Erie Indemnity Co (ERIE) 2012 Q3 法說會逐字稿

Good day, and welcome to the Erie Indemnity Company third-quarter 2012 earnings conference call. I'd like to introduce your host for today's call, Scott Beilharz. Please go ahead.

Thank you, and welcome everyone. We appreciate all of you joining us. On today's call, management will discuss our third-quarter 2012 result and other matters related to the company's third-quarter operations. Joining me today, are Terry Cavanaugh, President and CEO; Marcia Dall, Executive Vice President and Chief Financial Officer; Rick Burt, Executive Vice President, Product; Chip Dufala, Executive Vice President, Services; Bob Ingram, Executive Vice President, Information Technology; John Kearns, Executive Vice President, Sales and Marketing; and, Jim Tanous, Executive Vice President, Secretary, and General Counsel. Our earnings release and financial supplement were issued yesterday afternoon and are currently available on our website, www.erieinsurance.com. We will hear brief remarks from Terry and Marcia, and then open the call for Q&A.

Before we begin, let me remind everyone that today's discussion may contain forward-looking statements. 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 statement in our latest 10-Q filing, the SEC, dated November 1, 2012, and in the related press release.

Also, in this call, we may discuss non-GAAP measures. A reconciliation to the GAAP-based results can be found 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 12.30 PM Eastern time. Your participation on this call will constitute consent to the recording, 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. With that, I will now turn the call over to Terry.

Thank you, Scott, and good morning everyone. On today's call, I'll provide some perspective on our results for the quarter, and then turn the call over to Marcia to discuss the financial results in more detail.

Before we discuss third-quarter results, I want to talk about the severe weather we have experienced this past week. While insurance-related losses on the Exchange do not affect Indemnity's results, it is important we address this topic. Erie's number one priority is our customers, and in times of need, our customers depend on us more than ever. Our employees and agents are mobilized in our community and taking care of our customers. We will do everything we can to resolve claims quickly. I'd like to thank our employees and agents for their hard work in helping our customers during this difficult time.

Regarding the third quarter, Indemnity had strong gains in both net income and earnings per share. Driven primarily by strong topline growth, and positive year over year investment results. Combined, these led to Indemnity net income per share, diluted, for the quarter, of $0.96, compared to $0.87 last year. Direct written premium of the exchange grew 8.6% in the quarter, driving Indemnity's management fee revenue. Our agents continue to be successful in selling Erie's value proposition to both new and existing customers. The commitment by our agents, combined with our strong portfolio of product and services, have helped drive new policy growth, while maintaining a 90.8% policy retention rate.

Higher average premium per policy in all of our major lines of business has also contributed to the increase in revenue. Investments we're making in the business, from new systems to support our agents' ability to quote and bind, to new marketing programs, are beginning to take hold, and contribute to our strong topline growth. During the third quarter, our new web-enabled quoting system for auto was fully deployed in seven states, and pilots were launched in three more. Feedback has been positive, as we continue to work with our agents to make this system more effective.

This month we also began to roll out a new marketing portal. The portal will further enhance Erie's agents' ability to interact with existing customers, improve cross-selling opportunities, and sharing information in a more efficient manner. A substantial number of our agents are jointly marketing and advertising with us. And, significantly more our using sources like social media, e-mail, local events, and targeted mail, to effectively connect with prospects and customers. In September, we introduced a new Hispanic advertising campaign to support our bilingual agents' efforts to build awareness among this important and growing consumer segment. The investments we are making will help Erie agents grow their businesses, and successfully differentiate themselves, and Erie, in the marketplace. Our agents' confidence in Erie, and their commitment to grow with us, had led to advances in market share in every state in which we do business.

Before I turn it over to Marcia, I'd like to recognize some changes in our leadership team. After a nearly 35-year career with Erie, Mike Zavasky, Executive Vice President of Insurance Operations, will be retiring at the end of 2012. Since Mike joined Erie of 1977, he always served the company with a commitment to excellence. On a personal note, Mike has provided me with a great appreciation for Erie's culture, and the values that have made our organization what it is today. We wish Mike all the best in his retirement.

