Q3 2023 Erie Indemnity Co Earnings Call

Thank you and welcome everyone.

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

This recording will include 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 close and are available within the Investor Relations section of our website.

Current dotcom.

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 filings with the SEC dated October 26, 2023, and the related press release.

This prerecorded call is the property of Erie Indemnity company.

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, Tim.

Thanks, Scott and good morning, everyone.

Before we get into our financial results for the third quarter I'd like to share some details around our recent announcement, we made related to our approach to hybrid work.

We began to return to onsite work last year, we acknowledged we would need to learn and adapt we knew we'd likely evolve as we experiment with new ways of working following the pandemic.

Now after more than a year working on a variety of hybrid arrangements. We've learned we need a more consistent approach to how we work.

We believe it's important to increase the opportunities for employees to work together in person to collaborate and learn from one another.

This helps us build stronger bonds with our colleagues and ultimately stronger teams.

We also know that in person interaction is important to our business for building new relationships vital to our business model.

Upholding our service promise to customers and agents.

At the same time, we ran.

<unk> employees have come to value the flexibility hybrid arrangements offer.

With all that considered we landed on a balanced and innovative approach it.

It increases the opportunities for in person interactions, while giving employees more choice over when they work remotely.

Starting in January employees, and hybrid rules will be given an allotment of 52 days to work remotely each year.

Employees will work onsite in our offices on days that they are not using a lot of the remote date.

This revised approach preserves distinct relationship aspects of our business and the vibrant Erie workplaces that support our collaboration creativity and success.

Now, let's turn to our financial performance for the third quarter of 2023.

With respect to the Erie insurance exchange inflation and weather related events continued to adversely impact our combined ratio.

Our year to date net combined ratio claimed or 128% through the first two quarters to 121, 9% by the end of September.

Positive investment income was not enough to offset underwriting losses, resulting in a surplus decline of 6% since the second quarter How's.

However, we remain very strong financially and overall surplus position $9 1 billion.

Like many other carriers, we've been taking rate increases to improve our profitability.

These increases along with an upsurge in customer shopping in response to rising industry rates have contributed to the 20 year high or growth in our direct written premium.

Net growth, which is over 16% year to date.

As trigger supported by strong retention of 91% for personal and commercial lines combined.

With that I'll turn it over to our Chief Financial Officer, Julia Kankowski for a more detailed review of our financials.

Thank you, Tim and good morning, everyone.

As Tim mentioned, the third quarter was similar to the first two quarters of this year, we are still being impacted by weather related events across our footprint and we continue to experience an elevated combined ratio.

Inflationary pressures.

That said I am pleased to share that during the third quarter. The a M. Best rating agency once again affirmed our a plus superior ratings for financial strength.

Now, let me get into the details at hand for the quarter as I noted weather challenges continued in the third quarters somewhat unexpectedly typically storm activity diminishes in the second half of the year, but our footprint experienced two significant wind events in the early part of the third quarter.

Catastrophe losses in the quarter also increased.

Two adverse loss development associated with prior storms occurring earlier this year.

Non catastrophe property claims severity continues to grow in both personal and commercial lines, albeit at a more moderate rate than 2022.

Personal auto severity increases of 6% in 2023 are about half the level. They were in 2022, while commercial auto and homeowners severity increase remain about 10%.

To combat the increase in the combined ratio, we continue to take rate increases tightened underwriting guidelines and implement strategic agency management practices.

In mind that our policy span 12 months and we will see a much more significant benefit next year from those increases as they are realized.

Even with these rate increases we are still maintaining high levels of retention, which is complementing our new business growth.

For the year, we've increased new business premium more than 36% and total premium more than 16%.

With respect to the exchange the insurance operations, we manage direct written premium growth for the third quarter was 17, 6% driven by substantial growth in new business premiums, which grew almost 40% over the prior year.

With a net combined ratio for the quarter of $1 24 per cent.

Exchange's policyholder surplus decreased to $9 1 billion down nearly 1 billion from December 31.

