Q4 2023 Erie Indemnity Co Earnings Call - Pre-Recorded

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Operator: Good morning, and welcome to the Erie Indemnity Company fourth quarter and year-end 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 Investment Relations, Scott Balshars. Thank you, and welcome, everyone.

Good morning, and welcome to the Erie Indemnity company fourth quarter and year end earnings Conference call. This call was prerecorded and there'll be no question answer session. Following the recording.

I would like to introduce your host for the call Vice President of Investor Relations, Scott Pulse heart.

Thank you and welcome everyone.

Scott Balshars: We appreciate you joining us for this recorded discussion about our fourth quarter and year-end results. This recording will include remarks from Tim DeCastro, President and Chief Executive Officer, and Julie Palkowski, Executive Vice President and Chief Financial Officer. Our earnings release and financial supplement were issued yesterday afternoon after the market closed and are available in the investor relations section of our website erieinsurance.com.

We appreciate you joining us for this recorded discussion about our fourth quarter and year end results.

This recording will include remarks from Tinder Castro, President and Chief Executive Officer, and Julie took Housekeep 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.

Scott Balshars: 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 and are subject to known and unexpected risks and uncertainties. Such risks and uncertainties may cause results to differ materially from those described in these remarks.

Before we begin I would like to remind everyone that today's discussion may contain forward looking remarks.

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 Balshars: For information on important factors that may cause such differences, please see the Safe Harbor Statements in our Form 10-K filing with the SEC filed yesterday and in the related press release. This prerecorded call is the property of Erie Indemnity Company, and 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.

For information on important factors that may cause such differences.

Please see the safe Harbor statements in our Form 10-K filing with the SEC filed yesterday.

The related press release.

This prerecorded call is the property of Indemnity company.

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.

Tim DeCastro: Thanks, Scott, and thanks to all of you for taking the time to learn more about Erie's fourth quarter and year-end results for 2023. We're proudly moving closer to celebrating a century of service, and we're doing so as a company with $10 million in premium, a milestone reached in the fourth quarter of 2023. This came in a year of both record-setting growth and significant challenge. We saw net income for Erie Indem reach an all-time high of more than $446 million, and growth for Erie Insurance Exchange hit a 20-year high of 17%, helping us hit that $10 billion mark and move us towards 7 million policies in force. With all that said, we've certainly been feeling the negative effects of the economic and environmental pressures that continue to impact our industry. Weather-related claims rose to nearly 70,000 in 2023 compared to roughly 50,000 in 2022.

Thanks, Scott and thanks to all of you for taking time to learn more about <unk> fourth quarter and year end results for 2023.

We're probably moving closer to celebrating a century of service and we're doing so as a company with $10 billion in premium of.

The milestones reached in the fourth quarter of 2023.

This came in a year of both record setting growth and significant challenges we.

We saw net income for Erie Indemnity company reached an all time high of more than $446 million.

And growth for Erie insurance exchange at a 20 year high of 17%, helping us hit that $10 billion, Mark and moves us towards 70 million policies in force.

With all that said, we certainly have been feeling the negative effects of the economic and environmental pressures that continue to impact our industry.

Weather related claims rose to nearly 70000 and 2023 compared to roughly 50000 in 2022.

Tim DeCastro: Even with the typical decline in weather-related claims in the second half of the year and overall claim severity leveling out, we ended the year with a combined ratio of 119.1%, three points higher than year-end 2022. We have responded to the tough market conditions through rate increases. We're also reinforcing our focus on underwriting standards and partnering with our independent agents on individualized profitability action plans where appropriate. This multi-pronged approach is aimed at improving the combined ratio over time.

Even with the typical decline in weather related claims in the second half of the year and overall claims severity leveling out we ended the year with a combined ratio of 119, 1% three points higher than year end 2022.

We've responded to the tough market conditions two rate increases.

And we're also reinforcing our focus on underwriting standards and partnering with our independent agents, an individualized profitability action plans where appropriate.

This multi pronged approach is aimed at improving the combined ratio over time.

Tim DeCastro: In addition, we place a greater emphasis on managing expenses across the enterprise and expect to see long-term savings through our work to modernize legacy technology platforms and introduce new digital capabilities. I'll share an update on recent progress with those modernization efforts in a few minutes, but first, I'd like to introduce Chief Financial Officer Julie Pell-Caswell, who will provide a deeper review of our financial performance. Thank you, Tim, and good morning, everyone.

In addition, we placed a greater emphasis on managing expenses across the enterprise and expect to see long term savings through our work to modernize legacy technology platforms and to introduce new digital capabilities.

