Erie Indemnity Co (ERIE) 2011 Q2 法說會逐字稿

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

Thank you, Allie, and good morning, everyone. We appreciate all of you joining us. On today's call, management will discuss our second 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 supplement were issued yesterday afternoon, and these have been posted on our website, erieinsurance.com.

As a reminder, Indemnity's Second Quarter 2011 results do not include the results of the property and casualty insurance operations or life operations that were sold to the Exchange. However, the direct written premium produced by the Exchange's property and casualty operations is a primary driver of Indemnity's financial results and therefore pertinent to our discussion.

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 filing with the SEC dated August 2nd, 2011 and in the related press release.

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 after 12.30 p.m. 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.

I'll now the call now over to Erie's President and CEO, Terry Cavanaugh. Terry?

Good morning. And thanks for joining us.

Today, I'll provide some context around our second quarter performance and then turn the call over to Marcia for a high-level financial review.

As we've talked before on prior calls, Erie is focused on five key business strengths that we believe create strong performance in our Property and Casualty and Life and Annuity business -- understanding our target customers, supporting the success of our independent agencies, developing our internal talent, improving process and technology, and ensuring the strength of our balance sheet. The progress we're making on all fronts thus far in 2011 is encouraging and continues to produce sound results.

Indemnity finished the second quarter 2011 with net income per share of $0.94. Net operating income was $0.87 per share. For the first six months of 2011, net income per share was $1.72.

Total revenue from management operations for the second quarter 2011 was up almost 5%, driven by a 5.3% increase in direct written premium of the Exchange's Property and Casualty Group. Modest rate increases and our strong retention rate, now 90.8%, contributed to this result. Although policy and force increases were modest in the second quarter, written premium for both our personal and commercial lines was up again. Higher retention and increases in average premium per policy drove this result.

As a reminder, Indemnity sold its P&C subsidiaries to the Exchange at the end of 2010. However, I would like to comment on the P&C Group's combined ratio result for the second quarter, even though the underwriting results of the P&C Group have no effect on Indemnity's financial results.

Beginning late in the first quarter and continuing through the second quarter, the Exchange's operating territories experienced six severe weather events. For the second quarter of 2011, the Exchange's combined ratio totaled 140 and included 52 points, or $537 million, of catastrophe losses.

During the first half of 2011, we saw a significant number of catastrophe claims. And in times like these, Erie's above all-in-service reputation is put to the test. And in true Erie fashion, our agents and employees continue to deliver. I'm proud and grateful for the committed and compassionate way our Erie team has responded. Despite the more significant levels of catastrophe losses, the Exchange surplus grew by $80 million in the first half, to more than $5.1 billion.

A few items of note before I turn the call over to Marcia -- as you recall, Indemnity sold its minority share of Erie Family Life to the Exchange at the end of the first quarter 2011. While no longer directly contributing to Indemnity's results, our life business remains an important component of our product offerings. Erie Family Life performed well in the second quarter and the first half of 2011. We refreshed our term product and pricing strategies to more effectively compete in the life market and to continue to meet the needs of our customers.

In the area of technology improvements, during the second quarter, we successfully began to roll out a new billing system. It sets the stage for future processing efficiencies and enhancements like on-bill presentment.

Regarding our efforts with new products and pricing sophistication, last month, we launched Erie Rate Lock, our enhanced auto insurance endorsement, in two additional territories -- Pennsylvania and D.C. The Rate Lock feature allows customers to keep the same auto insurance rates unless they make certain changes to their policy. As such, Rate Lock has a high appeal to consumers who seek this stability in their insurance costs. It is providing our agents with a competitive market position and is an integral part of our personal lines of growth strategy.

On the talent front, I'm pleased that Richard Burt has joined us as our new Chief Actuary. Rick brings significant experience to Erie. Most recently, he worked for Deloitte Consulting in Los Angeles as partner and Western practice leader for actuarial risk and analytics. I'm confident that the addition of Rick's talent, experience and leadership to our already strong team will accelerate new, innovative solutions for Erie, further enhancing our competitive position.

Now, I'll turn the call over to Marcia.

Thank you, Terry, and good morning. I'll now provide a high-level overview of our second quarter 2011 results.

Net income for the second quarter 2011 was $52 million, compared to $49 million for the same period a year ago. On a per-diluted-share basis, net income was $0.94 per share in the current quarter, compared to $0.86 per share in the prior-year quarter. It is important to note that the second quarter 2010 net income included $6 million or $0.10 per share from the operations that were sold to the Exchange.

Second quarter net operating income was $48 million or $0.87 per share, compared to $51 million or $0.89 per share in the prior-year quarter. In the second quarter 2010, net operating income included $5 million, or approximately $0.09 per share, related to operations sold to the Exchange.

Two operating segments -- management operations and investment operations -- make up Indemnity's second quarter financial results. I'll begin with a review of our management operations.

Income before taxes from our management operations was $64 million, compared to $62 million in the second quarter 2010. Management fee revenue was $294 million in the second quarter of 2011, representing a 5% increase over the prior-year period. This is consistent with the percent growth in direct written premiums of the Exchange's property and casualty insurance operations. This result was driven by policy growth of 3% and a slight increase in the average premium per policy. Cost of management operations increased $13 million, or 5.4%, primarily due to increases in agent commissions. The gross margin from our management operations in the second quarter 2011 was 21.6%, compared to 22% in 2010.

