Erie Indemnity Co (ERIE) 2010 Q4 法說會逐字稿

Hello, and welcome to the Erie Indemnity Company fourth quarter and full-year 2010 earnings conference. I would like to introduce your host for today's conference call, Karen Kraus Phillips, Vice President, Investor Relations.

Thank you, Javon, and good morning. We appreciate all of you joining us. On today's call management will discuss our fourth quarter and full-year 2010 results and other matters. Joining me are Terry Cavanaugh, President and CEO, Marcia Dall, Executive Vice President and Chief Financial Officer, Chip Dufala, Executive Vice President, Services, John Kearns, Executive Vice President, Sales and Marketing, Jim Tanous, Executive Vice President, Secretary and General Counsel, and Mike Zavasky, Executive Vice President, Insurance Operations. Our earnings release and financial supplement 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 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. For information on important factors that may cause such differences, please see the Safe Harbor statements in our latest 10-K filing with the SEC dated February 24, 2011, and in the related press release. In this call, we will discuss non-GAAP measures. You can find the reconciliation to the GAAP-based results in the press release.

This call is being recorded, and the recording is the property of Erie Indemnity Company. It is not intended for reproduction or re-broadcast by any other party without the prior written consent of Erie Indemnity Company. A replay will be available on our website today after 12.30 PM Eastern time. Your participation on this call will constitute consent to the recording, publication, webcast, broadcast, and the 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. Terry?

Thank you, Karen, and good morning, everyone. I appreciate you joining us to discuss our fourth-quarter and full-year 2010 results. I'm very pleased with Erie's performance in 2010, and I have our employees and agents to thank. We remain focused on our strategy, and are executing well on each of our corporate objectives. This translates into positive financial results for the Exchange and Indemnity, creating added protection for our customers, security for our employees and agents, and value for you, our shareholders. Many thanks to the Erie team.

Our financial results in 2010 were strong. Indemnity ended the year with a 50% increase in both net income and earnings per share. Our fourth quarter made a positive contribution to this result, although smaller than the prior year. This was due primarily to the one-time deferred tax charge related to the pending sale of Indemnity's investment in Erie Family Life to the Exchange. Marcia will share the details of this in her discussion of the fourth-quarter results.

Several things of note happened during the fourth quarter. Our Board of Directors maintained the management fee rate the Exchange pays to Indemnity at 25%. The Board also increased Indemnity's dividend per share by more than 7%, on both class A and B shares, and approved a $150 million stock repurchase program. And on December 31st, we completed the previously announced sale of Indemnity's property and casualty subsidiaries to the Exchange. For Indemnity, this structure removes underwriting volatility from its operating results, and enables management to better utilize capital. For the Exchange, the new structure centralizes underwriting risk and its supporting capital, providing us greater flexibility to manage that capital.

Last year on the fourth-quarter call, I shared with you our strategy to move the Company forward. I'm happy to say, by every measure, we're showing good progress on our plan. I credit this to four things, clear direction, strong leadership, a high level of competency, and solid execution by our agents and employees. Erie's overall capability has been enhanced, and we're seeing positive evidence of that. Total policies in force were up over 3% year-over-year, and our retention rate also increased slightly to 90.7%, from an already strong 2009 result.

The growth of policies in force drove increases in direct written premium, which ended the year up 4.5%, the third consecutive year of increasing premium growth rate. This in turn, fueled increases in Indemnity's management fee revenue, and combined with our expense management efforts, produced a 2010 total year gross margin of 19.4%.

Throughout the last year, we earned a number of third-party recognitions related to our efforts, with employees, agents, customers, and the communities we serve. For example, for the third year in a row, Erie earned the highest ranking in the J.D. Power and Associates 2010 Auto Insurance Shop -- Stop -- Shopping Study, ahead of 25 of the nation's top auto insurers. We also were honored to receive the Company Award of Excellence from the Association of Professional Insurance Agents, the largest organization of independent agents.