I will share an update on recent progress with those modernization efforts in a few minutes, but first I would like to introduce Chief Financial Officer, Julie Pell Koski, who will provide a deeper review of our financials.

Julie.

Thank you, Tim and good morning, everyone.

Julie Pell-Caswell: Throughout 2023, we discussed how weather events and severity were the primary drivers of the profitability challenge for the exchange. To mention, we've taken action on several fronts aimed at improving profitability. We are starting to see the benefits of the more significant rate increases taken recently, with more to come. As a reminder, our policies span 12 months, unlike most of our competitors, so it takes longer to realize the benefits. We haven't yet seen a slowdown in new business growth, and our retention levels remain strong at 91.2% despite these rate increases. The policyholder surplus ended at $9.3 billion in December 2023. While this was lower than where we started the year, we did see a positive turn in the fourth quarter, with the surplus increasing $203 million. Again, the combined ratio for the year ended at 119.1%, which was an improvement from September year to date, given the fourth quarter experienced a lower level of weather events and more moderate severity growth.

Throughout 2023, we've discussed how weather events and severity were the primary drivers of the profitability challenge for the exchange.

Jim mentioned, we've taken action on several fronts aimed at improving profitability.

We're starting to see the benefits of the more significant rate increases taken recently with more to come.

As a reminder, our policy spend 12 months. Unlike most of our competitors. So it takes longer to realize the benefits.

We haven't yet seen a slowdown in new business growth and our retention levels remained strong at 91, 2%. Despite these rate increases.

Policyholder surplus ended at 93 billion at December 2023.

While this was lower than where we started the year, we did see a positive turn in the fourth quarter with surplus increasing $203 million.

Again, the combined ratio for the year ended at 119, 1%, which was an improvement from September year to date, given the fourth quarter experienced a lower level of weather events and more moderate severity growth.

Julie Pell-Caswell: Turning to the results for indemnity, net income was almost $111 million, or $2.12 per diluted share, in the fourth quarter of 2023, compared to $65.5 million, or $1.25 per diluted share, in the fourth quarter of 2022. 2023 total year net income was just over $446 million, or $8.53 per diluted share, compared to $299 million, or $5.71 per diluted share, in 2022. Rating income in the fourth quarter increased nearly 46 million, or 56.1% compared to the fourth quarter of 2022. For the total year, Indemnity experienced an increase in operating income of $144 million, or 38.3% compared to 2022. Both periods saw revenue growth outpace expense growth.

Turning to the results for indemnity net income was almost $111 million or $2 12 per diluted share in the fourth quarter of 2023 compared to $65 5 million or $1 25 per diluted share in the fourth quarter of 2022.

2023 total year net income was just over $446 million or $8 53 per diluted share compared to $299 million or $5 71 per diluted share in 2022.

Operating income in the fourth quarter increased nearly $46 million or 56, 1% compared to the fourth quarter of 2022 for.

For the total year indemnity experienced an increase in operating income of $144 million or 38, 3% compared to 2022.

Both periods revenue growth outpaced expense growth.

Julie Pell-Caswell: From a revenue perspective, management fee revenue from policy issuance and renewal services increased over $98 million, or 19.5%, in the fourth quarter of 2023 compared to the fourth quarter of 2022, and over $354 million, or 17%, for the full year compared to 2022. These increases in both the fourth quarter and total year were in line with the respective increases in the direct and assumed written premiums of the exchange. The main driver of the premium increase was that the exchange was continuing to experience substantial growth in new business premium, which grew over 43% in the fourth quarter and almost 38% for the year compared to the same respective prior year period. From an expense perspective, the total cost of operations from policy issuance and renewal services increased just over $54 million or 12.2% for the fourth quarter and almost $216 million or 12% for the total year 2023 compared to the same periods in

From a revenue perspective management fee revenue from policy issuance and renewal services increased over $98 million or 19, 5% in the fourth quarter of 2023 compared to the fourth quarter of 2022 and over $354 million or 17% for the total.

Year compared to 2022.

These increases in both the fourth quarter and total year were in line with the respective increases in the direct and assumed written premiums of the exchange.

The main driver of the premium increase was that the exchange with continuing to experience substantial growth in new business premium, which grew over 43% in the fourth quarter and almost 38% for the year compared to the same respective prior year periods.

From an expense perspective, the total cost of operations from policy issuance and renewal services increased just over 54 million or 12, 2% for the fourth quarter and almost $216 million or 12% for the total year 2023 compared to the same periods in 2000.

