Erie Indemnity Co (ERIE) 2010 Q3 法說會逐字稿

Hello and welcome to the Erie Indemnity Company's third quarter 2010 earnings conference. (Operator Instructions). I would like to introduce your host for today's conference call. Karen Kraus Phillips, Vice President and Director of Investor Relations. Karen Kraus Phillips: Thank you [Gevan], and good morning, everyone. We appreciate all of you joining us. On today's call management will discuss our third quarter 2010 results and other matters. Joining me are Terry Cavanaugh, President and CEO; Marcia Dall, Executive Vice President and CFO; Jim Tanous, Executive Vice President, Secretary and General Counsel; Michael Zavasky, Executive Vice President, Insurance Operations; John Kearns, Executive Vice President, Sales and Marketing and Chip Dufala, Executive Vice President, Services.

Our earnings release and financial supplements were issued yesterday afternoon and these have been posted on our website, Erieinsurance.com. On today's call management will share important information about current and future Company initiatives. As a result, forward-looking statements may be incorporated into their comments.

These forward-looking statements reflects the Company's current views about future events and are based on assumptions subject to known and unknown risks and uncertainties. These may cost results to differ materially from those anticipated as those described in those statements. For information on important factors that may cause such differences, please say the Safe Harbor Statements and our latest 10-Q filings dated November 4, 2010 and in the related press release and the consolidated financial statements and footnotes included in our form 8-K file on May 6, 2010.

In this call we will discuss non-GAAP measures. You can find reconciliations to the GAAP based results in the 10-Q. .

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 recordings, publication, webcast, broadcast and use of your name, voice and comments by Erie Indemnity. If you do not agree with these terms please disconnect at this time. And now I'll turn the call over to Erie's President and CEO, Terry Cavanaugh

Thanks very much Karen, and good morning to all. As Karen mentioned we have two new executive team members here with us today. John Kearns, Executive Vice President of Sales and Marketing and Chip Dufala Executive Vice President of Services which encompasses our claims and corporate services operations. These two gentlemen come from within the organization and have extensive insurance experience and business skill.

John joined Erie three years ago to lead our Commercial Lines Division. Under his leadership, the division has continued to successfully grow our commercial book with emphasis on process improvement and enhanced service to agents and customers. Prior to coming to Erie, John worked at a variety of leadership positions with St. Paul and later St. Paul Travelers.

Chip has been with Erie for 17 years, most recently as Senior Vice President of Erie Family Life. While leading our Life Company, he significantly enhanced processes and response times and further engaged agents in selling Erie Life products. Chip began his career in field operations and has held several leadership positions including Regional Vice President and Senior Vice President of Customer Service Operations. They are a great addition to Erie's executive team and I am confident their leadership will drive our business forward.

Regarding our most recent quarter I continue to be pleased with the progress we are making. Our third quarter results are evidence of Erie's continued discipline and focus on our strategy to develop our core businesses, enhance our agency relationships and strengthen our balance sheet. We have clear direction, strong leadership and a commitment across the enterprise to consistently execute on our strategic initiatives.

Our net income for the third quarter 2010 was driven primarily by strong top line growth, effective expense management and solid investment results. The property and casualty industry continues to be under pressure by weak economic conditions and significant price competition, especially in commercial lines.

Through the first six months of 2010, the industry experienced continued decline in net written premium. Erie has successfully dealt with market pressures seeing steady premium growth through the third quarter with strong increases in policies in force and modest increases in average premium per policy.

In personal lines pricing sophistication has enhanced our ability to match price to risk aiding competitiveness and profitability. We saw expansion in personal lines policies in force and average premium per policy. In commercial while exposures are still down, policies and force up across the board nearly 4% which resulted in an increase in commercial premium for the second quarter in a row. Our Life business continues to be an essential part of our product mix enabling agents to sell a full portfolio of Erie insurance products.

One of the most significant factors driving our policy growth is the relationship we enjoy with our independent agency force. Last month that relationship was recognized by the Association of Professional Insurance Agents, the nation's largest organization of independent agents. Erie was honored to receive the PIA's Company Award of Excellence. With the award the PIA recognizes the Company for it's commitment to independent agents and to furthering the interest of professional agents by creating a better business environment. We are very proud and honored to receive this prestigious national recognition.

