Erie Indemnity Co (ERIE) 2013 Q4 法說會逐字稿

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

Thank you, Danielle, and welcome, everyone. We appreciate you joining us.

On today's call we will discuss our fourth-quarter 2013 results and matters related to the Company's fourth-quarter and full-year operations. Joining me today are Terry Cavanaugh, President and CEO; Marcia Dall, Executive Vice President and Chief Financial Officer; and Sean McLaughlin, Executive Vice President, Secretary and General Counsel.

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'd 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 SEC dated February 27, 2014, and in the related press release. Also, during this call we may discuss non-GAAP measures. A reconciliation to the GAAP based results can be found in the 10-K.

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 the 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 the recording, its publication, webcast and 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.

With that, I'll now turn the call over to Terry.

Thank you, Scott. Good morning, everyone.

In 2013 our focus was on execution, on driving the initiatives that we put in place over the last few years in terms of products, processes, technology and talent development. The results and the intent was to strengthen the connections we have with our agents, our customers and our employees.

During 2013 the exchange reached a milestone in direct written premium of over $5 billion and a record high of $6.5 billion in surplus. Throughout 2013 we were able to grow in all major lines of business by increasing both policies in force and average premium per policy. We are proud that our retention remains strong at 90.6%.

The exchange's strong top-line growth help drive gains in Indemnity's net income and earnings per share. Indemnity's net income per share increased from $2.99 per share in 2012 to $3.08 per share for 2013.

Our success is fueled by top-line growth and our ability to conduct our business efficiently. Success would not be possible without our team, our agents who connect with our customers and sell our value proposition everyday and our employees who provide superior service to our customers. We take these connections very seriously at Erie, whether it's the support we give our agents, the product and services we provide our customers, or the dedicated presence we have in the communities we serve.

With that, I'll now turn the call over to Marcia to review our financials.

Thank you, Terry, and good morning, everyone. Today I will review the results for the fourth-quarter and the full-year 2013.

First let's look at our fourth-quarter results. After tax net income for the quarter was $36 million compared to $30 million for the same period a year ago. On a diluted share basis, net income was $0.67 per share in the current quarter compared to $0.56 per share in the prior-year quarter. This reflects an increase in income from both management operations and investment operations.

Revenue from our management operations grew by $26 million to $309 million in the fourth quarter. This represents a nearly 9% increase over the prior year period and is consistent with the 9.5% increase in direct written premiums achieved by the property and casualty group. The growth in direct written premiums for the quarter was the result of a continued strong policy retention rate of 90.6%, an 11% increase in new business policies, and a nearly 5% increase in the average premium per policy.

Turning now to our expenses for the quarter, our cost of management operations grew by $19 million to $268 million. Commission expense increased $14 million or nearly 9%, primarily driven by the increased premium generated by the property and casualty group. Noncommission expenses increased $5 million or 5%, due primarily to personnel costs. These include increases in pension and medical expenses and an increase related to the incentive plan compensation cost.

Pretax income from management operations totaled $41 million compared to $34 million in the fourth quarter 2012. Indemnity's investment income for the quarter increased by $3 million to $13 million pre-tax. This increase is due to favorable results from our limited partnership investments.

As Terry mentioned, Indemnity's net income per share increased from $2.99 per share in 2012 to $3.08 per share for 2013. For the year, Indemnity benefited from an increase in its income from both management operations and investment operations.

Pretax income from management operations in 2013 totaled $209 million compared to $205 million in 2012. Excluding a $6 million adjustment related to North Carolina Reinsurance commissions, 2012 income from management operations would have been $199 million. The increase in income from management operations was driven by a $109 million or 9% increase in revenue, reflecting strong top-line growth in the exchange's direct written premium.

Contributing to the exchange's overall premium growth was a 4.8% increase in total policies in force and a 4.5% increase in average premium per policy. The increase in direct written premium also benefited from a strong 90.6% retention rate and double-digit premium growth from new business.

Management operation expenses for the year grew $105 million, or 11% overall. Indemnity's commission-related expenses grew $75 million, or 12%, primarily as a result of our growth in premiums and an increase in the projected expense for our agency bonus program. This bonus program rewards our agents for growth and profitability related to their book of business over a three-year period of time.

