Erie Indemnity Co (ERIE) 2009 Q1 法說會逐字稿

Hello and welcome to the Erie Indemnity Company first-quarter 2009 earnings conference. At the request of Erie Indemnity this conference is being recorded for replay purposes. At this time all participants are in a listen-only mode. Following prepared remarks from management we will open the call for questions and answers.

Now I would like to introduce your host for today's conference call, Karen Kraus Phillips, Vice President and Director of Investor Relations.

Thank you Patrick and good morning everyone. We appreciate all of you joining us today.

On today's call management will discuss our first-quarter 2009 results. Joining me are Terry Cavanaugh, President and CEO, Marcia Dall, Executive Vice President and Chief Financial Officer, Jim Tanous, Executive Vice President, Secretary and General Counsel, Mike Zavasky, Executive Vice President, Insurance Operations, and George Lucore, Executive Vice, President, Field Operations.

Today's prepared remarks will be approximately 30 minutes. Following those remarks we'll open the call for questions. We issued our earnings release and additional supplements yesterday afternoon. If you need a copy of the press release or any of the exhibits, you can find these in the investor relations section of our website at ErieInsurance.com. We also filed Form 10-Q with the SEC.

On today's call the management of Erie Indemnity Company will share important information about current and future initiatives being undertaken at the company. As a result certain forward-looking statements may be incorporated into their comments. These forward-looking statements reflect the company's current views about future events and are based on assumptions subject to known and unknown risks and uncertainties. These risks and uncertainties may cause results to differ materially from those anticipated as described in those statements.

Many of the factors that will determine future events or achievements are beyond our ability to control or predict. For information on important factors that may cause such differences, please see the Safe Harbor statements out latest 10-Q filing with the SEC dated April 30, 2009 and in the related press release and 8-K.

In this call we will discuss some non-GAAP measures. You can find a reconciliation of those measures to GAAP measures in a press release and in the supplement posted on our investor website and ErieInsurance.com.

This call is being recorded and the recording is the property of Erie Indemnity Company. It is not intended for reproduction or rebroadcast by any other party without the prior written consent of Erie Indemnity Company.

A replay will be available on our website today at 12:30 PM Eastern Time. Your participation on this call will constitute consent to the recording, publication, webcast broadcast, and use of your name, voice, and comments by Erie Indemnity. If you do not wish to or agree with these terms, please disconnect at this time.

And now Erie's President and CEO Terry Cavanaugh. Terry?

Thank you Karen. Good morning and thanks for joining us this morning. Today Marcia and I will talk briefly about our first-quarter 2009 results, and then the entire group will respond to your questions.

One of the most significant things that happened during the first quarter was the announcement that Marcia Dall joined Erie as its new Chief Financial Officer. I would like to welcome Marcia to her first quarterly call. She and I are both looking forward to meeting with many of you in the months ahead and of course seeing you at our upcoming annual shareholders meeting next Tuesday, May 5.

Now to our first-quarter discussion.

The impact of the financial market disruption continued through the first quarter of 2009. Net income per share diluted decreased to $0.19 compared to the $0.51 at the end of the first quarter 2008, reflecting the impact of losses from our limited partnership investments and underwriting losses from increased catastrophes during the quarter.

Operating income per share decreased to $0.29 at March 31, 2009 compared to $0.78 per share for the same quarter a year earlier.

From an underwriting perspective, we experienced two catastrophic events during the first quarter of 2009. These two events that contributed nearly 8 points to our GAAP combined ratio. The first was a wind storm that hit Ohio and Pennsylvania in February. The second was a hail storm that hit Harrisburg, Pennsylvania in late March. It's during these situations that Erie really shines. I want to commend the agents and employees who worked together to ensure that our customers were taken care of quickly, effectively, and fairly.

As expected, rate reductions we took an early 2008 for our personal lines continued to flow through during the first quarter of 2009 bringing down our average written premium per policy. We expect that to turn during the second quarter given the rating actions we've taken in a later part of 2008 and thus far in 2009.

Clearly people are looking for service and financial protection they can count on in this economy. Our operating and financial strength have helped us to continue to attract and retain more customers. Policies increased by more than 3% during the first quarter of 2009 compared to a year earlier, reflecting solid growth in auto and home personal lines. Retention in personal lines continues to climb, and new personal lines policies sold have increased by nearly 6% compared to the first quarter of 2008.

