Erie Indemnity Co (ERIE) 2011 Q1 法說會逐字稿

Hello, and welcome to the Erie Indemnity Company's first-quarter 2011 earnings conference call. I'd like to introduce your host for today's call, Karen Kraus Phillips, Vice President and Director of Investor Relations.

Thank you, Jovan, and good morning. We appreciate all of you joining us. On today's call, management will discuss our first-quarter 2011 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 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 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-Q filings with the SEC, dated May 5, 2011, and in the related press release.

This call is being recorded, and the recording is the property of Erie Indemnity Company. It is 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 p.m. Eastern time. Your participation on this call will constitute consent to the recording, publication, webcast, broadcast, and the use of name, voice and comments by Erie Indemnity. If you do not agree with these terms, please disconnect at this time. I'll now the call now over to Erie's President and CEO, Terry Cavanaugh.

Thank you, Karen, and good morning. On the call today, I will provide some insights into our operations thus far this year, and Marcia will share highlights of our first-quarter financial results. We'll then get to your questions.

A few weeks ago, we held our 86th annual shareholders meeting. Thanks to all of those who joined us. At that meeting, we re-elected all 13 members of our Board of Directors. Erie's Board is a hard-working and insightful group, and I'm grateful for their continued support and commitment.

As you know, our financial results for 2010 were strong. We finished the year with 51% growth in net income and earnings per share, despite lingering economic pressure.

I'm pleased to say that we continue to make progress. Indemnity proved solid financial results in the first quarter of this year, driven by growth in management fee revenue and earnings from our limited partnership investments. Our net income was $0.78 per share, down slightly from the prior-year quarter, while net operating income was flat year-over-year at $0.77 per share.

As a reminder, indemnity's first-quarter 2011 results do not include the results of the property and casualty insurance operations that were sold to the Exchange at the end of 2010; however, the direct-written premium produced by the Exchange's property and casualty operations is a primary driver of Indemnity's financial results.

Thanks to the work of our agents and employees, the strategies we put in place are producing positive results in all 3 insurance segments. Overall, we added more policies in the first quarter, held our high P&C retention steady at 90.7%, and saw an increase in total average premium per policy.

Direct written premium of the property casualty group grew by more than 6% in the first quarter 2011, which is consistent with the increase in Indemnity's revenue from management operations. Personal lines direct-written premium was up nearly 6%, driven by policies-in-force growth, a continued strong retention rate, and an increase in average premium per policy.

We did experience a decline in new auto and home production, compared to the strong growth we experienced in the first quarter of 2010. With the backdrop of the current economy, I'm particularly encouraged by the increases we're seeing in our commercial lines premium, which is up again in the first quarter of 2011. Agents are bringing on new customers, and successfully maintaining renewals. We continue to manage rate, exposures, and our underwriting process effectively.

Our life operations, an important component of our overall product portfolio, also delivered a positive performance in the first quarter with growth in policies and net policy revenue. These are all strong indicators of Erie's relevance in the market place.

We're working to capitalize on this momentum in 2011. Two of our top priorities, technology enhancements and agency development, are helping us move us in the right direction. We continue to improve our technology support for our agents.

For example, commercial lines on-line, C-Line, will enhance the way Erie agents write commercial business with us. C-Line is a multi-year effort that will strengthen Erie's competitive position on 3 fronts -- process, pricing, and product. Agents can quote, bind, issue, and endorse policies in real time. We began rolling this system out to agents this spring, with an enhanced business owner's package product.

We're also focusing on enterprise-wide processing improvements aimed at ease of doing business. These improvements include our continued work on a customer-focused billing system.

We're also working to create better alignment of our technology with agency management systems, and in our life business we have introduced electronic life applications to help smooth the process for agents and create a quicker turnaround for customers.

Growing our agency distribution system and supporting the development of our agents continues to be a priority for Erie. By the end of the first quarter 2011, our distribution system numbered 2,100 agencies, with more than 9,500 licensed representatives. Supporting their expansion efforts is important to our success, that's why we're working with them to develop and execute strong business plans and investing in new ways to help them achieve their goals.

For some, that means helping to hire a new producer. For others, establishing an additional office. Positioning our agents for success within their unique marketplace translates into market share growth for Erie. Now I'll ask Marcia to take us through the financial results.