Julie Pell-Caswell: Our most significant cost of operations, our commission expenses, grew $53 million for the fourth quarter, while the total year commission expenses increased $169 million. The higher commissions in both periods were driven by the increase in direct and affiliated assumed written premiums of the exchange. Non-commissioned expenses for the fourth quarter grew $1 million, while the total year non-commissioned expenses grew $47 million.

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Our most significant cost of operations. Our commission expenses grew 53 million for the fourth quarter, while the total year Commission expenses increased $169 million.

The higher commissions in both periods were driven by the increase in direct and affiliated assumed written premiums of the exchange.

Non commission expenses for the fourth quarter grew $1 million, while the total year non commission expenses grew $47 million.

Julie Pell-Caswell: The fourth quarter increase was driven by additional investments in both technology of $3 million and customer service of nearly $1 million, offset by lower sales and advertising costs of over $2 million. And we'll provide greater detail on our technology and customer service delivery in a couple of minutes. The increase in total year non-commissioned expenses was due to additional investments in technology of almost $19 million and higher administrative and other expenses of $20 million driven by higher personnel costs. Also, the growth in the number of policies led to an increase in underwriting and policy processing costs of $9.4 million. Our investments generated almost $10 million in pre-tax income in the fourth quarter of 2023 compared to $300,000 in the fourth quarter of 2022. For the total year 2023, pre-tax income from investments was $29 million compared to $600,000 in 2022.

The fourth quarter increase was driven by additional investments in both technology of $3 million and customer service of nearly $1 million.

Set by lower sales and advertising costs of over $2 million.

Jim will provide greater detail on our technology and customer service deliveries in a couple of minutes.

The increase in total year non commission expenses was due to additional investments in technology of almost $19 million and higher administrative and other expenses of $20 million driven by higher personnel costs.

So the growth in number of policies led to an increase in underwriting and policy processing costs of $9 4 million.

Our investments generated almost $10 million in pre tax income in the fourth quarter of 2023 compared to $300000 in the fourth quarter of 2022.

For the total year 2023 pre tax income from investments was $29 million compared to $600000 for 2022.

Julie Pell-Caswell: Finally, in 2023, we paid our shareholders $222 million in dividends. Also, in December of last year, our board approved a 7.1% increase in the 2024 regular quarterly cash dividend for both our Class A and Class B shares. Now, I'll turn the call back over to Tim. Okay?

Finally in 2023, we paid our shareholders $222 million in dividends.

Also in December of last year, our board approved a seven 1% increase in the 2020 for regular quarterly cash dividend for both our class a and class B shares.

Now I'll turn the call back over to Tim Tim.

Tim DeCastro: Thanks, Julie. The rapid pace of technology and changing consumer behaviors have heightened the sense of urgency to modernize our platforms and introduce new digital capabilities. As I mentioned earlier, we know it's important for long-term expense savings, and it's critical to our ability to offer innovative and customer-centric products and services. That's why we made modernization one of our top priorities in 2023.

Thanks Julie.

The rapid pace of technology, and changing consumer behaviors have heightened the sense of urgency to modernize our platforms and introduce new digital capabilities.

As I mentioned earlier, we know it's important to long term expense savings and it's critical to our ability to offer innovative and customer centric products and services.

That's why we made monetization one of our top priorities in 2023.

Tim DeCastro: A notable example of progress is the migration of several legacy platforms to the cloud, technology infrastructure that is more stable, secure, and efficient. The largest cloud conversion to date was our Erie Claim Center platform, which is now seeing a 75% reduction in system outage time and significantly reduced costs. In our third quarter call, I shared that we launched a pilot for a refreshed workers' compensation platform starting in Indiana. Since that time, our team has successfully rolled out the platform in every state in our football.

A notable example of progress is the migration of several legacy platforms to the cloud.

The technology infrastructure that is more stable secure and <unk>.

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Largest cloud conversion to date was our Erie claim center platform.

Which is now seeing 75% reduction in system outage time and significantly reduced costs.

And our third quarter call I shared that we launched a pilot for a refresh workers' compensation platform starting in Indiana.

Since that time, our teams have successfully rolled out the platform every state in our footprint.

Tim DeCastro: The refresh introduces full policy servicing capabilities, an online account for commercial customers, and a new billing platform that allows customers the ability to manage their automatic payments. Other significant progress was made in the enhancement to our claim status portal, a valuable tool that puts important claims information at the fingertips of agents and customers. In 2023, more than 75 different enhancements were made to the platform to improve the user interface and make the information provided by the tool more robust. Nearly 100% of auto claims handlers and more than 70% of property claims handlers are using the tool to share important updates with agents and customers. Helping claims get handled faster and more efficiently. These modernization efforts are continuing in 2024 and beyond. And we're embracing agile ways of working to help us work faster, improve our speed to market, and deliver the capabilities demanded by today's marketplace.