The effect of the economy is more evident on our commercial lines as businesses are making changes to their insurance coverages to reduce costs, and exposure growth has also slowed. These factors have had impact on topline premium growth.

Commercial policies in force were up more than 2% for the quarter compared to a year earlier, which is encouraging but not enough to offset declines in average written premium per policy. We're working closely with our agents to promote our commercial business, and we're beginning to see an increase in commercial quote activity.

During the first quarter of 2009 we appointed 31 new agencies to represent Erie. All of these appointments are in territories where we have opportunity for growth. As we indicated on the fourth quarter call, we expect 127 new agencies in 2009. In 2008 we appointed 156 new agencies, surpassing our goal of 140 new agency appointments.

Before I turn the call over to Marcia, I would like to touch on expense management. Our long-term goal is to better align expense growth with premium growth. However it is imperative that Erie continue to invest in information technology to further its position in the marketplace. We have appointed a new Senior Vice President of Information Technology who is the process of refining our technology governance and processes with an even more disciplined approach to technology spending. We expect the growth in noncommissioned operating expenses 2009 will be lower than our original projections.

Now, I'll turn the call over to Marcia, who will go through the financial results for the quarter.

Thanks Terry and good morning everyone. As you know, I joined Erie about a month ago. I'm very pleased to be part of the Erie team, and I'm looking forward to meeting with many of you in the upcoming months.

Today I will share a summary of overall results and additional detail on our management operations, underwriting, investment performance.

For the first quarter 2009, net income decreased to $11 million compared to $30 million in the first quarter of 2008. As Terry mentioned, the earnings decrease in the first quarter was driven primarily by losses from our limited partnership investments and insurance underwriting losses, primarily from increased catastrophic events of the quarter.

Losses from limited partnerships, which reflect fourth-quarter 2008 activity, were $0.32 per share after tax for the first quarter compared to earnings of $0.09 per share after tax for the first quarter of 2008.

Insurance underwriting losses totaled $0.07 per share after tax for the first quarter compared to gains of $0.04 per share after tax in the first quarter 2008.

Now, I'll provide some additional detail on the results of our management operations. Management fee revenue was essentially flat in the first quarter compared to last year. The management fee rate for both years was 25%. The direct written premium for the Property and Casualty Group were flat from the previous year with growth in policies in force offset by a decline in average premium per policy. Policies in force grew 3%, reflecting growth of over 124,000 policies year-over-year. Most of this growth was offset by a drop in year-over-year average premium per policy. This was not unexpected as rate reductions we took in 2008 continued to move through our book of business, primarily in our renewal premiums.

Premiums from new business increased 4% to $99 million, and strong new business growth in personal lines was partially offset by a decline in commercial lines new business. Personal lines new business premiums written grew 12% to $66 million in the first quarter, reflecting solid growth in new policies in force, offset by a slight decline in year-over-year average premium per policy. Our commercial new business premiums written decreased 8% to $33 million in first quarter, reflecting a slight decrease in new policies in force, offset by a marginal increase in the average premium per policy.

Premiums generated from renewal business were essentially flat year-over-year, reflecting an overall retention ratio -- a higher overall retention ratio offset by a decline in average renewal premiums.

The overall retention ratio has been steadily improving, increasing to 12-month moving average of 90.8% in the first quarter, up from 90.6% at December 31, 2008 and up from 90.4% at March 31, 2008. The decline in average renewal premiums reflects the impact of rate reductions taken in early 2008 and slower exposure growth.

We expect the pricing actions we've taken in the latter part of 2008 and in 2009 to result in a net increase in direct written premiums in 2009.

The total cost of management operations increased by almost 1 point during the first quarter compared to the first quarter of 2008. Commissions related or independent agents, which makes up the majority of the management costs, were relatively flat period-to-period. The cost of management operations excluding commission costs increased 3% for the first quarter, primarily as a result of higher levels of contract labor costs related to various technology initiatives.

Now I'll provide more detail on the results of our insurance underwriting operations.

The GAAP combined ratio for the company was one 111% in the first quarter of this year compared to 92% last year. This resulted in an underwriting loss for the first quarter of $6 million compared to an underwriting profit of $4 million in 2008.

There were three primary drivers of this result. First, catastrophic losses contributed 8 points to the GAAP combined ratio. Second, the loss in loss adjustment expense ratio related to the current accident year excluding cat was 74% in the first quarter, 3 points higher for the first quarter 2008. And third, development of prior accident year loss reserves resulted in adverse development of 4 points in the first quarter compared to (technical difficulty) of 5 points for the first quarter of 2008. The adverse development was primarily the result of one large Workers Compensation combined with increasing lost cost trends on automobile, bodily injury, and commercial liability claims.