Now shifting to indemnity in the third quarter indemnity generated net income of $131 million or $2 51 per diluted share compared to $84 million or $1 61 per diluted share in the third quarter of 2022.

For the first nine months of 2023, net income was $335 million or $6 41 per diluted share compared to $233 million or $4 46 per diluted share for the same period in 2022.

Operating income increased 39% or 42 million in the third quarter of 2023 compared to the third quarter of 2022.

<unk> also saw an increase in operating income of 33% or $98 million for the first nine months of this year compared to the first nine months of 2022.

Indemnity management fee revenue for policy issuance and renewal services increased 97 million or 17, 7% in the third quarter 2023 compared to the third quarter of 2022.

For the first nine months of 2023 indemnity saw an increase of $236 million or 16, 2% compared to the same period of 2022.

Management fee revenue allocated to administrative services increased one 5 million in the third quarter and $3 5 million in the first nine months of 2023 compared to the same periods in 2022.

Turning to indemnities cost of operations for policy issuance and renewal services commissions increased $45 million in the third quarter and $116 million in the first nine months 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 nearly $13 million in the third quarter of 2000 to 2023 compared to 2022.

We're writing and policy processing expenses increased almost 3 million primarily related to increased underwriting report costs.

Information technology costs increased by almost 1 million driven by increased professional fees.

Also administrative and other expenses increased just under 10 million in the third quarter of 2023 compared to the same period in 2022, driven by increases in personnel costs and professional fees.

For the first nine months of 2023 indemnity saw an increase in non commission expenses of nearly $48 million.

Expenses were primarily driven by increases in technology investments of almost $16 million, including professional fees hardware software and personnel costs.

Underwriting and policy processing expenses increased just over 9 million due to increased reporting personnel and postage costs.

Administrative and other costs increased over $29 million due to an increase in personnel costs.

Overall personnel costs were impacted by increased compensation, including higher estimated costs for incentive plan Award.

This was partially offset by lower pension costs compared to 2022 due to an increase in the discount rate.

The increases in incentive plan costs were driven by improved direct written premiums and policies in force growth and a higher company stock price at September 32023, compared to September 32022.

Investment income before taxes totaled just over $12 million in the third quarter compared to a loss from investments before taxes of nearly $1 million in the same period of 2022.

For the first nine months of 2023, we recorded investment income before taxes of $19 2 million compared to 300000 in the first nine months of 2022.

As always we take a very measured approach to our capital management and we maintain a strong balance sheet.

The first nine months of 2023, our financial performance enabled us to pay our shareholders over $166 million in dividends.

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

Thanks Julie.

As we head into the last part of the year, we continue to make progress in our journey to modernize our legacy platforms and enhance our digital capabilities.

In September we launched a pilot for a refresh workers' compensation platform.

The refresh introduces full policy servicing capabilities, our application and service platform.

Actually of online accounts for our commercial customers and a new billing platform that allows customers to manage their accounts.

The enhanced platform is being piloted in Indiana.

<unk> rollout to additional states before the end of this year.

We're also seeing positive impacts of some of the digital answers made earlier in the year, our agents asked for more capabilities to connect with customers through our online account platform now.

Now thanks to updates made to our claims that portal earlier in the year customers and agents have important claims status information at their fingertips, along with many other options, including online auto I'd cards and paperless invoicing.

And our third quarter, we've seen customer engagement claim status grow by 8% compared to last year. At this time, we believe this consistent growth will continue into 2024.

Before we close I'd like to make note of several recent accolades for our business in our workplace.

Forbes has recognized Erie on its 2024 list of America's Best insurance companies of.

Of the 84 companies on the list here. It was one of only five to Meeker rankings in all five categories.

<unk> was ranked first in permanently.

Fifth in term life six donato.

700, and renters and.

In eighth in homeowners.

<unk> was also recently named to Newsweek's list of America's Best customer service 2024, and the categories of homeowners and life insurance.

