Erie Indemnity Co (ERIE) 2013 Q2 法說會逐字稿

Good morning, and welcome to the Erie Indemnity Company second quarter 2013 earnings conference call. I would like to introduce Scott Beilharz, Vice President of Capital Management and Investor Relations, and our host for today's call.

Thank you, Nicole and welcome, everyone. We appreciate you joining us. On today's call we'll discuss our second quarter 2013 results and matters related to the Company's second quarter operations. Joining me today are Terry Cavanaugh, President and CEO, and Marcia Dall, Executive Vice President and Chief Financial Officer. Our earnings release and financial supplement were issued yesterday afternoon and are currently available on our website, erieinsurance.com. In this call, we will first hear statements from Terry and Marcia and then open it up for questions.

Before we begin, I would like to remind everyone that today's discussion may contain forward-looking remarks that reflect the Company's current views about future events. These remarks are based on assumptions subject to known and unexpected risks and uncertainties. These risks and uncertainties may cause results to differ materially from those described in these remarks. For information on important factors that may cause these differences, please see the Safe Harbor Statements in our latest 10-Q filing with the SEC dated August 1, 2013 and in the related press release.

Also, during this call we may discuss non-GAAP measures. A reconciliation to 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 may not be reproduced 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 constitutes your consent to recording, its publication, webcast, and broadcast in the 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. I'm pleased to start this call by saying we have had another good quarter. Even in this environment of stubborn unemployment and increased competition for consumer attention and loyalty, we are continuing to win in the market with effective pricing and our steadfast commitment to service. At the same time, we are looking ahead and investing in our future to improve technology platforms and agency support.

Difficult market challenges hurt some companies but provide opportunities for strong companies like Erie. In this second quarter, we've experienced continued high retention while increasing premium over last year. Marcia will share more details when she discusses our financial results, but let me touch on a few highlights first. We've experienced strong topline growth in the first half of 2013, driven by a 9.7% increase in direct written premium of the property and casualty group. We were able to grow in all major lines of business as we increased policies in force and average premium per policy, and retention remains strong at an impressive 90.9%. We attribute this success and our continued growth to products that meet our customers' needs and the exceptional service delivered by our agents and employees.

Competitive products and attention to service have enabled Erie to continue market share gains across all lines in all states where we do business. While acknowledging our success, we must also be mindful of the challenges ahead and not become complacent. We remain focused on remaking innovation, service, ease of doing business the priorities for driving our business forward. In personal lines we're enhancing our web- enabled quoting capabilities. For example, in several states we recently added ErieSecure Home Functionality to our existing web-based quoting system. Agents in those states can now obtain a combined personal auto and Erie SecureHome quote in a matter of minutes.

As we step toward the future, we continue to make improvements not only in our product offerings and technology, but also to our facilities. In July, we announced the development plans for a state-of-the-art training center. This new facility will keep Erie on the cutting-edge of claims technology and training. That's important because it enables our employees and agents to better serve our customers. Our positive growth, strong financials and commitment to improving our business capabilities have positioned us for continued success in the coming quarters and beyond. With that, I will now turn the call over to Marcia to review our financial results.

Thank you, Terry, and good morning, everyone. Our net income was $0.84 per share in the current quarter compared to $0.80 per share in the prior-year quarter. This reflects relatively flat management operations income and a slight increase in our investment income. Our management operations' pretax income totaled $59 million in both the second quarters of 2013 and 2012. Revenue from our management operations grew $28 million to $344 million in the second quarter. This represents an 8.8% increase over the prior-year period and is consistent with the 9.3% increase in direct written premium of the property and casualty group. For the help of our independent agents, we delivered policy growth of a little more than 4% and a nearly 5% increase in year over year average premium per policy.

As Terry mentioned, our retention remains strong at 90.9%. We are also attracting new customers, delivering a nearly 12% increase in new business premiums. Our cost of management operations grew $28 million to $285 million. Commission expense increased $22 million in the second quarter of 2013 compared to the prior-year quarter. Commission expense in the second quarter 2012 included a $6 million commission adjustment from the North Carolina reinsurance facility for commissions previously paid by Indemnity. Excluding this adjustment, our commission expenses would have increased 10% for the current quarter, which is in line with our premium growth.

Noncommission expenses increased $6 million compared to the prior-year quarter, reflecting higher personnel costs and increased acquisition related expenses due to new business growth. The growth margin for management operations was 17.3% in the second quarter of 2013 compared to 18.6% in the second quarter of 2012. Excluding the North Carolina Commission adjustment, the second quarter of 2012 gross margin would have been 16.8%. Indemnities investment income grew $2 million for the quarter to $8 million pretax. This increase reflects higher earnings from our alternative investment portfolio.

Now, let's look at our results for the first six months of 2013. Indemnity's net income totaled $81 million compared to $79 million for the same period last year. On a per share diluted basis, net income was $1.54 per share compared to $1.47 per share for the prior year. In our management operations, income before taxes grew $3 million to $108 million. The gross margin for management operations for the first half of 2013 was 16.7% compared to 17.8% for 2012. Excluding the North Carolina Commission adjustment, the gross margin for the first half of 2012 would've been 16.8%.

Indemnity's investment income grew slightly to $15 million for the first half of 2013 due to higher levels of income from our alternative investments. Our asset levels have declined as a result of our dividend and repurchase strategy, and we continue to realize lower levels of yield on our portfolio due to current market conditions.

Regarding our share repurchases, during the second quarter the Company repurchased approximately 24,000 shares of our outstanding Class A common stock at a total cost of $1.8 million. As of June 30, 2013, we had approximately $53 million remaining in our repurchase program. Now, I will turn the call back over to Terry.