Thank you, Terry, and good morning. I'll now provide a high-level overview of our first quarter 2011 results. Net income for the first quarter of 2011 was $44 million, compared to $47 million for the same period a year ago. On a per diluted share basis, net income was $0.78 per share in the current quarter, compared to $0.82 per share in the prior year quarter.

As you know, at the end of the fourth quarter of 2010, we completed the sale of Indemnity's property and casualty subsidiaries to the Exchange for a final purchase price of $285 million. It is important to note that the first quarter 2010 net income included $4 million, or $0.07 per share from the P&C subsidies that were sold to the Exchange.

First-quarter net operating income was $43 million, or $0.77 per share, compared to $44 million, or $0.77 per share in the prior-year quarter. In the first quarter of 2010, net operating income included $2.6 million, or approximately $0.05 per share, from the P&C subsidiary.

For the first quarter 2011, Indemnity had results from 3 segments -- management operations, life operations, and investment operations. I'll begin with a review of our management operations. Income before taxes from our management operations was $48 million, compared to $53 million in the first quarter 2010.

Management fee revenue was $251 million in the first quarter 2011, a 6% increase over the prior-year period. This is consistent with the 6% growth in direct-written premiums of the Exchange's, property and casualty insurance operations. This result was driven by policy growth of more than 3%, and a slight increase in average premium per policy.

Cost of management operations increased $19 million, or 10.4%, reflecting increases in agent commissions and employee compensation, and the impact of a $5 million first quarter 2010 legal reserve release.

The gross margin from our management operations in the first quarter 2011, was 18.6%, compared to 21.8% in 2010. The first quarter 2010 gross margins were possibly impacted by to the reserve release I just mentioned. Excluding this adjustment, the gross margin would have been 19.8% in the first quarter of 2010.

From our life operations segment, Indemnity's income before taxes was $3 million, compared to $2 million in the prior-year quarter.

Now turning to the results of our investment operations. Indemnity recorded a profit before taxes of $16 million, compared to $14 million in the prior-year quarter. It is important to note that the first quarter 2010 investment results included $8 million of investment income related to the property and casualty subsidiaries that were sold to the Exchange.

Net investment income was $4 million for the first quarter 2011, down from the $9 million in the prior-year quarter. Net realized gains on investments were $1 million, compared to gains of $5 million in the first quarter of 2010. There were no impairments in the first quarters of 2011 or 2010.

Our income from equity and limited partnership investments was $11 million in the first quarter of 2011, reflecting continued improvements in all 3 investment types -- private equity, mezzanine and commercial real estate. On March 31, 2011, we completed the sale of Indemnity's 21.6% share of Erie Family Life to the Exchange for a purchase price of $82 million.

For context, it's important to note that Indemnity's 2010 net income includes $7 million, or $0.13 per share of income related to Erie Family Life. After March 31, 2011, Indemnity will have results from only two segments, management operations and investment operations.

Looking at our share repurchases, in the first 4 months of 2011, we repurchased 700,000 shares of our class A common stock at a total cost of $45 million, in conjunction with our current stock repurchase program. As of April 30, 2011, we had approximately $100 million in repurchase authority remaining under the program.

Thank you, Marcia. One final note before opening the call for questions. I would like to recognize our agents and claims employees who are responding so effectively to our customers who have been hard-hit by the severe storms this spring. Once again, the Erie team is going above and beyond to support our customers in their time of need. It's in these situations that Erie's above-all service reputation is tested, and time and time again, the Erie team comes through. Out of these difficult situations, the Erie brand is recognized and appreciated.

Our customers express high satisfaction with their Erie agent and claims adjustor and a strong sense of customer loyalty to Erie. They actively share their stories with others, referring neighbors, friends, and family to us. That positive service interaction generates word of mouth that leads to new business. When our customers are most vulnerable, they have lost their home, their belongings, or worse, a loved one, they know they can count on us. Our thoughts go out to everyone that's been affected. Operator, you can open the call for questions.

Thank you. (Operator Instructions). Our first question is from Caroline Cameron with Macquarie.