With the retirement of Mike, Rick Burt been promoted to Executive Vice President for our Product Lines, personal, commercial and life. Rick came to Erie in 2011 as our Chief Actuary. Rick has over 27 years of experience in the property and casualty industry, including serving as a partner of Deloitte Consulting, and holding leadership positions with a global insurance broker. As I mentioned last quarter, Bob Ingram joined Erie as our new Chief Information Officer in August. Bob is a seasoned executive and leader with a proven track record of IT success in the insurance industry. Bob joins us from Hartford, where he was most recently Senior Vice President and CIO for commercial lines. As a member of our executive team, he will be a key player in helping build our technology capabilities. Both individuals bring strong leadership, and have the experience needed to execute on our strategic initiatives. With that, I'll now turn the call over to Marcia to review the financials for the quarter.

Thank you, Terry. And, good morning everyone. Net income was $51 million, compared to $47 million in the third quarter of 2011. On a per share diluted basis, net income was $0.96 per share in the current quarter, compared to $0.87 per share in the prior-year quarter. In our management operations, income before taxes was $66 million, compared to $62 million in the third quarter, 2011. Management fee revenue was $305 million, up 8.8% year over year, and consistent with the 8.6% increase in direct written premiums of the property and casualty group. This result was driven by policy growth of 3.4%, and a 4.1% increase in year over year average premium per policy.

We continue to maintain our strong customer retention, while taking rate increases where appropriate, to more precisely price our risk. Renewal premiums increased 7.5% over the prior year, driven by a 3.7% increase in average premium per policy, and a strong retention ratio of 90.8%. As Terry discussed, our agents have generated significantly higher levels of new business premium, in both personal and commercial lines, relative to the same period in 2011. New business premiums increased nearly 18% compared to a year ago, driven by a 10% increase in new policies, and an increase of nearly 8% in average premium per policy. Cost of Management Operations was $247 million, or 9.5% higher than the prior-year quarter. Non-commissioned expenses increased $9 million, or 12.2% over the prior-year quarter, driven by higher levels of acquisition-related costs, information technology, and personnel costs. The third-quarter 2012 gross margin, for Management Operations, was 20.9%, compared to 21.7% in the third quarter of 2011.

Now turning to the results of our Investment Operations. Indemnity recorded profit before taxes of $12 million in its Investment Operations, compared to $5 million in the prior-year quarter. The increase in investment results over the prior year was driven primarily by net realized gains on investments of $2 million in the current quarter, compared to losses of $6 million in the third quarter, 2011. Now let's look at our results for the first nine months of 2012. Indemnity's net income totaled $130 million, compared to $143 million for the same period last year. On a per share diluted basis, net income was $2.43 per share, compared to $2.59 per share for the prior year. The decrease in net income was primarily from lower investment income, driven by a reduction in limited partnership income, and a slight decrease in management margin.

In our Management Operations, income before taxes was $171 million for the first nine months of 2012, compared to $174 million last year. The gross margin for Management Operations was 18.8% for the first nine months of 2012, compared to 20.7% for the prior-year period. In our Investment Operations, Indemnity recorded a profit before taxes of $26 million for the first nine months of 2012, compared to a profit before taxes of $38 million for the same period in 2011. Regarding our share repurchases, during the third quarter, the company repurchased approximately 161,000 shares of our outstanding Class A common stock, at a total cost of $11 million. For the year, through October 17, 2012, Class A shares repurchased under the program had approximately 796,000, at a total cost of $57 million. As of October 17, 2012, we have approximately $80 million remaining in our repurchase program.

Thank you, Marcia. Before we get to your questions, I'd like to mention two recognitions the company received, recently. In September, Erie received the Best Practices of Excellence Award from the Independent Insurance Agents and Brokers of America. This is an annual award presented to companies that have made imaginative, outstanding, and unique contributions to best practices that enhance the independent agency system. Erie earned the recognition for its commitment to enhancing agent training programs.

In October, J.D. Power and Associates released their 2012 Auto Claims Satisfaction Study. This particular study focuses on the interactions insurers have with customers throughout the claims experience. I'm very pleased with Erie's strong performance this year, placing the highest-satisfaction tier. Erie takes great pride in being above all in service, and it showed as Erie significantly improved its score over the past 12 months, tied for second our of 27 eligible auto insurers. We are very proud to receive these recognitions, and I'd like to thank our employees and agents, who work so hard on behalf of our customers. And now, I'll turn the call back over to the operator to open the line for questions.