The refreshed introduces Gould policy servicing capabilities online account for commercial customers and the new billing platform that allows customers the ability to manage their automatic payments.

Other significant progress was made in the enhancement to our claim status portal.

<unk> tool that puts important claims information at the fingertips of agents and customers.

In 2023 more than 75 different enhancements were made to the platform to improve the user interface.

And to make the information provided by the tool or robust.

Nearly 100% of auto claims handlers and more than 70% of that property claims handlers are using the tool to share important updates with agents and customers.

Helping claims can handle faster and more efficiently.

These modernization efforts are continuing in 2024 and beyond and.

We're embracing agile ways of working to help us work faster.

Our speed to market.

And deliver the capabilities demanded by today's marketplace.

Our spirit of innovation is also behind the investments, we're making through Erie strategic ventures.

This venture capital arm of Erie Indemnity company formed in 2022 focuses on investing in the personal and commercial insurance value chain.

Tim DeCastro: That spirit of innovation is also behind the investments we're making through Erie Strategic Ventures. This venture capital arm of Erie Indemnity Company, formed in 2022, focuses on investing in personal and commercial insurance values. And recently, we announced three initial startup investors. Wagmo, which offers tech-enabled pet wellness and insurance; Roots Automation, which leverages artificial intelligence to automate manual and time-consuming insurance processes; and Trust and Will, an online estate planning platform. These initial investments are adjacencies that have the potential to deliver value to Erie, our agents, and policyholders. In addition to capital, the startup companies also benefit from Erie's industry expertise.

And recently, we announced three initial startup investments.

<unk>, which offers tech enabled pet wellness and insurance.

Rousseau automation, which leverages artificial intelligence to automate manual and time consuming insurance processes.

And trust and will and online the state planning platform.

These initial investments are adjacencies that have the potential to deliver value to Erie and our agents and policyholders.

In addition to capital startup companies also benefits from Aries industry expertise.

We look forward to continuing to build our portfolio to support more visionary entrepreneurs and help bring innovative products and services to the market.

As I mentioned earlier in the call weather claims have been up significantly over the prior year.

It makes accolades like those we recently received from J D power, even more meaningful.

Tim DeCastro: We look forward to continuing to build our portfolio to support more visionary entrepreneurs and help bring innovative products and services to the market. As I mentioned earlier in the call, weather claims have been up significantly over the prior year, which makes accolades like those we recently received from J.D. Power even more meaningful. In December, J.D.

In December J D power ranked the best in home insurance customer satisfaction coming and number one for both homeowners and renters insurance.

<unk> score of 856 on J D. Power's 1000 point scale was 37 points higher than the homeowners insurance segment average for 2023.

And both of our ranking and scores improved during a year. When the study cited overall homeowner satisfaction is flat compared to the previous year.

Tim DeCastro: Power ranked Erie the best in home insurance customer satisfaction, coming in at number one for both homeowners and renters insurance. Erie's score of 856 on J.D. Power's 1,000 point scale was 37 points higher than the homeowners insurance segment average for 2023, and both our ranking and score improved during a year when the study cited overall homeowner satisfaction as flat compared to the previous year. This recognition comes on the heels of two other first-place rankings from J.D. Power in 2023.

This recognition comes on the heels of two other first place rankings from J D power in 2023.

One for property claims experience.

Another agreement on the agent satisfaction personal lines.

I'd like to express my gratitude to our agents and frontline employees from claims first notice of loss and customer care operations.

Continuing to be above all in service.

And especially in these demanding times.

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

Okay.

This concludes.

Tim DeCastro: One for Property Claims Experience and another for independent agent satisfaction in person. I'd like to express my gratitude to our agents and frontline employees from Claims, First Notice of Loss, and Customer Care Operations, continuing to be above all this even in and especially in these demanding times. Thank you all for listening, for your continued interest in Erie. This concludes. Copyright 2020 Mooji Media Ltd. All Rights Reserved. No part of this recording may be reproduced without Mooji Media Ltd.'s express consent. WithThank you for the wonderful collaboration, in partnership of Mooji Media Ltd. Audio-V narrow-mounted 5inch accompaniment with Mooji Media Ltd. Video- instruments by RSD Happy New Year 2021, Thank you for watching!

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