Q2 2023 Erie Indemnity Company Pre Recorded Earnings Call
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Good morning, and welcome to the Erie Indemnity Company second quarter 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 Hartz.
Thank you and welcome everyone.
We appreciate you joining us recorded discussion about our second quarter results.
This recording one could remarks from Timna Castro, President and Chief Executive Officer, and Julie Perkowski, 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 your 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.
These remarks are based on assumptions.
Any 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 July 27, 2023 and in the related press release.
If pre recorded call is the property of the indemnity company.
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, Tim.
Thanks, Scott and thanks to all of you for your interest in <unk> performance for the second quarter of 2023.
The executive team and I have spent a lot of time over the past few months connecting with our various stakeholders.
With agents at our annual branch meetings across our footprint and at our combined agency Task Force meeting urinary with employees that are open door leader Forum and claims recognition meetings.
Investors at our annual meeting of shareholders held in April .
Frequent topic of discussion at these recent gatherings has been the challenges the industry continues to face.
Inflation supply chain issues and an increase of severe weather are among the most pressing and we're certainly feeling the effects of them so far in 2023.
That's reflected in our combined ratio, which now stands at $1 28 compared to $113 seven for the first half of 2022.
Both personal and commercial lines continue to experience an increase in severity for property auto and uninsured and underinsured motorist claims although costs are growing at a more moderate pace than in the prior year.
Year to date personal auto claim severity is up 6% compared to last year and 21% since 2021.
Weather and catastrophe losses are also on the rise Hale wind and tornadoes have been battering areas across our footprint in the first half of the year.
Through June of 2023 catastrophe event claim counts were up nearly 70% compared to 2022 and catastrophe claims contributed 16% of the combined ratio at the end of the second quarter compared to 10% in 2022.
While many of the external factors impacting the combined ratio are out of our control, we're taking actions within our control to bring it down to more favorable levels.
Financial Officer, Julie Pell Koski, we'll be talking more about some of those strategies and just a few minutes.
And despite the factors impacting our combined ratio overall performance picture is strong, especially in our growth and retention numbers.
Overall policies in force are up five 2% with personal lines, reaching its highest growth in 20 years at five 5%.
Retention was also strong at 98% for personal and commercial lines combined with retention for personal auto which stands at 92, 3% approaching an all time high.
This impressive growth and loyalty demonstrated by our policyholders as a testament to the strong value proposition we offer.
Our recent ranking on the Fortune 500 list for the 20th consecutive year. This year at number for 2014 is yet another.
All said, we are confident in our overall financial stability as we continue to navigate the challenges of today's world.
With that I'd like to turn it over to Julie <unk> ask you to offer a closer look at our financials. This is julie's first earnings call since taking the reins as <unk> Chief Financial Officer and me welcome.
Welcome Julie.
Thank you, Tim and good morning, everyone.
Over the course of my 25 year career with Erie I have had the pleasure of working across several different disciplines that have prepared me for the role of CFO and I'm delighted to be with you. This morning to share our second quarter results.
As Tim mentioned, our business experienced an unusually early and severe start dorm season, and we continue to feel the pressure of the inflationary conditions that are contributing to higher loss severity. These two factors are the primary drivers of the increase in our combined ratio in the exchange.
While we are prioritizing efforts to improve the exchanges profitability the exchange generated substantial growth in the second quarter of 2023. This quarter marks the first time in our history that we've written over $1 billion of direct written premium in a single quarter.
This strong production growth drove the increase in the amount of management fee revenue for the Indemnity company, which Youll see as we review our second quarter 2023 result.
Starting with the exchange the insurance operations, we manage direct written premium growth for the second quarter was 16, 3% driven by substantial growth in new business premium, which climbed almost 32, 6% over the prior year.
With a combined ratio for the quarter of 118, 9% the exchange's policyholder surplus decreased to $9 7 billion down 400 million from December 31.
The primary focus of our strategy to address the elevated combined ratio is taking rate increases to more appropriately matched the level of losses were experiencing in the current environment.
This has resulted in us taking double digit rate increases and also evaluating our rating needs more frequently.
Of course, we monitor our competitive position and the rate increases we are taking are in line with the industry.
We also stay focused on our underwriting and agency management discipline and have identified certain initiatives targeted toward improving profitability.
These strategies along with several others will allow us to continue driving down our overall combined ratio.
Now shifting to indemnity.
In the second quarter indemnity generated net income of $118 million or $2 25 per diluted share compared to $80 million or $1 53 per diluted share in the second quarter of 2022.
For the first half of 2023 net income was $204 million or $3 90 per diluted share an increase compared to the first half of 2022 net income of $149 million or $2 84 per diluted share.
Operating income increased 29% or $30 million in the second quarter of 2023 compared to the second quarter of 2022 and.
Indemnity also saw an increase in operating income of 29, 9% or $56 million for the first half of this year compared to the first half of last year.