(Operator Instructions)

Our first question comes from Adam Klauber, William Blair.

Nice quarter. Couple of different questions. As far as rates, it looks like in the third quarter, your personal lines you have average rate of 3%, and commercial lines of 6%. As we think about next year, could you give us any clues on the direction, or the trend in both areas on the rate basis?

Good morning. You know, we don't forecast, for publication, what we think our rate capabilities will be in any quarter, let alone 2013. Clearly, we look at our own costs in terms of loss activity as well as other costs, and then look at what exposure is, and then try to underwrite to that. And so again, we will leave it up to the future quarters to determine how quickly and how well we do from that standpoint.

Okay. From a system standpoint, you've been rolling out some new systems, and that's also been impacting your costs. Can you talk about what other systems, and sort of the timing of those rollouts would be?

We continue to work on our two main agency-facing systems, which would be our personal lines, DS-Pro system, as well as what we call C-Line, which is our commercial line system, as well as, obviously, we have a lot of other things going on. We have a billing system that's very evident to our agents as well as our customers. All of those continue to be in a state of build-out at various stages. I would suggest our billing system is in a stabilized mode. We finally, I guess we're into the -- we've finalized all of our customers onto that platform this quarter. A

s like all technology, we continue to find ways to improve the interface and the way it looks to customers. Our DS-Pro system has been very effective and is being received very well by our producers. That is on a very strong track to be delivered, in terms of, I'll call it its first complete phase in 2013. And then, C-line remains a fairly early entry into our ability to create a more effective platform for our commercial lines business. And then, lastly, what doesn't get a lot of play is we've got a very substantial, and very effective, life platform that has been very well received that is very, very streamlined, and been well received by both customers and agents.

Okay. Thank you. And then, as far as Hurricane Sandy, the Indemnity does not have direct exposure but the exchange clearly has significant exposure. Could you go into some details on the reinsurance coverage that could help protect exchange from losses on the hurricane?

Again, we have asked about in the financial information. We have a substantial program that is in place to protect us from very substantial balance sheet events. Our cash [from] points at the $350 million, and it goes on top of that to about $800 million, and we have bit of [cope] insurance participation is there. But, we think we are in a strong position to respond to this. We've got a great balance sheet; we have a very liquid balance sheet. Our book of business is made up of a lot of small risks; and, our focus, right now, is making sure that those customers and those agents are taken care of effectively. We were mobilized well before the storm hit land. And, we have been in the market before the storm actually hit, and we are receiving great commentary in terms of our ability to respond to those customers' needs.

Okay. Thank you very much.

(Operator Instructions)

Amir [Tehr], Capital Returns Management.

Good morning.

Good morning.

I was hoping to find out -- can you give us an idea of the claims that have come in so far from Hurricane Sandy, specifically the amount of claims that have come in within homeowners, auto and commercial? And, if you could give us split by state that would be great.

It's much too early to give you specific numbers. But, I think it is typical of what our book of business is, our market share. Obviously, large slug of it is coming into the homeowners line; we have some, obviously, commercial multi-peril in terms of our commercial book. Smaller scale, our private passenger automobile book, obviously, is being affected as is our commercial book. Geographically, I think it's important to remember that we don't do any business in New Jersey, Connecticut, and have lesser exposure in our New York State, down-state. And so, again, this is taking a pattern of a pretty much other storms that we've had throughout our history. A lot of smaller claims, based upon the makeup of our book of business.

All right. And then, I think we are at about 2.5 days out from, after the storm. And, perhaps looking at historical claims activity that you have had during other storms, could you give us an idea as to what percentage of ultimate claims you think has come in, so far?

No. It's still too early to do that. In the past, we have not done that. So, we're not going to start doing that now.

Okay. Thank you.

I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Scott Beilharz for any closing remarks.

Thank you, Ally. Given that there are no more questions, thanks again for joining us. A recording of this call will be posted on our website www.erieinsurance.com after 12.30 PM, Eastern time, today. If you have any questions, please call me at 814-870-7312. Thank you.

Thank you, everybody.

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