Erie Indemnity Co (ERIE) 2011 Q3 法說會逐字稿

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

Thank you, Sean, and good morning. We appreciate all of you joining us. On today's call, management will discuss our third 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 third 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 and our latest 10-Q filing with SEC Dated November 3, 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 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 after 12.30PM Eastern Time.

Your participation on this call will constitute to 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 now turn the call over to Erie's President and CEO, Terry Cavanaugh. Terry?

Thank you, Karen, and good morning everyone. I am pleased with Indemnity's financial results in the third quarter. Net income per share was $0.87 compared $0.94 per share last year. Included in last year's third quarter result was $0.13 per share from the insurance operations which we sold to the Exchange in December.

Operating income per share was $0.93 compared to $0.89 a year ago. Our management fee revenue, Indemnity's primary source of revenue, increased again this quarter, up over 5% from a year ago which is consistent with the increase in the Exchange's direct written premium.

We continue to grow premium at the Exchange which is encouraging in this economy. Our strong customer retention, now at 90.8%, and improved pricing are driving the results.

New and renewal premium increased this quarter compared to the prior year, with personal lines up nearly 5% and commercial nearly 8%. In personal lines, private passenger auto new business premiums increased slightly compared to a decrease a year earlier. The result in the current quarter was due to an increase in average premium per policy. New personal auto policies in force declined year-over-year.

We continue to attract new customers, but at a lesser rate than the strong growth with we saw in 2010. Private passenger auto renewal premium increased as well due in large part to our continued strong customer retention in this business at 91.6%. We also saw premium increases in our homeowners line this quarter in both new and renewal business. Again strong retention and an increase in average premium per policy drove this result.

We are generating revenue growth in our commercial business as well, driven by increases in rate, market share, and a continued positive trend in workers' comp audit premiums. Our capability to underwrite, sell, and service commercial business has improved and with the initial rollout of our new commercial system, we have the foundation to launch new and enhanced coverages. Severe weather has been a big theme in the industry in the first nine months of this year and while the insurance related losses at the Exchange have no effect on Indemnity's results, I would like to touch on the topic briefly.

During the third quarter, Tennessee, Pennsylvania, Maryland, North Carolina, and Virginia saw multiple severe weather events from Hurricane Irene and Tropical Storm Lee among others. For the third quarter 2011, the statutory combined ratio of the Exchange totaled 105.4% and included 16.5 points or $174 million of catastrophe-related losses.

As always, I would like to acknowledge the hard work of our employees and agents to resolve customer claims quickly and fairly. This has been one of the most active catastrophe years of our Company's history. Our customers depend on us to be there to support their recovery and that is just what we are doing. Thanks again to all of you for your good work.

Turning back to Indemnity, given our strong financial position, the board of directors at our meeting last month approved a continuation of our current-share repurchase program with $150 million authorization.

Now I will turn the call over to Marcia.

Thank you, Terry, and good morning. I will now provide a high-level overview of our third quarter 2011 results. Net income for the third quarter 2011 was $47 million compared to $54 million for the same period a year ago.

On a per diluted share basis, net income was $0.87 per share in the current quarter compared to $0.94 per share in the prior year quarter. It is important to note that the third quarter 2010 net income included $7 million, or $0.13 per share from the operations that were sold to the Exchange.

Third quarter net operating income was $51 million or $0.93 per share compared to $51 million or $0.89 per share in the prior year quarter.

In the third quarter 2010, net operating income included $7 million or approximately $0.12 per share related to operations sold to the Exchange. Two operating segments, management operations and investment operations, make up Indemnity's third quarter financial results.

I will begin with a review of our management operations. Income before taxes from our management operations was $62 million compared to $58 million in the third quarter 2010. Management fee revenue was $280 million in the third quarter 2011 representing a 5% increase over the prior year period. This is consistent with the 5.4% growth and direct written premiums of the Exchange's, property, and casualty insurance operations. This result was driven by policy growth of 2.6% and a 2.9% increase in average premium per policy.

Cost of management operations increased $9 million or 4% driven primarily by an increase in noncommissioned expenses of $7 million over the prior year quarter. This represents increases in personnel costs, professional fees and software expenses. Agent commissions increased $2 million in the third quarter 2011 compared to the same quarter last year. The gross margin from our management operations in the third quarter 2011 was 21.7% compared to 21.1% in 2010.

Now turning to the results of our investment operations. Indemnity recorded a profit before taxes of $5 million compared to $20 million in the prior year quarter. It is important to note that the third 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 third quarter 2011, down to the $10 million in the prior year quarter due to the operations sold to the Exchange. Net realized losses on investments were $6 million compared to gains of $5 million in the prior year quarter. The net realized losses reflect the volatility in the equity markets in the third quarter. There were no impairments in the third quarters of 2011 and 2010.