These rankings were based on customers' likelihood to recommend as well as criteria like customer focus all year.

Mitigation professional competence range of services and <unk>.

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Investor's business daily as listed here on its 2023, most trusted financial companies list list.

The list is based on a survey that asked consumers to read their financial service providers on attributes space that are most important to them.

<unk> ranks number two in both auto and home insurance and 13th overall.

On the workplace side three of our employee affiliate networks earned 2023 diversity impact awards from the global employee Resource Group network.

This is the world's largest network of employee resource groups business resource groups and diversity Council is dedicated to making measurable progress Chris on diversity equity and inclusion.

Fred Johnson, Vice President of the Wisconsin branch and executive sponsor of your East African American affinity network was also 106 recipients of the networks diversity impact executive sponsor of the year Award for a third straight year.

Finally, our future focused internship program has been named to the rising insurance Star Executive list of the industry's 50 best internship programs for the third consecutive year.

The future focus program has helped launch the careers of hundreds of current period employees, who started as in turns and it continues to serve as important talent pipeline.

This past summer more than 100 interns from 50 different colleges and universities.

Worked in departments across the company.

As always thank you again for listening in today and for your continued interest here.

Yes.

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

Okay.

[music].

Scott Beilharz: Thank you and welcome everyone. We appreciate you joining us for this recorded discussion about our third quarter results. This recording will include remarks from Tim NeCastro, President and Chief Executive Officer, and Julie Pelkowski, Executive Vice President and Chief Financial Officer. Our earnings release and financial supplement, where she'd yesterday afternoon, after the market closed, and are available within the Invest Relations section of our website, irinsurance.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.

Scott Beilharz: For information on important factors and may cause such differences, please see the safe harbor statements in our form 10 key filing with the SEC, dated October 26, 2023, and in the related press release.

Scott Beilharz: This pre-recorded call is a 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.

Scott Beilharz: With that, we'll move on to Tim's remarks.

Timothy NeCastro: Tim? Thanks, Scott.

Timothy NeCastro: Good morning, everyone. Before we get into our financial results for the third quarter, I'd like to share some details around our recent announcement we made related to our approach to hybrid work. We began to return to onsite work last year. We acknowledged we would need to learn and adapt. We knew we'd likely evolve as we experiment with new ways of working, following the pandemic. Now, after more than a year of working in a variety of hybrid arrangements, we've learned we need a more consistent approach to how and where we work.

Timothy NeCastro: We believe it's important to increase the opportunities for employees to work together in person to collaborate and learn from one another. This helps us build stronger bonds with our colleagues and ultimately stronger teams. We also know that in-person interaction is important to our business, for building the relationships vital to our business model and for upholding our service promise to customers and agents. At the same time, we recognize employees have come to value the flexibility hybrid arrangements offer.

Timothy NeCastro: We've all had considered we landed on a balanced and innovative approach. It increases opportunities for in-person interactions while giving employees more choice over when they work remotely. Starting in January, employees in hybrid roles will be given an allotment of 52 days to work remotely each year. Employees will work onsite in our offices on days that they are not using in a lot of remote day. This revised approach will help preserve distinct relationship aspects of our business and the vibrant eerie workplaces that support our collaboration, creativity and success.

Timothy NeCastro: And now let's turn to our financial performance for the third quarter of 2023. With respect to the eerie insurance exchange, insulation and weather related events continue to adversely impact our combined ratio. Are your-to-date net combined ratio climbed from 120-28% through the first two quarters to 121.9% by the end of September? As it has been, investment income was not enough to usfit underwriting losses, resulting in the surplus decline of 6% since the second quarter.

Timothy NeCastro: However, we remain very strong financially in an overall surplus position of $9.1 billion. Like many other carriers, we have been taking great increases to improve our profitability. These increases, along with enough surge in customer shopping in response to rising industry rates, have contributed to the 20-year high for growth in our direct burden premium. That growth, which is over 16% year to date, is progress supported by strong retention of 91% for personal and commercial lines combined.