Indemnity's noncommission expenses grew $30 million or 8.6% in 2013. This increase is primarily due to growth in new business and increased personnel costs. The increase in personnel related expenses reflect higher projected incentive awards and increased costs related to our benefit program.

Turning now to capital management. Indemnity has consistently paid dividends since 1933. Last year our financial performance and the strength of our balance sheet enabled us to return nearly $84 million in dividends to our shareholders. In December 2013, our Board approved a 7.2% increase in the regular quarterly cash dividend of both Class A and Class B shares.

We also continued our stock repurchase program in 2013. During the fourth quarter, the Company repurchased approximately 142,000 shares of our outstanding Class A common stock at a cost of $10 million. For the full-year 2013 we repurchased approximately 432,000 shares at a cost of $31 million. As of February 14, 2014, we had approximately $33 million of share repurchase authorization remaining in our program.

And now I'll turn the call back over to Terry.

Thanks, Marcia.

I mentioned that 2013 was a year of strong execution. We remain focused on the strategic products, processes and capabilities we will need in order to continue our momentum in the marketplace.

Our multi-year business strategy focuses on four key priorities. First, we are working to enhance the overall experience between our agents and customers. Our agents are the critical link between Erie and our customers and these connections are the strategic advantages that differentiate our service, our Company and our brand.

Second, our strategy is to continue to expand our product offerings, allowing our agents to remain competitive and relevant in the marketplace.

The third component of our strategy is our commitment to service. Being above all in service means always reaching higher. We must continue to identify how service needs are changing and what consumers expect from their insurance company. We look to reinforce value with every interaction and deliver a best-in-class service experience.

The fourth and final component to our strategy is geographic expansion. As we announced in the third quarter, we plan to begin operations in the Commonwealth of Kentucky by the first quarter of 2015 or earlier if possible. These four key priorities will insure that our overall strategy is successful for our agents, our customers and our shareholders.

Finally, I would like to close my comments by recognizing the passing of Lucian Morrison. Lucian became a director of Erie Indemnity in 2006 and served with distinction on several committees during his time with us. The entire Board and management team mourns his death. His intellect, business skill and humor will be missed by the Erie family. We extend our condolences to Lucian's wife, Nancy, and their family and friends.

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

(Operator Instructions) Jeff Halis, Tyndall Management.

A question about expenses. In 2003 noncommission expenses as a percentage of management operation revenues was 19.6%. Five years after that, the year that you took charge, 2008, it had risen to 26%. In this past year it had risen to 29.1%.

This ongoing pattern suggests to me either a significant deterioration in the business model or significant failures by management. If the cause is a deterioration in the business model, could you describe the changes so that we can consider the future implications?

I would not characterize it as a change in business model, it's more a recognition of how the industry is evolving and changing along with consumer demands. And so I would suggest that, over that period of time many industries have changed, and I think the insurance industry has been one of those.

And I think we, as a successful participant in that industry, have been able to recognize those changes and then they would revolve around aspects of producer compensation, technology --

This obviously doesn't ask include commissions.

I'm just trying to broaden the conversation to talk about what we consider the value model that we bring to the agent and to the consumer.

Clearly, technology has been a big player in this. We continue to invest in our people platform. Again, this focus we have on service is unwavering and I would suggest that the consumer needs to have more capability in terms of being able to be comfortable and confident with their insurance provider. And so we're spending money around that.

I would suggest, again, the whole world of benefits continues to expand in terms of issues of medical and other aspects of engaging our employees.

We have variable compensation in there in terms of -- again, that are not tied to the agency compensation. But again, as we continue to grow unit counts and attract new customers, we have a significant cost there in terms of being able to acquire that business, as it relates to surveys and other underwriting tools that we utilize.

And so I do recognize that that number has grown but I think, again, overall, we run a successful business.

Well, Terry, it's not a question of whether you run a successful business, it just seems meaningfully less successful than it used to be. I think Erie always had a great reputation for service and the 50% -- more than 50% increase in the relative share of noncommission expense also represents an actual doubling of the noncommission expense.

That can't continue and the Company remain profitable and successful. So I guess I still don't understand enough about why it went up so that I can understand whether it's going to grow another 50% in the future.

