Erie Indemnity Co (ERIE) 2013 Q1 法說會逐字稿

Good morning, and welcome to the Erie Indemnity Company First Quarter 2013 Earnings Conference Call. I'd like to introduce your host for today's call, Scott Beilharz. Please go ahead.

Thank you, Pablo, and welcome, everyone. We appreciate all of you joining us.

On today's call, management will discuss our first quarter 2013 results and other matters related to the Company's first 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, Products; Chip Dufala, Executive Vice President, Services; Bob Ingram, Executive Vice President, Information Technology and Chief Information Officer; 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, ErieInsurnace.com.

We will hear brief remarks from Terry and Marcia and then open the call for questions.

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 with the SEC dated April 29, 2013, 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.

During the first quarter, Indemnity delivered net income per share of $0.69. This reflects both strong top-line growth and positive year-over-year investment results. In fact, the momentum we saw in 2012 has continued during the first quarter of 2013.

Direct written premium of the exchange grew 10%, with increases in retention, new policies, and average premium per policy. Many factors contributed to this healthy growth -- a solid portfolio of products with a value proposition that creates industry-leading retention; our ongoing localized marketing efforts; and our effective, dedicated, loyal, independent agency force.

One of the core elements of Erie's growth strategy is to ensure our agents have a solid portfolio of products to sell. This goes hand in hand with our commitment to drive innovation execution throughout the enterprise. We're seeing this with products such as Erie Rate Lock and ErieSecure Home, our newest personal line products, and our updated universal life product that we call ERIEflex4.

We've also just recently introduced a new term life product, ERIE LifeSense, that conveniently provides up to $90,000 worth of coverage. With LifeSense, we can make can make an underwriting decision in about 15 minutes.

The revenue we gain from our life business does not impact Indemnity directly, but products like ERIEflex4 and LifeSense help us meet the full complement of needs our customers have for financial protection and help our agents serve and retain our customers.

Other recent results indicate our brand awareness efforts are beginning to take hold. We've expanded our go-local marketing strategy to several more markets.

In addition, we've extended our shared buy program that leverages Erie's buying power and expertise to help our agents more cost effectively and efficiently purchase co-branded marketing material and media.

Through these two efforts alone, we now have locally based brand advertising programs available in more than 70% of our designated market areas. These efforts and many others enabled Erie in 2012 to grow market share in every state where we write business.

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 $0.69 per share in the current quarter compared to $0.67 per share in the prior-year quarter, reflecting growth in our management operations income and a slight decrease in our investment income.

In our management operations, income before taxes was $49 million, up $3 million over the prior-year quarter. Revenue from our management operations grew $27 million to $303 million. This represents a 10% increase over the prior-year period and is consistent with the 10% increase in direct written premium of the property and casualty group. With the help of our independent agents, we delivered a policy growth of a little over 4% and a nearly 5% increase in year-over-year average premium per policy.

Our retention remains as strong as ever at 91%, and we are attracting new customers as well, delivering a 17% increase in new business premiums.

Cost of management operations grew $24 million to $254 million. Commission expense grew $10 million, or 10%, consistent with our growth in direct written premium.

Non-commission expenses increased $9 million, or 12% over the prior-year quarter, driven primarily by higher levels of acquisition-related costs and personnel-related expenses.

Indemnity's net income for the quarter also reflects investment income of $7 million pretax, a $1 million decrease compared to the prior-year quarter. This decrease reflects lower levels of realized gains on the investment portfolio in first quarter of 2013 compared to the prior year, partially offset by higher earnings from our alternative investment portfolio.

Regarding our share repurchases, during the first quarter, the Company repurchased approximately 190,000 shares of our outstanding Class A common stock at a total cost of almost $14 million. As of April 19, 2013, we had approximately $54 million remaining in our repurchase program.

Now, I'll turn the call back over to Terry.

Thank you, Marcia.

A few weeks ago, we held our annual shareholder meeting here at our home office in Erie, and that same week, we celebrated the 80th anniversary of Erie's founding. At our shareholder meeting, all 13 members of our Board of Directors were reelected to serve another year. I'd like to express my sincere gratitude to our directors for their continued support, guidance, and steadfast commitment to our success.

Before we get to your questions, I'd like to mention a couple of recognitions the Company recently received.

In March, we were named as one of the top insurance companies on Professional Women's Magazine's "Best of Best" list. This award reflected our diversity, inclusion practices and policies, an area of great importance at Erie, where we work to attract, recruit, develop, and retain top talent who share our dedication to service.

In April, JD Power and Associates released their 2012 Property Claim Satisfaction Study. This particular study focuses on the interactions insurers have with customers throughout the property claims experience. I'm very pleased with Erie's performance this year, remaining in the highest satisfaction tier.

Yesterday, JD Power and Associates released the results of its 2013 Auto Shopping Study. Three factors -- policy, price, and distribution -- contribute to customer satisfaction in this study. We are proud to report that Erie and our agents placed first. This is the fourth time in the past seven years that Erie has placed first, a testament to our continued focus on being above all in service.

And now I'll turn the call back over to the operator to open the line for questions.

Thank you, and we will now conduct our question-and-answer session. (Operator instructions)

Ray Iardella, Macquarie.

Hi, good morning. This is Chris Mammone calling for Ray. Thanks for taking the call.

I was hoping maybe you could just expand a little bit on one of the comments you made earlier about having higher levels of acquisition-related costs and personnel-related expenses. Is there any chance you could just add a little more detail on what your expectations are, maybe some kind of time horizon for these relatively elevated costs and what you anticipate the margin outlook over the foreseeable future as it's related to those expenses? Thanks.

Good morning, Chris. I will give you some flavor, I guess, on our current and our past activities. I'm not going to necessarily, I guess, respond to a forward-looking statement.