Julie Pelkowski: With that, I'll turn it over to our chief financial officer, Julie Pelkowski, for a more detailed review of our financials. Thank you, Tim, and good morning, everyone. As Kim mentioned, the third quarter was similar to the first two quarters of this year. We are still being impacted by weather-related events across our footprint, and we continue to experience an elevated combined ratio due to inflationary pressures. That said, I am pleased to share that during the third quarter, the AMBest rating agency, once again, affirmed our A-plus superior rating for financial strength.

Julie Pelkowski: Now, let me get into the details at hand for the quarter. As I noted, weather challenges continued in the third quarter somewhat unexpectedly. Typically, storm activities diminishes in the second half of the year, but our footprint experience two significant wind events in the early part of the third quarter. Catastrophe losses in the quarter also increased due to adverse loss development associated with prior storms occurring earlier this year. Non-catastrophe property claims severity continued to grow in both personal and commercial lines, albeit at a more moderate rate than 2022.

Julie Pelkowski: Personal auto severity increases of 6% in 2023 are about half the level they were in 2022, while commercial auto and homeowner severity increase remain about 10%. To combat the increase in the combined ratio, we continue to take rate increases, tighten underrating guidelines, and implement strategic agency management practices. Keep in mind that our policy spans 12 months, and we will see a much more significant benefit next year from those increases as they are realized.

Julie Pelkowski: Even with these rate increases, we are maintaining high levels of retention, which is complementing our new business growth. For the year, we've increased new business premium more than 36% and total premium more than 16%. With respect to the exchange, the insurance operations we managed, direct-written premium growth for the third quarter was 17.6%, driven by substantial growth in new business premium, which grew almost 40% over the prior year.

Julie Pelkowski: With a net combined ratio for the quarter of 124%, the exchange's policyholder surplus decreased to 9.1 billion, down nearly 1 billion from December 31st.

Julie Pelkowski: Now, shifting to Indemnity, in the third quarter, Indemnity generated net income of $131 million or $2.51 per diluted share compared to $84 million or $1.61 per diluted share in the third quarter of 2022. For the first nine months of 2023, net income was $335 million or $6.41 per diluted share. Compared to $233 million or $4.46 per diluted share for the same period in 2022.

Julie Pelkowski: Operating income increased 39% or 42 million in the third quarter of 2023 compared to the third quarter of 2022. Indemnity also saw an increase in operating income of 33% or 98 million for the first nine months of this year compared to the first nine months of 2022. Indemnity's management fee revenue for policy issuance and renewal services increased 97 million or 17.7% in the third quarter of 2023 compared to the third quarter of 2022.

Julie Pelkowski: For the first nine months of 2023, Indemnity saw an increase of $256 million or 16.2% compared to the same period of 2022. Management fee revenue allocated to administrative services increased $1.5 million in the third quarter and $3.5 million in the first nine months of 2023 compared to the same period in 2022. Turning to Indemnity's cost of operations for policy issuance and renewal services, commissions increased $45 million in the third quarter and $116 million in the first nine months of 2023 compared to the same period in 2022.

Julie Pelkowski: The increases in agent compensation in both periods were driven by growth and direct and affiliated assumed written premium partially offset by a decrease in agent incentive compensation. Non-commissioned expenses increased nearly 13 million in the third quarter of 2023 compared to 2022. Underwriting and policy processing expenses increased almost 3 million primarily related to increased underwriting report costs. Information technology costs increased by almost 1 million driven by increased professional fees. Also administrative and other expenses increased just under 10 million in the third quarter of 2023 compared to the same period in 2022 driven by increases in personnel costs and professional fees.

Julie Pelkowski: For the first nine months of 2023, Indemnity saw an increase in non-commissioned expenses of nearly 48 million. Expenses were primarily driven by increases in technology investments of almost 16 million including professional fees, hardware, software and personnel costs. Underwriting and policy processing expenses increased just over 9 million due to increased reporting personnel and postage costs, of course. Administrative and other costs increase over 20 million due to an increase in personnel costs. Overall, personnel costs were impacted by increased compensation, including higher estimated costs for incentive plan awards.