Indemnities management fee revenue for policy issuance and renewal services increased $89 million or 16, 3% in the second quarter of 2023 compared to the second quarter of 2022.
For the first six months of 2023 indemnity saw an increase of $159 million or 15, 4% compared to the first half of 2022.
Management fee revenue allocated to administrative services increased just over $1 million in the second quarter and $2 million in the first six months of 2023 compared to the same periods in 2022.
Turning to indemnities cost of operations for policy issuance and renewal services commissions increased $44 million in the second quarter and $71 million in the first half of 2023 compared to the same periods in 2022.
The increases in agent compensation in both periods were driven by growth in direct and affiliated assumed written premium partially offset by a decrease in agent incentive compensation.
Non commission expenses increased $16 1 million in the second quarter of 2023 compared to 2022.
Underwriting and policy processing expense increased $3 7 million primarily related to the increased production growth.
Information technology costs increased by $3 3 million driven by increased personnel costs and professional fees.
Also administrative and other expenses increased $7 7 million in the second quarter of 2023 compared to the same period in 2022, driven by increases in personnel costs, partially offset by a decrease in professional fees.
For the first six months of 2023 indemnity saw an increase in non commission expenses of $33 million, primarily driven by increases in technology costs of $14 8 million and administrative and other costs of $10 6 million.
The increased technology costs were driven by higher professional fees personnel costs and hardware and software costs.
Administrative and other costs increased $10 6 million, primarily due to an increase in personnel costs, partially offset by a decrease in professional fees.
Overall personnel costs were impacted by increased compensation, including higher estimated costs for incentive plan award, partially offset by lower pension costs compared to 2022.
Investment income before taxes totaled $12 million in the second quarter compared to a loss from investments before taxes of $2 million in the same period of 2022.
For the first six months of 2023, we recorded investment income before taxes of $7 million compared to $1 million in the first six months of 2022.
While we recognize limited partnership losses in the first six months of 2023. These losses were offset by both higher bond net investment income and lower realized and unrealized losses on equity securities, which drove the improvement over the same period of 2022.
I will remind you that the limited partnership asset classes in runoff and we continue to expect more limited and inconsistent earnings from this asset class in the future.
As always we take a very measured approach to our capital management and we maintain a strong balance sheet for the first six months of 2023, our financial performance enabled us to pay our shareholders over a $110 8 million in dividends.
Thank you again for your time today now I'll turn the call back over to Tim Tim.
Thanks Julie.
Another major topic of discussion recently has been our focus on monetization.
As I've mentioned in previous calls transitioning out of legacy platforms and investing in greater digital capabilities are among our highest priorities in 2023.
Recent updates to our claim status platform provide more robust claims information to agents employees and customers on a more intuitive platform.
And another claims platform Erie claim center was recently migrated to the cloud.
This was our largest migration to date with several more planned as part of <unk> overall cloud transformation initiatives.
We expect these innovative efforts to increase speed and productivity across the enterprise.
Another key modernization effort is tied to our upcoming refresh of workers' compensation, which we'll introduce full policy servicing capabilities on our application and service platform.
A new billing platform that allows for enhanced pay as you go functionality and the introduction of online accounts for our commercial customers.
We also continue to make enhancements to our mobile App and online account platform.
Most recently, we introduced self service functionality roadside assistance and the mobile app through Gerald.
Several other modernization efforts are also underway all aimed at helping us to increase efficiency reduce expenses and to better serve our customers and agents.
Expect to hear more updates on this work in future earnings calls.
You had another challenge almost all industries have been facing recently has been the tight labor market and the war for talent.
We're pleased to share that the challenges in attracting and retaining talent, we experienced in 2021 and 2022 have leveled out.
And our claims division, where we experienced some of the biggest talent challenges all of new positions have been filled.
And we've developed an advanced staffing capacity tool that enables us to identify and respond to staffing needs in real time.
In this tough labor market workplace accolades are particularly important.
So we're excited to have recently earned the great place to work certification from the great place to work Institute.
This recognition is based on the results of an engagement survey central all Erie employees in June .
Four out of five Erie employees completed the survey and 86% of those employees said area as a great place to work this.
This compares to just over half or 57% of employees at typical U S based companies and 91% for the benchmark set by Fortune 100, Best places to work.
We're proud of our longstanding reputation as an employer, who places a great deal of importance on our workforce culture and treats employees like family. This.
This recognition as a certified great place to work affirms that commitment.
We're also proud to have recently earned a global distinction as one of the one of only four U S. Based insurers named all three of Forbes world's best insurance companies list for 2023.
Orbs ranked the best insurance companies in three areas homeowners auto and life insurance.
Erie insurance ranked number five in the U S for auto number seven in the U S for homeowners and number 11 in the U S for life.
With that I'd like to thank you all again for listening in today and for your continued interest in Erie.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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