Our business is a brand that we take great pride in, in terms of making sure that we do things that kind of -- that display the results that we've shown, both operationally as well as the reputation that we have.

In our business, we will have expenses and investments in things like sales contests and incentives. We're looking to, obviously, build out a stronger technology platform. We are, again, very focused on the service component of our business, and that all leads to, again, I think, a model that creates strong written premium growth. It creates great retention. It creates great loyalty to our agents. And so I am comfortable that we're investing in the business effectively, and that will play out to an appropriate margin and performance in future quarters.

Sure, no, that's helpful. Thank you.

And kind of touching on what you just mentioned, in terms of investment in the platform, do you guys feel that the investments you've made thus far are adequate, or do you still see further opportunities for incremental investment to drive more long-term value in the platform?

These folks I know around the table are never satisfied, but two things. I think the minute you think you have a model that's going to work, either customer expectations change or a competitor does something. So this is a business that you've constantly got to keep one foot in the today with the understanding that tomorrow is going to produce another opportunity or another issue you have to deal with.

So I think we are more competitive and we are more competent today than we were three years ago and five years ago, but that doesn't mean we don't have to invest and be aware that others will be doing things that we've got to respond to in the future.

That's helpful, thanks.

And then one more follow-up, if I could. Is there any sort of indication or expectation internally for what kind of returns on the limited partnerships you guys are expecting over the course of '13? Just trying to get a sense for what we as analysts may be able to look at as indications of the performance of those investments, if that's possible or not.

No, I don't think it's -- that's a very lumpy business. I think we're very comfortable with, again, the selections we've made and then the discussions we're having with the GPs. But in order to do any kind of a forecast that would create any kind of accuracy would be inappropriate.

Okay, great. Thanks very much for taking the questions.

Yes.

Thank you. Our next question is from the line of Adam Klauber of William Blair.

Thanks. Good morning, everyone.

Good morning, Adam.

A couple different questions. You're growing nicely in the last couple quarters, really over the last year, in the auto line, traditionally a pretty competitive business.

One, if you can give us any sense, do you think some of that growth is coming more from the large nationals, regionals, or direct? Not looking for exact but just the sense.

And, also, how much of the [PIF] growth in auto is being sold on a package basis with home or some other products?

The first question is where the new business is coming from. I'd say all of the above.

Okay.

I think, again, I am pleased at how we've been able to sort of create a value proposition with our very good agents on the ground. It appears it's resonating with the consumer. And while we see everything in the press about the consumer shopping more on the Internet, I think, again, many of them shop but they also want a decision face to face. And so we've been very fortunate to be able to have great agents that are now, I think, are enabled with some better technology from our platform, with some good products and some good pricing, and we're winning in the marketplace out there against everyone.

I guess if I were to make some commentary, I think maybe some of the regional companies by virtue of the catastrophes have pulled back a little bit, and we may be winning more from some of the single state and smaller regionals, although I will tell you I think we're also taking market share away from some of the big players, too. So we're very happy with what we're doing.

In terms of your second comment in terms of -- was it PIF?

When you're getting new customers, are--?

Oh, yes, that's right. Selling and so on. We do not have a package policy --

Right.

-- but we have -- again, one of the things we are doing, and we're very conscious of, is managing our exposure for both auto and home, and we are, I would suggest to you, in most cases on new business writing both the auto and the home --

Okay, okay.

-- as well as trying to sell umbrella, as well as talking about the life business, as well as asking that customer whether they have a small business they own.

So, again, I think that's the power of our brand is to have an agent that is embedded in that town, whether it be Chicago or Scranton or Parkersburg, West Virginia, and to be able to go through and have that kind of dialog with their neighbors and friends.

Okay. Also sticking with the auto, it seems like you've been getting some nice rate there as well as the industry, I guess, as far as the first quarter what we can see. You know, did you see any slowdown in that, or was that just with the momentum keeping what we've seen in the last couple quarters or even building?

I'm not sure I understand the question.

Sorry. So, are you still getting -- are you seeing any slowdown in auto rate in the last quarter?

Well, I don't think -- no, again, it's a process where we have -- we're in 11 states and the District of Columbia. We are constantly -- every month we have a process by which we're looking at territories for each product. And so it's an ongoing process, and based upon what states come up and what needs are evident, we'll move rates for those products and those territories. And then based upon what we're doing in those states, we'll have revenue and exposure and pure rate play itself out in the quarter that we're talking about.

Okay.

So I would suggest there's nothing that would indicate that automobile rates are slowing down.

Okay. And then on the commercial side, you're also -- you're experiencing very good growth. I mean your PIF is up to almost 5%. Do you have continued appetite to expand in the commercial area?

Yes, I think we do. Again, we don't -- again, our market share is not -- it has opportunity to grow. Again, I don't think we have any place where we can't grow our business. I think, again, what you're seeing there is a disciplined underwriting approach. We're managing the exposure, I think, effectively. We're making sure we get the right rate. We're making sure that the credits that we give, if any, are appropriate.

And I think we -- our business is, I call it a Main Street business. It's an attractive business. It has a low severity. Frequency's been controllable, and so we are excited about being able to go down Main Street and write the florist and the funeral homes and the restaurants and the tile contractors. And so we think there that continues to be a great business and a business that will grow for us.

Okay. Thank you very much.

Thank you. (Operator instructions)

And with that, I'm showing no further questions in queue. I'd like to turn it back to Scott Beilharz. Please go ahead.

Thank you, and thanks again for joining us. A recording of this call will be posted on our website, ErieInsurance.com, after 12:30 PM Eastern Time today. If you have any further questions, please call me at 814-870-7312. Thank you.

Thank you. Again, thank you, ladies and gentlemen, for joining today's conference. You may now disconnect. Have a great day.