Now I'll review the results of our investment operations. The company's investment operations recorded a loss of $26 million during the first quarter compared to a loss of $5 million for the same period in 2008. This was driven primarily by losses from our investments in limited partnerships.

As we said previously, there is a quarter lag in the financial statement we receive from our general partners, which serve as our primary basis for valuations of limited partnership interest.

The losses in limited partnerships reported in first quarter represent actual results in the fourth quarter of 2008, which were significantly affected by volatile market conditions. Equity in losses related or limited partnership investments were $28 million for the first quarter compared to earnings of $8 million in the first quarter of 2008. These losses were primarily related to investments in real estate limited partnerships.

Net realized losses on investments in the first quarter totaled $8 million compared to $25 million in first quarter of 2008.

We did see an increase in net investment income for the first quarter, up 7% to $13 million compared to last year, driven by increased bond amortization.

And last, related to our investment in Erie Family Life Insurance Company, we reflected a loss of $1.7 million in the first quarter, primarily driven by losses from limited partnership investments in the Erie Family Life Insurance portfolio.

We continue to maintain a strong cash position as cash and cash equivalents totaled $78 million at March 31, 2009.

In the first quarter the company repurchased 42,200 shares of its outstanding Class A common stock at a total cost of $1.2 million in conjunction with its stock repurchase plan. Approximately $89 million of repurchase authority remains under this plan through June 30, 2009.

In summary, the balance sheets of Erie Indemnity Company and the Erie Insurance Exchange remain strong and are well-positioned to support our growth.

On a personal note, I'm delighted to be able to join such a wonderful company. During my short time here I have met numerous agents, policyholders, employees, and business partners who care deeply for Erie Insurance, and they provide the heart and soul that make it such a great company.

Karen, we can open the call to questions.

Thank you. Patrick, if you would open the call?

(Operator Instructions) Michael Phillips, Stifel Nicolaus.

Hi. Thanks. Good morning everybody. And good morning to you Marcia. I look forward to meeting you.

Morning.

First question is on just some line item stuff, line of business line item stuff. First on personal lines. But you know, I hear your comments, and we know what you did in '08 with the early rate reductions and now kind of you're flipping the switch recently with the rate changes there, which is clearly helping some. Can you just drill down a little bit more on some of the details and split up the personal line comments in the home and personal? I guess specifically, when I look at the back of your supplement and see the average rates are still down for both the two moving in kind of the same direction, I see PIP moving favorably for both auto and home. But then when I look at just the overall direct written premium, those two lines are just sort of moving in the opposite direction. And just trying to help -- help me understand that drop. Homeowners is doing quite well and moving up. And auto is showing that drop and will probably change soon, but what's going on behind the scenes between the two?

Is that too much? Did I talk too fast? (multiple speakers) Because I do, so -- and then I (multiple speakers)

We are following it. I guess Mike Zavasky would like to take a shot at it, and then we can follow up on that.

[Fire away.]

One of the things that's still flowing through are rate changes we took an early '08 that are still flowing through in the first quarter, particularly in Workers Compensation in Pennsylvania and in Maryland. So that's where you're seeing that. So those changes ran out March 31. So in the second quarter you will see that start to swing in the other direction.

The other piece is we do sort of have a built-in inflation number there into the property business there that allows us -- most people I will say who are very concerned about their home these days, they want to make sure it's properly insured to value. And we also have an inflation guard capability at our renewals to build in the recognition of what it would cost to replace our homes that we ensure. Unlike the auto business where again -- and we actually have some people that are -- instead of buying a new car every four years now are holding onto those automobiles and may in fact be dropping coverage as a result of that.

Okay, I think (multiple speakers)

So you have two different dynamics going on from an exposure standpoint there also.

Right. Absolutely. I missed the comment. I'm sorry. I missed the comment on Workers Comp. Could you say that again?

On Workers --?

Well, we had the rate reductions that took place in the first quarter of '08 that run out in -- by March 31 they ran out.

Okay. So on comp, how much or your -- besides that rate there, but when you think about Workers Compensation as really -- is that a line to worry about at all? Is there any kind of conscious thoughts of maybe we need to pull back here given trends in medical costs? How do you think about that?