Now, turning to the results of our investment operations, Indemnity recorded a profit before taxes of $17 million, compared to $11 million in the prior-year quarter. It is important to note that the second quarter 2010 investment results included $7 million of profit before taxes related to operations sold to the Exchange.

Net investment income was $4 million for the first quarter of 2011, down from $9 million in the prior-year quarter, due to the operations sold to the Exchange. Net realized gains on investments were $6 million, compared to losses of $3 million in the second quarter 2010. There were no impairments in the second quarter 2011, compared to impairment losses of $1 million in the prior-year period.

Our income from equity and limited partnership investments was $7 million in the second quarter 2011, compared to $6 million last year, reflecting improvements in private equity and real estate investments, which were offset somewhat by lower returns in our mezzanine debt investments.

Now let's look at our results for the first six months of 2011. Indemnity's net income totaled $96 million, or $1.72 per share; compared to $96 million, or $1.68 per share for the same period last year. Net income for the first six months of 2011 and 2010 included income related to operations sold to the Exchange. In 2011, that amount was $1 million, or $0.02 per share. And in 2010, it was $12 million, or $0.21 per share.

Net operating income was $91 million, or $1.64 per share; compared to $95 million, or $1.66 per share in the first six months of last year. Net operating income for the first half of 2011 and 2010 included income from the operations sold to the Exchange. In 2011, the amount was $1 million, or $0.02 per share. And in 2010, it was $10 million, or $0.18 per share.

Looking at our share repurchases for the year through July 22nd, 2011, the Company repurchased 1.4 million shares at a total cost of $95 million. Given the $4 million we repurchased late in 2010 and our year-to-date repurchases of $95 million, we have approximately $51 million of repurchase authority remaining under the current program.

Thank you, Marcia.

Erie's financial results thus far in 2011 are consistent with our long-term pattern of success. That consistent and effective performance has recently been recognized by two external agencies. First, A.M. Best in June affirmed the A-plus superior rating of the Erie Insurance Group. In its rating announcement, A.M. Best cited Erie's superior capital position, well-established agency relationships, outstanding business persistency, reflected by our high retention rates; and controlled operating expenses, among other attributes, as reasons for our A-plus superior rating.

Then again, last month we learned that Erie was listed among Ward's 50 top performing insurance companies. It's the fourth consecutive year we've achieved this honor. The Top 50 list is based on Ward's annual financial analysis of over 3,000 property/casualty insurers in the US. The companies named to the list have passed specific safety and consistency measures and achieved superior performance over the previous five years. This is the 21st year for Ward's Top 50 list, and the 14th time that Erie has been among those named.

Our inclusion on the Ward's list speaks directly to the consistency of our performance and our results. It recognizes our financial stability and focus on service, upon which all of our stakeholders rely. It takes each of us thinking critically day-in and day-out to create and sustain that level of performance. I am proud to say that our employees and leaders are motivated to do just that.

Operator, you can now open the line for questions.

(Operator instructions) Bill Broomall, Macquarie.

My first question is on the management operations business. Direct written premiums was up 5.3%, I think, in the quarter. Where do you think that goes going forward? And what lines do you think can drive that going forward?

(Inaudible)

And is that level kind of consist -- sustainable?

We're not prepared to make a forward-looking statement like that. Obviously, we try to manage the business in an effective way, where we can take advantage of the marketplace opportunities, take advantage of our great agency relationships. Doing that in the economic climate we're in is difficult. But I think it's very good news that we continue to, one, grow customers; two, have a retention rate that continues to grow and is spectacular; and three, our average premium per policy continues to grow. So I think that bodes well for us.

Got it.

And next, I'll move on over to the -- I think you said, about the technology rollout that you had -- is that going to be an ongoing expense? How should we think about that? As well as maybe -- I think you said, about dodging in agent commission fees. How are those going to look going forward?

I made no commentary on agency commission fees at all.

I'm sorry. All right.

How about, then, on the technology side?

I think we continue to make technology -- I'll call it -- investments. While it currently is a cost, it's also investment to make sure that our platform continues to meet the needs of our agents, our customers and our employees. So it is, I'll say, an ongoing focus of ours. It can be a bit lumpy in terms of how it plays out in the income statement. But we are very focused in making sure that we do what's necessary to continue to grow our technology capability.

All right.

And then, moving over to the personal cost of $2 million in the management operation, where was that in the business? What drove that? Were you adding people?

It's just the normal increase that you would see -- this is Marcia. It's the normal increase that you would just see in salaries and benefits year-over-year, based on some additions of people but also just the increase in benefit costs and merit increases.

We are invested in our business. We've doubled our efforts in terms of building a sales force. So we've got two classes of new people coming in, in terms of being able to be groomed to be a more effective sales organization in the field. We've selectively added to, I think, some of the infrastructure here in terms of enterprise risk management, some of the things in the actuarial field -- again, to invest in our business, to be prepared for the future.

Okay.

(Operator instructions) I am showing no further questions at this time.

Great. Thank you, Allie.

As a reminder, a recording of the call will be posted on our website, erieinsurance.com, after 12.30 p.m. Eastern Time today. If you have any questions, please call me at 814-870-4665.

Thanks again, and make it a great day.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.