claims costs, we have quickly adapted.

Speaker 4: become more agile. Agile in a way that still compels us to perform for our policy holders and agents. We have taken a more diligent approach to underwriting, and we've also taken a deeper look into our policy rate structures. All of these efforts are putting us in a position to deliver improved financial results as we are already seeing top-line growth. The exchange, direct-written premium growth for the fourth quarter was 12.1%.

Speaker 4: driven by an increase in the average premium per policy and increased policy retention. For the year, the exchange saw an increase in direct rate and premiums of 9.2% compared to 2021.

Speaker 4: The increase was driven by strong new policy growth of 3.7%, and an increase in new director and premium of 14.5%, combined with increased policy retention. Turning to the results for indemnity, net income was over $65 million or $1.25 per deluded share in the fourth quarter of 2022 compared to $55 million or $1.05.

Speaker 4: per deluded share in the fourth quarter of 2021. 2022 total year net income was $299 million, or $5.71 per deluded share, compared to $298 million, or $5.69 per deluded share in 2021. Operating income in the fourth quarter increased nearly $20 million or 31.7% compared to the fourth quarter of 2021. 2021.

Speaker 4: From a total year perspective, indemnally experienced an increase in operating income of $58 million or 18.3% compared to 2021. Management fee revenue from policy issuance and renewal services increased over $53 million or 11.8% in the fourth quarter of 2022 compared to the fourth quarter of 2021. And almost $175 million or 9.1% for the total year compared to 2021.

Speaker 4: The increases in both the fourth quarter and total year were driven by increases in the direct and assumed written premiums of the exchange. The total cost of operations from policy issuance and renewal services increased $35 million for the fourth quarter and over $118 million for the total year 2022 compared to the same period in 2021. Commission expenses for the fourth quarter grew $16 million while the total year commission expense increased $71 million.

Speaker 4: Similar to the management fee, the increase in both the fourth quarter and total year were driven by an increase in the direct and affiliated assumed written premiums. Turning to our non-commissioned expenses for the fourth quarter in Emily Saun increase of over $19 million, compared to the fourth quarter of 2021. The fourth quarter increase was driven by increases in underwriting and-

Speaker 4: during by personnel costs as well as underwriting report costs.

Speaker 4: Information technology costs grew $13 million due to increased hardware and software costs, as well as personnel costs.

Speaker 4: Sales and advertising costs increase $7 million due to increased advertising in agent-related costs. And finally, administrative and other expenses increased nearly $23 million, driven by personnel costs related to compensation and increased professional fees.

Speaker 4: In demnese fourth quarter, pre-tax income from investment total $300,000. This represents a decrease of roughly $12 million compared to the fourth quarter of 2021.

Speaker 4: The decrease was driven by losses in the limited partnership investments. And Emily's total year of pre-tax income from investments was just over $600,000, a decrease of $67 million compared to 2021. The large decrease is attributable to losses in our limited partnership portfolio of $10 million. Recorded in 2022, compared to earnings on limited partnerships of $32 million recorded in 2021.

Speaker 4: And, Emily also incurred $27 million in realizing unrealized losses in 2022, compared to gains of $5 million recorded in 2021. I will remind you that the limited partnership asset classes and runoff, and we continue to expect more limited and inconsistent earners from this asset class in the future. Thank you.

Speaker 4: Finally, in 2022, we paid our shareholders dividends in the amount of $207 million. Also, 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 2023. Now I'll turn the call back over to Tim. Tim? Thank you.

Speaker 4: Finally, in 2022, we paid our shareholders dividends in the amount of $207 million. Also, 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 2023. Now I'll turn the call back over to Tim. Tim? Thank you, Greg. Thank you.

Speaker 5: Technology has not only become vital to how our workforce connects, but it's also an integral part of how we do business. This isn't new to us, but the speed and focus of technology has certainly been heightened over the past three years.

Speaker 5: Eerie strategy in essence is to modernize our business model with greater digital capabilities while continuing our investment in one of our most unique assets. Our independent agency force.

Speaker 5: And because of the face of technology, we're focused on acceleration and agility to get that strategic work done. This means working faster, working smarter, and being nimble.

Speaker 5: It also means setting objectives and tracking key results to ensure we're hitting goals and timelines, engaging the effectiveness and success of our overall strategy. Not only will this allow us to monitor as legacy platforms and bring new products and services to market more quickly, but shorter run times for major projects and initiatives will also lead to expense reductions. The accelerated agile approach was used to launch a recent pilot for a new online...

Speaker 5: Following the pilot, we expect to expand the program to more agencies throughout 2023.

Speaker 5: We also continue to invest in our new enhanced ways to serve our existing customers. Our online account platform, which acts as a digital, sell-service tool for customers, is now used by more than 1 million households, and chat services have become a popular feature of the customer experience.

Speaker 5: More than 22,000 conversations were handled by the Digital Services team last year. It increased more than 200% over 2021. Based on recent survey data, customers rated the tool an average of 4.7 out of 5.

Speaker 5: Two new products launched in 2022 are also showing promising early results. The combined cyber-sweet coverage, which protects businesses against cyber attacks, now covers more than 11,000 eerie secure business customers. An extended water coverage, which was piloted in two states in early 2022, and rolled out to 10 states within our footprint in the second half of the year, has been added nearly 14,000 policies so far, protecting customers against certain types of water damage.

Speaker 5: As we've always done, we're developing and refining these new products and services alongside our independent agents. The relationship we have with our agency course is unparalleled. We place a high priority on seeking their input, recognizing their successes, and making sure they have the very best products, technology, and business processes in place. These efforts were recognized recently when Erie was ranked highest among personalized insurers in the JD Power 2022 US Independent Agents Satisfaction Study released in October . This is the second year in a row. The independent property cash gain insurance agents have braided Erie highest in satisfaction.

Speaker 5: Our independent agent distribution model has been a key driver of our success for nearly 100 years, and we will continue to build a matriation of trust and collaboration as we move into our second century. Before we close, I do want to acknowledge some changes to our executive team that have been announced since our last call. As we share publicly in November , Executive Vice President and Chief Financial Officer, Greg Thatting, will be retiring at the end of April . Greg is the familiar voice on this call, and he's been an extremely valuable member of our Executive Team. Both for the wise financial perspective and expertise he offers, and the institutional knowledge he's gained in his nearly 40-year career at Erie. His partnership will be truly messed.

Speaker 5: Julie Pellakowski will succeed right to become executive vice president and chief financial officer on May 1st. Julie currently serves as senior vice president of our enterprise office. Prior to taking on that leadership role last year, Julie served as senior vice president and controller. She began her career in 1991 with Delight and Tush and joined area in 1998 as an internal auditor before moving into various leadership roles within our finance division. Julie's years of extational leadership have positioned us strongly for the future. Finally, we welcome to our executive team, Sean Dugan. Sean was promoted to your executive vice president of the Human Resources and Corporate Services on January 1st.

Speaker 5: Since 2020, Shawn has led our Human Resources as Senior Vice President and prior to that, he held the position of Corporate Human Resources Officer. His 30-year-old career includes leadership roles spanning underwriting, corporate training, development, talent acquisition, and community outreach. Shawn's expertise in both business and support functions and his deep knowledge of the organization is a tremendous asset.

Speaker 5: to our executive team. As always, I'd like to thank our employees and agents for their dedication to our above all in the service commitment, our shareholders for their continued support and trust, and all of you for your continued interest in your e-mail. Thank you all for listening in today. Ladies and gentlemen, this concludes the program. Thank you for your participation. You may now disconnect. Thank you.