Good morning. My first question is just on the general market environment. I know some of your competitors have been taking a bottoming out in rates and in the cycle. I'm just wondering what your thoughts are there? Are you seeing any improvement in exposure units, or is it mainly just rates; what may be sort of potentially driving some growth going forward?

Well, I think it's a little different from commercial lines than it is personal lines. The personal lines, we've been moving rate in a disciplined way on both auto and home. Certainly home has been the leading product in terms of moving rate, and we think that will continue in the marketplace.

In terms of commercial, clearly in the first half of last year, we were still sort of the getting affected by, again, an exposure dip, both in terms of as we were renewing policies, having less exposure and (inaudible) giving money back in terms of audit premium, and that is not occurring now. So, we do believe there is a bottoming out going there, and we are getting selective rate across the commercial landscape, as based upon the need and what the underwriting attractiveness looks like, both on renewal business and new business.

Okay. Thanks. That's helpful. And then I was just hoping you could provide an update. Do you guys have any exposure to any of the storms in the second quarter that have happened so far?

Clearly the weather activity has been fairly pervasive throughout the United States. We have had some storm activity, although, as is you are reminded, that in fact under our realignment of our capital, the underwriting results do not affect the public Company, but we're very proud of the fact that our team is responding to a number of events that have taken place in our footprint, and we look forward to responding to those effectively and paying those claims promptly and moving forward. Chip, I don't know if you have any other commentary on that.

Yes, thank you, Terry. Hello, Caroline, this is Chip Dufala. We have been impacted by several weather events beginning in March and extending into April. Every few days, severe weather seemed to be hitting one of our territories. Tornadoes and storms with high winds and hail have affected our customers in Tennessee, which was really a spillover of the storm that hit Alabama, where we do not do business. Pennsylvania, Wisconsin, Virginia, West Virginia, and North Carolina were also affected.

These were fairly significant events for the industry, and impacted the exchange, as well. As Terry said in his remarks, our agents and claims employees have done a stellar job in responding to customers' needs. Our thoughts are with those who have been affected by these storms.

Okay. Great. Oh, sorry, go ahead.

No, from our standpoint, obviously, as indicated in these first quarter numbers, we started out the year very strong with a very good combined ratio, and we think we have a very effective business model that will be a good provider of risk protection for all of our customers.

Okay. Thank you, that's all really helpful, and I was hoping you could just provide an update on your thoughts on capital management right now with the new structure. Whether you guys are favoring more potentially increasing a dividend, or focusing more on repurchase? Just wondering what your thoughts are there.

As you know, we have an active repurchase program authorization going forward. We gave you an update on where we stand through 4 months. The dividend issue is something we look at, the end of the year, as is typical in our December time frame. We have a long-term perspective in how we run this business, whether it be in terms of capital management, underwriting, or sales, and we think we are doing an effective job and look forward to your support.

Okay. Great. Thank you very much.

Thank you, Caroline.

(Operator Instructions). Next in line we have Don Taylor with Franklin Templeton.

Good morning. I was hoping you could discuss the path or the prospects for getting to a point in the management operations segment that you can have some operating leverage. I would think at some point, we would be able to grow the management fee revenue greater than the cost of management operations.

I think, again, based upon what is the marketplace presents to us in terms of economic growth, both in personal lines and commercial lines, we would be able to do that. I think if there's opportunities to grow the business organically in our existing geography, as well as to look at other opportunities we night have longer term, so we understand that question, and we look forward to being able to execute on that.

Is there a premium growth level that would cause the positive operating leverage?

This is Marcia. The way I think about it is, obviously the top line is going to grow based on the premium growth, so I think them team is very focused on making sure that we're working with our agents to write profitable business and grow at a reasonable level there to generate profitable business over the long term for the health of the exchange as well as the health of the management company.

Along with that, and continuing to make investments on the expense side that both encourage our agents to write that business through commissions and bonus structures, as well as continued investments in technology and other strategic investments that will help us long-term grow the business, and can generate that operating leverage.

Okay. Thank you.

(Operator Instructions). I would like to turn it over to our speakers for any closing remarks.

Well, thank you all. Again, as a reminder, our 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, please call me at 814-870-4665. Thanks again, and make it a great day.

Thank you, guys.

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