Now I will turn it over to Marcia to review our third quarter results and then we will spend time discussing the new structure that we announced yesterday.

Thank you Terry, and good morning everyone. Indemnity continued to perform well through the third quarter. Our net income was$54 million in third quarter 2010 compared to $40 million in third quarter 2009. On a per diluted share basis, net income was $0.94 per share in the current quarter compared to $0.69 per share in the prior year quarter.

Net operating income was $51 million or $0.89 per share compared to $38 million or $0.66 per share in the prior year quarter. Income before taxes from our Management Operations was $58 million compared to $48 million in third quarter 2009.

Our third quarter 2010 results was driven by strong growth in management fee revenue while management expenses were relatively flat year-over-over. The increase in management fee revenue is consistent with the 5.2% increase in the Property and Casualty group direct written premiums for the current quarter. This result was driven by policies in force growth of 3.4% and a 0.4% increase in average premium per policy.

Operating costs were up approximately $3 million or 1% in the third quarter 2010 compared to a year ago reflecting growth and commissions and agent-related expenses. The gross margin from a Management Operations in the third quarter 2010 was 21.1% compared to 18.1% in 2009.

Now I'll review the results of our Property and Casualty Insurance Operations. The third quarter 2010 GAAP combined ratio for the P&C operations was 98.7% compared to 98.1% a year ago. The slight increase in the combined ratio was driven primarily by higher losses that were almost entirely offset by lower expenses. The increase in losses was driven by higher current year losses and our property lines of business due to increases in frequency and higher level of catastrophic losses.

From our Life Operations segment Indemnity's income from taxes was $3 million compared to income before taxes of $2 million in the prior year quarter.

And finally Indemnity's Investment Operations recorded a profit before taxes of $20 million compared to a profit before taxes of $3 million in the prior year quarter. Net investment income was flat year-over-year at $10 million. Net realized gains on investments were also flat year-over-year at $5 million.

No impairments for the quarter compared to impairment losses of $3 million in the prior year quarter. And lastly, our income from equity and limited partnership investments was $5 million in the third quarter 2010 compared to losses of $9 million in the prior year quarter reflecting continued improvements in all three areas private equity, mezzanine and commercial real estate.

For the first nine months of 2010, Erie Indemnity net income totaled $150 million or $2.62 per share diluted compared to $84 or $1.46 per share diluted. During the third quarter 2010 we repurchased 546,000 of our class A common shares at a total cost of $28 million. Approximately $58 million remains under the current plan. Now I'll turn the call back over to Terry.

Thank you, Marcia. As we announced yesterday together with our Board of Directors, we've been working on a new corporate structure. In the end, the new structure we have chosen will align all insurance underwriting operations within the Exchange, and Indemnity will continue to function as the management company for the Exchange. For employees, agents and customers this change will have no effect on your work, or your relationship with Erie, or how we sell our service our products through independent agents.

In our current structure Indemnity as the attorney in fact for the Exchange policy holders is the management company and owns three subsidiary insurance companies. Premium dollars from all the property casualty insurance companies are pooled together. The Exchange receives 94.5% of the underwriting profit or loss and Indemnity receives 5.5% of the profit or loss. The Exchange and Indemnity also share ownership of Erie Family Life Insurance Company. The Exchange owns 78.4% and Indemnity owns 21.6%.

Under the new structure which is subject to regulatory approval, the Exchange will own 100% of all insurance entities, property in casualty and life and Indemnity will continue to function as the management company. This is not new for Erie but rather a return to our roots as this was Erie's original structure established by our co-founders in 1925. For Indemnity this structure removes underwriting volatility from it's operating results and enables management to better utilize capital to create value for you, our shareholders.

For the Exchange, the new structure centralizes underwriting risk and it's supporting capital providing greater flexibility to manage that capital. The new structure will be formed in two phases beginning with the sale of Indemnity's property and casualty subsidiaries to the Exchange which pending regulatory approval is scheduled to close by year end. The sale of Indemnity's equity interest and Erie Family Life to the Exchange is scheduled to close by March 31, 2011, again, subject to regulatory approval.

Proceeds from these transactions will be used by Indemnity to first, fund profitable growth within our personal, commercial and life insurance businesses. And second, fund capital strategies including common stock dividends and share repurchases which will be reviewed by our Board of Directors at it's December meeting. Now I'll turn the call over to Marcia to walk through the financial details.