Our income from equity in limited partnership investments was $7 million in the third quarter 2011 compared to $5 million last year reflecting improvements in mezzanine debt and private equity investments. For the first nine months of 2011, Indemnity's net income totaled $143 million or $2.59 per share compared to $150 million or $2.62 per share for the first nine months of 2010. The net income for 2011 and 2010 includes a corresponding $0.02 and $0.33 per share related to operations sold to the Exchange.

Now turning to our share repurchases. The Company repurchased 2 million shares of our outstanding Class A common stock through October 20, 2011, at a total cost of $141 million. As Terry mentioned earlier, our board approved a continuation of our stock repurchase program for a total of $150 million. This includes, and is not in addition to, any unspent amounts remaining under the prior authorization.

Thank you, Marcia. Throughout the year on these calls, I have talked about Erie's strategy and our focus. Our employees and agents continue to execute our strategy, and I am encouraged by our continued strong-value proposition.

Operator, you can open up the call for questions.

Thank you, ladies and gentlemen. (Operator Instructions). Our first question comes from Bill Broomall with Macquarie. Please go ahead with your question.

Great. Thanks. Just a question on rates. I think you said that you were getting rates of 5% personal lines and 8% commercial. I know weather doesn't directly affect you, but does the way the Exchange, it is writing the premium, do you need more rate, do you think there will be more rate as it relates to driving off the weather going forward? Just a comment to you for the additional risks that we have seen clearly everywhere across the Midwest and Northeast and what not.

Yes, clearly, you know, the weather is a component of our larger picture in terms of rate adequacy and it has become obviously a significant issue this year, but it is a significant issue every year. It is particularly obviously something we focus in on the property side, the homeowners business, and that -- I think you see in the industry and us respond in a way that lets us feel comfortable that we have got the right rate for the exposure, at the same time being competitive.

Okay. And so going forward do we think you need additionally on top of what we got this quarter, or I am thinking of, how direct premiums will flow going forward, or and then how does that relate to maybe if you get growth versus like policies, additional policies maybe, or you think on growth coming from that angle as well.

We are constantly looking at rate. Actually, every month we are having rating discussions across our footprint on all products and all zip codes. That's just something that goes on consistently. I think you have seen us obviously be able to take advantage of the marketplace and move rate up. We then balance that with the need to make sure that we have a competitive product so that our customers are seeing the value proposition and that our agency distribution system can sell a product. It is a matter equilibrium and a long-term perspective, and I think we do that better than most companies.

Okay, great. If I could move to over to the investment operations. The equity and earnings of limited partnerships of $7 million, that was, I mean, a lot of other companies out there have been reporting negative results from private equity and investments like that. What is -- you guys had positive growth -- what is driving that? It has kind of held up in the recent environment. And then also can you tell us do you report that on a lag at all, the private equity investments?

Marcia, do you want to --

Yes this is Marcia. We do report on a lag. It is based on a three-month lag, based on the reporting from the limited partnerships and the GPs. What I think you will see in the carefulness that you need to look at their results versus ours is our mix. We have a reasonable amount within the mezzanine area and it seemed to hold up pretty well in the quarter versus real estate private equity also was positive as well. So it is probably being given more by the mix of the limited partnerships between the various companies and the types of investments that they may be in -- their underlying, say, the mezzanine investment.

Okay. Great. Thank you very much.

Thank you.

Thank you.

(Operator Instructions). Our next question comes from Ron Bobman with Capital Returns. Please go ahead with your question.

Hi, I have a follow up question on that private equity or LP question. I remember looking in the Exchange's stat filings and there is a pretty healthy list of private equity investments. Is Indemnity's participation in sort of private equity and LP investing world a sort of a pro-rata interest and sort of maybe a smaller but mirror image of all the funds that Exchange is in? Or is it in sort of ad hoc subset, and not proportional?

There is an overlap between the investments and it is definitely materially smaller from an Indemnity perspective although there are some differences between the two portfolios.

But is it largely sort of a mirror image albeit smaller in size?

There are some, yes. I would not call it a mirror image. There a number of investments where there is an investment both in the Exchange --- from the Exchange's perspective as well as from Indemnity, but it's not 100%.

Okay. Are you allocating -- what is your plan going forward? Are you sort of, do you continue to have a plan to have sort of a like allocation to these private LP private equity investments? Or do you foresee them shrinking in relative size as a mix of your total investment portfolio? What are your plans on that?

We made a decision a couple years ago to no longer invest in new limited partnerships from an Indemnity perspective.

Okay.

We do continue to look at opportunities in a limited partnership area related to the Exchange.

Thanks a lot, that makes it clear. Best of luck and thank you.

Thank you.

Thank you, Ron.

I am not showing any other questions in the queue at this time.

Well, thank you all very much for being on the call. As a reminder, a recording will be posted on our website, erieinsurance.com after 12.30PM Eastern Time today. If you have any questions please call me at 814-870-4665, and make it a great day.

Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.