Julie Pelkowski: This was partially offset by lower pension costs compared to 2022 due to an increase in the discount rate. The increases in incentive plan costs were driven by improved direct-written premiums and policies in force growth and a higher company stock price at September 30, 2023 compared to September 30, 2022.

Julie Pelkowski: Investment income before taxes totaled just over 12 million in the third quarter compared to a loss from investments before taxes of nearly 1 million in the same period of 2022. For the first 9 months of 2023, we recorded investment income before taxes of 19.2 million compared to 300,000 in the first 9 months of 2022.

Julie Pelkowski: As always, we take a very measured approach to our capital management and we maintain a strong balance sheet. For the first 9 months of 2023, our financial performance enabled us to pay our shareholders over 166 million in dividends.

Julie Pelkowski: Thank you again for your time today.

Timothy NeCastro: Now I'll turn the call back over to Tim. Tim? Thanks Julie.

Timothy NeCastro: As we head into the last part of the year, we continue to make progress in our journey to modernize our legacy platforms and enhance our digital capabilities. In September, we launched a pilot for our refreshed workers compensation platform. The refreshed introduces full-policy servicing capabilities, our float application and service platform, the introduction of online accounts for our commercial customers, and a new billing platform that allows customers to manage their account. The enhanced platform is being piloted in Indiana, but plans to roll it out in additional states before the end of this year.

Timothy NeCastro: We're also seeing positive impacts of some of the digital enhancements made earlier in the year. Our agents asked for more capabilities to connect with customers through our online account platform. Now, thanks to updates made to our claim staff as portal earlier in the year, customers and agents have important claim status information after fingertips, along with many other options, including online auto ID cards and paperless invoicing. In our third quarter, we've seen customer engagement and claim status grow by 8% compared to last year at this time. We believe this consistent growth will continue into 2024.

Timothy NeCastro: Before we close, I'd like to make note of several recent accolades for our business and our workplace. Forbes has recognized Eerie on its 2024 list of America's best insurance companies. Of the 84 companies on the list, Eerie was one of only five to make the rankings in all five categories. Eerie was ranked first in permanent life, fifth in term life, sixth in auto, seventh in renters, and eighth in homeowners. Eerie was also recently named to Newsweek's list of America's best customer service, 2024, in the categories of homeowners and life insurance. These rankings were based on customers likelihood to recommend, as well as criteria like customer focus, quality of communication, professional competence, range of services, and accessibility.

Timothy NeCastro: Investors Business Daily is listed in Erie on its 2023 most trusted financial companies list. The list is based on a survey that asks consumers to rate their financial service providers on attributes based that are most important to them. Erie writes number two in both auto and home insurance and 13th overall.

Timothy NeCastro: On the workplace side, three of our employee affinity networks turned 2023 diversity impact awards from the Global Employee Resource Group Network. This is the world's largest network of employee resource groups, business resource groups, and diversity councils dedicated to making measurable progress on diversity, equity, and inclusion.

Timothy NeCastro: Fred Johnson, vice president of the Wisconsin branch, an executive sponsor of Erie's African American Affinity Network, was also one of six recipients of the network's diversity impact executive sponsor of the year award for a third of its three year.

Timothy NeCastro: Finally, our future focus internship program has been named to the Rising Insurance Star Executive List of the industry's 50 best internship programs for the third consecutive year. The future focus program has helped launch the careers of hundreds of current Erie employees who started his interns, and it continues to serve as an important talent pipeline. This past summer, more than 100 interns from 50 different colleges and universities worked in departments across the company.

Timothy NeCastro: As always, thank you again for listening in today and for your continued interest here.

Scott Beilharz: This concludes today's conference call. Thank you for participating. You may now disconnect.