In 2010, we put a number of things in place to maintain our overall success, spur profitable growth, and more specifically, continue to support our agents' efforts in the field. Many of these things I've talked about during the year, such as increased pricing sophistication, our agency business planning process, enhancements in underwriting, and technology advancements. These tools and shared knowledge support our agents' abilities to sell and service customers, helping Erie gain ground. While we're seeing benefits today from these initiatives, we're also building a stronger foundation to add support for our customers, agents, employees, and shareholders, well into the future. Now I'll turn the call over to Marcia, to share the details of our financial results.

Thank you, Terry, and good morning. Today I'll share our results for the fourth-quarter and full-year 2010. First, let's look at our fourth-quarter results. After tax net income for the fourth quarter 2010 was $12 million, compared to $24 million for the same period a year ago. On a per diluted share basis, net income was $0.22 per share in the current quarter, compared to $0.43 per share in the prior year quarter. Fourth-quarter net operating income was $17 million or $0.32 per share, compared to $22 million or $0.39 per share in the prior year quarter.

Our net income was affected by two, one-time impacts. First, an $18 million or $0.31 per share deferred tax expense, related to the announcement of the pending sale of Indemnity's interest in Erie Family Life to the Exchange, which is scheduled to close by March 31, 2011. Second, a realized GAAP book loss of $6 million after-tax, or $0.10 per share from the sale of several limited partnership investments. In the fourth quarter, we sold limited partnership investments, with a book value of approximately $20 million. This sale generated $11 million of cash proceeds, and a tax recovery of $15 million.

Now let's look at each of our operating segments, beginning with management operations. Income before taxes from our management operations was $29 million, compared to $34 million in the fourth quarter of 2009. Management fee revenue was $236 million in the fourth-quarter 2010, up 5.7% from the prior year, and consistent with the growth in direct written premium. This result was driven by policies in force growth of 3.3%, and a slight increase in average premium per policy.

Operating costs were up approximately $17 million, or 8.6% over the prior year period, reflecting increases in employee compensation and agent commissions. The gross margin from our management operations in the fourth-quarter 2010 was 12%, compared to 14.6% in 2009. It is important to note, our fourth-quarter gross margin is typically lower, due to the seasonality of our written premiums and management fees.

Turning to our insurance underwriting operation, the fourth-quarter 2010 GAAP combined ratio was 95.3%, compared to 91.1% a year ago. Catastrophe losses contributed 4.4 points, compared to 1.9 points in the same period a year ago. Favorable development of prior accident year loss reserves improved the combined ratio 9.6 points, compared to 6.4 points in the prior year. Favorable development in the fourth-quarter 2010 was driven primarily by improved severity trends in the commercial multi-peril, private passenger auto, and workers' compensation lines of business. From our life operation segment, Indemnity's income before taxes was $3 million, compared to a nominal loss in the prior year quarter.

Now I'll discuss our investment operations results. Indemnity recorded a profit before taxes of $11 million, compared to a profit before taxes of $1 million in the prior year quarter. Net investment income was $9 million for the fourth-quarter 2010, down slightly from $10 million in the prior year quarter. Net realized losses on investments were $8 million, compared to gains of $5 million in the fourth-quarter 2009. As I mentioned earlier, the fourth-quarter 2010 results include the sale of several limited partnership investments.

There were nominal impairment losses in the fourth-quarter 2010, compared to impairment losses of approximately $2 million in the prior year quarter. Our income from equity and limited partnership investments was $10 million in the fourth-quarter 2010, compared to losses of $12 million in the prior year quarter, reflecting continued improvements in all three investment types, private equity, mezzanine, and commercial real estate.

As Terry mentioned, we completed the sale of Indemnity's wholly-owned property and casualty subsidiaries to the Exchange. At the time of the sale, Indemnity received $293 million based on an estimated purchase price. Two items will affect the final settlement. First, the GAAP book value of the P&C subsidiaries on December 31, 2010, was slightly lower than the estimated purchase price. Second, Indemnity retained a deferred tax asset of $6 million, that was not transferable to the Exchange. This deferred tax asset is related to capital losses that will be available to offset future capital gains of Indemnity. As a result, Indemnity recorded a liability of $8 million to the Exchange, for the deferred tax asset and the difference in the GAAP book value. Net after-tax cash proceeds to Indemnity are estimated to be $285 million. Final settlement of the transaction will occur by March 31, 2011. There was no gain or loss resulting from the sale.