Thank you, Terry. Yesterday, Erie Indemnity Company entered into a definitive agreement with Erie Insurance Exchange for the sale to the Exchange of it's wholly owned Property and Casualty subsidiaries. Erie Insurance Company, Erie Insurance Company of New York and Erie Insurance Property and Casualty Company for an aggregate purchase price equal to the GAAP book value as of December 31, 2010. Net after tax cash proceeds to Indemnity from this transaction are estimated to be between $290 million and $300 million.

Also yesterday, Indemnity entered into a definitive agreement to sell its 21.6% minority interest in Erie Family Life to the Exchange for per share purchase price equal to 95% of the GAAP book value per share as of March 31, 2011. Net after tax cash proceeds to Indemnity from this transaction are estimated to be between $55 million and $60 million in 2011.

Because Indemnity and Exchange are under common control for financial reporting purchases, there will be no impact from Indemnity net income from these transactions. Any gain or loss resulting from these transactions will be recorded as an adjustment directly to the equity of Indemnity. Indemnity will book an increased deferred tax liability of approximately $17 million in the fourth quarter of 2010. This deferred tax charge is required due to Indemnity's decision to sell us interest in Erie Family Life rather than receiving its share of EFL's capital in the form of future dividends which would have been eligible for an 80% dividend received deduction. This charge will run through Indemnity's income statement in the fourth quarter of 2010.

For reference purposes, Indemnity's year-to-date 2010 operating income includes $10.9 million or $0.19 per share from the property and casualty subsidiaries all of which is from Investment Operations. And $5.9 million or $0.10 per share from Erie Family Life. The P&C entities in Erie Family Life will remain well capitalized after the transactions are completed. [Ian Best] has reviewed these two factions and has affirmed the A-plus superior rating for the P&C entities and the A excellent rating for Erie Family Life.

As Terry indicated, proceeds from these transactions will be used by Indemnity to first, fund profitable growth within our personal, commercial and life insurance businesses and second, fund capital strategies including common stock dividends and share repurchases which will be reviewed with our Board of Directors at its December meeting.

Thank you, Marcia. When these are transactions are complete, our corporate structure will be simplified. All underwriting risk and supporting capital will be aligned with the Exchange and Indemnity will continue to function as the management company. With the Exchange this corporate structure enhances operational execution and provides for greater agility in managing capital. For Indemnity it provides added liquidity and removes underwriting volatility allowing us to better utilize capital to fuel profitable growth and create shareholder value.

For our customers agents and employees, this change will be transparent to you. Erie will continue to operate at superior levels in its relationship with you and commitments to you. Thank you for your attention. Operator, we can now open up the call for questions.

(Operator Instructions). Our first question comes from [James Palm with CPA Partners].

Hi, guys. Thanks for simplifying the structure. I think it's a very interesting and encouraging move that you guys made to free up a lot of capital in the holding company or Indemnity. The question now is once you have a structure simplified, I know you mentioned that there's no change in the relationship with employees, things like that. In any away will this free you up to perhaps grow a little bit quicker on the Exchange level in terms of acquiring policies at a good underwriting profitability ratio?

We're always trying to do that. So I think that this will create some greater clarity around certain roles. I think we'll continue to have a steady as you go strategy the will allow us to make sure that we grow the business effectively, do it with underwriting margin in the Exchange and the proper controls and margin in the Indemnity Company, so all the constituencies; customer, agents and shareholders are treated fairly.

Going back to the transaction, do you have any plans or objectives for the proceeds you're going to use? You're going to receive?

As we outlined in our prepared statements, we believe we have the opportunity to look selectively and continue to invest in our business appropriately and then using it for appropriate capital management strategies.

Great. Fantastic. Again, thank you very much.

I see no further questions in the queue. I'll turn it over to our speakers for any closing remark.

Thank you operator, and thank you all for your attention. I'd also like to thank our Board of Directors, employees and agents for their tremendous dedication to Erie. Their effort to grow the business profitably in a manner that is consistent with Erie's service philosophy continues to yield positive results for all Erie stakeholders. Thank you very much and have a good day.

As a reminder, a recording of the call will be posted on our website, erieinsurance.com after 12.30 PM Eastern Time today. If you have any questions please call me, 1- 814-870-4665. Thanks again and make it a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.