Thanks, Marcia. Before we get to your questions, I am very proud to announce a number of recent Company recognitions. In June, JD Power released its 2013 US auto insurance study. Erie once again placed in the high satisfaction tier for the two geographic areas we serve, the Mid-Atlantic and North Central regions. Our scores improved in billing, payment and claims.

Also in June, AM Best affirmed the A+ Superior rating of the property and casualty affiliates of the Erie Insurance Group, as well as the A Excellent rating of Erie Family Life Insurance Company. Erie Property and Casualty affiliates have maintained an AM Best rating of A Excellent or better since 1939. In July, we learned that the Ward Group has once again recognized Erie as one of its Ward's 50 top-performing property and casualty companies. This was our sixth consecutive year receiving this award. These awards acknowledge the totality of our business proposition, including our commitment to service, innovation, and financial strength and an operating model that allows us to meet our customers' evolving needs.

Finally, I would like to announce that the Honorable Sean J. McLaughlin will be joining Erie Insurance as our new Executive Vice President, Secretary, and General Counsel on August 26. Sean most recently served as Chief Judge for the US District Court for the Western District of Pennsylvania. We are excited to have Sean join us on the executive team and the Erie family. He will be a valuable asset to all. And now I will turn the call back over to the operator to open the line for questions.

(Operator Instructions)

Adam Klauber, William Blair.

Thanks; good morning, everyone. A couple different questions. Clearly, you're continuing to show nice growth across product lines. From a geographic standpoint, particularly in the auto and homeowners, which states would you say are growing better than average and which states would you say are not growing as well?

I think as I mentioned in my prepared remarks, we are growing our market share in all of our product lines which would indicate that in all territories. We are having success across our footprint. I would not suggest that we are having a particularly difficult time in any of our states. I think, again, it's a testimony to the things we've done over the past several years in terms of making sure we invest in our agency plant, giving them the tools necessary to be successful, both as individuals and as a brand in those states.

So I guess I'm very pleased that, across the board we are having success. We've looked at our footprint and looked at places where we maybe had less penetration and had worked hard to build the brand there. And those would be places like western Tennessee, a bit of eastern and northeastern New York State. We continue investing in places like Wisconsin and Illinois where we have less market penetration, but we are a Company that is very focused in on that, and we are being successful.

Okay, thanks. And then, as far as the competitive environment, again sticking with the personal lines business, in the last 12 months or so, from what we've seen, a lot of the competitors have been increasing or trying to get more rate. And, again, it's obviously state-by-state or geography business. In auto and particularly homeowners, have you seen any change in that competitive environment, or are they still generally pushing for rate and trying to be more focused on profitability than market share growth at this point?

Yes, I would say the marketplace and the personal line space is fairly disciplined, again, based upon the realities of the investment marketplace. And I would suggest that the tools that the industry has been able to develop over, call it, the last decade in terms of being better able to predict, perhaps, loss costs in the future, there is, I'd consider a slow but consistent march to make sure that the industry stays on top of the rate for both homeowners and automobile.

Clearly, the Homeowners business has been more problematic based upon the weather and concentration issues, but I also see some interest in making sure that the Automobile business stays the same. It doesn't -- I would suggest it doesn't cost any less today to repair an automobile than it did a year ago. So, you've got to make sure you don't get lulled into complacency on the automobile lines, and I think the industry and we are paying attention to that.

Okay. And then -- sorry, could you explain that North Carolina Commission adjustment more? I did not catch exactly what that was.

Sure, that's something that's been -- we discussed obviously last year when it happened, but I'll let Marcia respond to that.

Right. Last year, in 2012, we had an adjustment in the second quarter for commissions that were reimbursed by North Carolina, and that had not come through to indemnity. So, we got a benefit, or reduction in our commission expense last year in second quarter. So, what we're trying to show or explain in our prepared remarks here is that if you exclude that, because that was a one-time amount, then you can see our commission expenses tracking more normally year over year to our growth in our direct written premium.

That makes sense; okay.

Yes, so it was a benefit in 2012, and now our 2013 commissions are normalized.

Right; okay. That makes sense. And then, within the auto industry, we have seen a number of competitors begin adapting user-based insurance, putting the GPS trackers in the car. Obviously Progressive was early, but then we've seen a number of other major competitors jump in. I guess, what is your thoughts on that GPS or UBI technology? Do you think that will have an impact, and are you thinking about doing that in your own business?

We continue -- we've not been public about it, but we have experimented in that. We have the data of automobiles over the last, I guess it's probably going back two years. We've got millions of miles of data on that, and we continue to pick it apart and see what we can learn from it from that standpoint.

I think technology will continue to change this business, just not in the Automobile business, but I think at some point down the road it will change it in the Property businesses. Houses become smarter and more sophisticated, and mechanical breakdown becomes a bigger issue with consumers. I think the cars will, at some point -- my personal opinion will be have those automatically part of that.

I'm intrigued by whether automobile manufacturers get into the, I'll call it, the data business, and I think, again, what we see today will be completely different than it is 10 or 15 years from now. I think it's an intriguing opportunity. I'm not sure today it is a big threat. Again, I think if you look at our competitors, they still struggle with pricing and profitability on some of those endeavors, but we are not blind to that and we will continue to investigate it.

Okay. Thanks a lot.

I am showing no further questions at this time. I would like to turn the call back over to Scott Beilharz for any further remarks.

If there's no more questions, thanks again, everyone, for joining us. We appreciate your participation and questions. A recording of this call will be posted on our website, erieinsurance.com, after 12.30 PM Eastern time today. If you do have any additional questions, please call me at 814-870-7312. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.