Again, I can't speculate on what the demands of the marketplace will be going forward in terms of where we need to invest in our business to remain a good value proposition for our distribution force and for our customers.

So you think a 50% increase in expenses relative to revenues in a 10 year period represents sound management policy in the context of the existing marketplace?

I think in a question like that, you've got to look at, again, the specifics of the industry, what's taken place. I can't at this point in time look at what the platform looked like in 2003 and necessarily compare that --

Okay. Then 2008 when you took over it's I think a 10% or 11% relative increase in five years.

Yes it has been. And I would suggest that I think we've done a lot over the last five years to create a business that is reflective of the kind of business success we're having in the marketplace.

I think we have been prudent. But also I would suggest that we have been proactive in investing in areas that we think will continue to provide value around, again, sound actuarial science in terms of marketing capability that we brought to our agents, whether it be more effective and tighter financial controls, stronger legal presence. And so all these things that I think are necessary to run a business effectively we have invested in over the last five years.

Do you think Erie was unsuccessful five years ago when it had the lower cost structure?

Was it more successful five years ago?

No. Was it unsuccessful when it had the lower cost structure?

No. Well, again, it's just one aspect of a business. Five years ago it was also -- it hadn't grown in three or four years. It had had a major underwriting issue before that time. And so, again, I would suggest that an investor needs to look at the totality of our business and, at any one time, there are going to be things you can look at that I guess may concern you.

But I think we're very comfortable that we're doing the right thing with our dollars to run a business effectively today and, more importantly, to run an effective business tomorrow.

Well when you say look at the totality, you cited the earnings per share reflecting significant buybacks. In 2013 it was $3.08, 2012 it was $2.99, 2011 it was $3.08, 2010 is $2.85. Is that successful growing business?

I think, again, in terms of growing the business for all the constituencies, I think we are satisfied that we are doing well in terms of being able to make sure all of those constituencies, the agency, the customer, the employee and the shareholder, are effectively rewarded.

Is that listing the shareholder last -- the listing that you think about? Because it doesn't think seem like the shareholder was very rewarded in the last three or four years.

I'm sorry you feel that way. Again, we do spend time worrying about it and making sure that the shareholders are rewarded.

I will tell you that I think the return that we've been able to create economically over that period of time has not been insignificant. And I do spend time though worrying about, again, I'll call it the engine that drives shareholder value on a daily basis. We've got to do the things that are effective for our agents -- for those people that choose to do business with us.

We spend time very much worried about the consumer in terms of, again, their choice to choose us as their insurance carrier and then how we respond to their needs when a claim occurs and we --

I just want to be clear. So you are giving no indication that the expense level, which is at a peak and 50% higher than it was 10 years ago, will ever go down and it might go up from where it is today.

I did not say that.

I just want be clear that you are not giving any indication of a reduction.

I'm not giving any indication one way or the other.

Okay -- which means no indication of a reduction. I will let somebody else ask a question.

Ron Bobman, Capital Returns.

I just -- obviously expense management has come up I think at least a couple of times in the most recent calls. And I do think given the trend -- the historic run rate of expenses -- that it would be prudent and very reasonable for -- if it's not this call, it's the next call, that you give us some expectation for expenses.

Now, I'm not asking you to look three, four, five years out but surely you've got a business plan for the next 12 and maybe 24 months.

And it is what it is. I'm not challenging the trend line but we would appreciate some sort of insight as to whether you think this current relationship on a percentage basis of noncommissional expenses is going to be at this level, is going to top out or requires additional expense.

And it's -- we are not asking for, I think you used the word crystal ball, but if you could give us some guidance at some point, and some point soon, it would be appreciated. Thanks and best of luck.

Thank you very much for the input.

Thank you. And I am not showing any further questions at this time. I would like to turn the call back to Scott Beilharz for any further remarks.

Thank you, Danielle. And if there are no more questions, thank you, again, 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.

Our 2014 annual meeting of shareholders is scheduled for Tuesday, April 15 at 9:30 AM Eastern time at our corporate headquarters in Erie, Pennsylvania. If you 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. Everyone have a great day.

Thank you very much for your interest.