Well, we're always looking at the underwriting trends and how they correlate to the premium we could achieve in the marketplace. We adjust our risk appetite based upon what we know the marketplace will enable us to achieve. Workers Compensation is -- has been a competitive line, and so we monitor it very carefully.

This is George Lucore. I would like to add that because it is such a competitive line, that we instituted in the last 18 months some significant changes in how we manage the claims inside of Workers Compensation because it is such a cost driver. But we have made significant improvements to the claims management process, we have closed nearly 500 old claims out totaling -- it's had a net positive impact on the reserve side of the situation. So we're managing that much more aggressively and expect to improve returns into the future.

Okay. Thanks George. That was very helpful.

Last one for me and I'll circle back if I have to I guess. The comments on the noncommissioned and the IT spending for the year and how that's probably lower than your initial guidance. Any -- and I don't know if [Eric] is in the room or not, but if he is, maybe his thoughts on what he's seeing as priorities and plans for the year and that might be different than what was in place before he took over.

He's not in the room, so I will take it, and Mike can sort of handle it also. We've got Mike heading up the technology world for us at the executive level.

It's not a redirection, it's more of a refinement that we're looking to make sure we spend more money more effectively. (technical difficulty) [I think] we're doing a -- we're beginning to do a much more effective job of disciplined vendor management. We're very much more focused on a knowledge transfer to make sure that when we use outside contract labor that that technology and that knowledge is being transferred to our employees so we can further that capability going forward.

I think we continue to have focus on making sure that a agency portal is continuing to be built out to be effective. We are very committed to obviously our agents as our sole distribution method, and the more that we can do for them in terms of making (technical difficulty) that we're sure that we have an effective portal both from an underwriting and sales standpoint that will work well for us.

We are focusing on more customer contact in the customer portal as well as then continue to built out more effective technology capability in the back room on the underwriting side in the commercial lines arena. We've made some nice strides in terms of the personal line side, and so I think those are the main points, along with, again, getting better at data management and business intelligence.

So I think that's sort of my commentary at a 25,000 foot level. Mike, I don't know if you want to --

The only thing I would add to that is, with a lot more emphasis on project management and the governance process around IT, we're finding we're being a little more effective.

So the -- and I will say the issue we have is the way the Indemnity accounts for its expenses versus, again, building technology for the whole enterprise including the Exchange. Our technology spending can be a bit lumpy from quarter to quarter. So I would also caution with the fact that we still have a need and we will still spend the money, but I think will do it in a much more deliberative matter where we will get better bang for our buck over the course of the next 24 months.

Thanks very much. I'll hop off for now. Thanks.

(Operator Instructions) Michael Phillips, Stifel Nicolaus.

Still may. Okay. I'll just hang out all day. This is fine. Now here's just a couple more then.

I didn't understand the -- and Terry and I were kind of chatting about this earlier. But the limited partnership stuff, and do you have to make those additional spendings right away in this quarter. Or is that -- do you have to make $[80 or so] million through 2012?

Michael, the way I would think about it is these are funding commitments that exist through 2012. We continue to work with our partners to monitor the fund's performance and ensure that they are prudently managing those investments, but those are not triggered in particular in any one quarter.

So that's -- whatever it was, $80-something million, that's not right away, that's (inaudible) two or whatever?

That's right, through 2012.

And then I was sort of surprised by the net investment income growth in the quarter. And you gave us the reason why, but it's clearly better than what everybody else is seeing. Any thoughts on how that plays out for the rest of this year?

This is really related to amortization related to some previously impaired bonds that we expect to hold until maturity and where we will recover all of our principle and related interest. Once the new accounting rules are adopted in second quarter, this incremental bond amortization will go away. So we would not expect that that trend would continue.

Thanks. And I guess I'll just wrap it up with this then, Marcia, have you anything in early days you see as kind of -- this [really] needs attention or this is great and doesn't need it? Or just early thoughts?

As I said in my closing, I think the strength of this company is really all of the employees and the agents and the policyholders, the strength of the service mission for the company, and I'm really glad to be part of the team.

Thank you Michael.

It appears we have no additional questions at this time. I would like to turn it back over to management for any closing remarks.

Just a reminder that the recording of the call will be posted on our website, ErieInsurance.com after 12:30 PM Eastern Time today. If you have any questions at all, as always please call me at 814-870-4665.

Thanks again and make it a great day.

Thank you.

Thank you.

This concludes today's conference. We thank everyone for their participation.