Now let's look at our full-year 2010 results. Indemnity's net income totaled $162 million or $2.85 per share diluted, compared to $108 million or $1.89 per share diluted in 2009. Net operating income increased to $163 million or $2.88 per share, from $109 million or $1.91 per share in 2009. Income before taxes in our management operations was $202 million, compared to $187 million a year ago. Also, our gross margin from our management operations increased to 19.4% in 2010, from 18.7% in 2009. Both of these increases were driven by strong premium growth of 4.5%. The GAAP combined ratio produced by insurance underwriting operations was 100.1% in 2010, compared to 99.2% in 2009. The increase in the 2010 GAAP combined ratio was primarily driven by catastrophe losses, which added 7.3 points to the 2010 results, compared to 3.4 points in 2009.

And finally, the results of our investment operations. We ended the year with profit before taxes of $56 million, compared to losses of $36 million in the prior year. The 2010 result was driven by equity in earnings from our limited partnership investments of $21 million, compared to losses of $76 million in the prior year. It is important to note that Indemnity's 2010 net income includes $19 million of income related to the property and casualty operations that were sold to the Exchange on December 31, 2010. Indemnity's 2010 net income also included $7 million of income, related to its investment in Erie Family Life that will be sold to the Exchange on March 31, 2011.

For the first quarter 2011, the results for Indemnity's shareholder interest will relate to Indemnity's management, life insurance, and investment operating segments. After March 31, 2011, Indemnity's financial results will reflect only two segments, management operations and investment operations.

Looking at our share repurchases during the fourth-quarter 2010, we repurchased 198,366 shares of our class A common stock at a total cost of $12 million. For the full-year 2010, we repurchased more than 1.1 million shares at an average price of $49.97, for a total cost of approximately $57 million. As of December 31, 2010, $146 million of repurchase authority remains under the current plan. Now I will turn the call back over to Terry.

Thank you, Marcia. Earlier, I briefly referenced Erie's service reputation, but in reality, it takes center stage. Erie's Above All in Service brand is the hallmark of our value proposition. It has earned us the loyalty of our customers and agents, and many accolades and awards. Last week J.D. Power and Associates unveiled its inaugural cross-industry list of 40 Customer Service Champions, and Erie is among them. According to the J.D. Power report, these service champions not only excel within their respective industries, but also stand out when evaluated across multiple industries. Other service champions include the Ritz-Carlton, Southwest Airlines, Wegmans, and Zappos. The list represents the top 5% of 800 brands evaluated by J.D. Power, on five key performance indicators, people, presentation, price, product, and process.

In their press release announcing the champions, J.D. Power states, companies that have successfully weathered the economic storm are those that have a business strategy of service excellence, and recognize that delivering high quality service is a powerful differentiator in the face of changing market conditions. I couldn't agree more. To the people who built this fine Company, those today who are charged with preserving and growing it, and those that will follow, thank you for your responsiveness and your dedication to superior service.

This morning, we've shared with you what we've accomplished in 2010, and I'm pleased to tell you the momentum continues into 2011. Our employees and agents are engaged, focused and executing effectively. In every facet of the business, we're improving our process delivery, managing efficiencies, and growing our capabilities. I'm excited about what we're doing today, and what I know we will accomplish in the months and the years ahead. Operator, we can now open the call for questions.

(Operator instructions).

Well, it appears we have no questions, so I just want to thank everyone for being on the call. And as a reminder, a recording of the call will be posted on our website, erieinsurance.com at 12.30 PM Eastern time today. If you have any questions, please call me at 814.870.4665. Our 2011 annual meeting of shareholders is scheduled for Tuesday, April 19th, at 9.30 AM Eastern time, at our home office in Erie, Pennsylvania. We hope to see you all there. 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 all disconnect. Everyone, have a great day.